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TWN Info Service on WTO and Trade Issues (July10/03)
6 July 2010
Third World Network

US claims "landmark" victory in WTO Airbus dispute
Published in SUNS #6957 dated 2 July 2010

Geneva, 1 Jul (Kanaga Raja) -- A dispute panel of the World Trade Organization (WTO) has handed down a ruling on Wednesday that found decades of launch aid (of more than 15 billion euros) and other subsidies provided to Airbus by the European Union and certain Member States were illegal under WTO rules.

This ruling was issued by the panel in its massive 1,000-plus page report made public on Wednesday. An interim ruling was issued confidentially to the two parties in the dispute earlier in March. As is customary, the report has been in the hands of the two parties since two months before its publication Wednesday.

The dispute was brought by the US against the European Communities and certain EC Member States (Germany, France, the United Kingdom, and Spain) in 2004 concerning measures affecting trade in large civil aircraft. A panel was established in July 2005.

The EU subsequently initiated a counter-dispute against the US, alleging that the US had provided large amounts of subsidies to the aircraft manufacturer Boeing. An interim ruling in this dispute is expected sometime in July.

The EU has indicated its intention to appeal the panel ruling, and the Airbus industry spokesperson has publicly made this clear.

The US has claimed this to be a "landmark" victory in its dispute against the EU.

A press release by the Office of the US Trade Representative (USTR) said that the panel found that every instance of launch aid provided by certain EU nations for new Airbus aircraft over the last forty years, as well as other subsidies the US had challenged, caused adverse effects to the interests of the US and therefore are WTO-inconsistent subsidies.

According to the US, the panel also concluded that certain launch aid provided for the Airbus A380 super-jumbo jet (by Germany, Spain and the United Kingdom) was a prohibited subsidy under WTO rules.

Apart from the more than 15 billion euros in launch aid provided by the European governments to Airbus, the US also said that the panel found that France, Germany and Spain provided more than 1 billion euros in infrastructure and infrastructure-related grants between 1989 and 2001, including the provision of land in Hamburg to allow Airbus to expand production facilities, extending an airport runway in Bremen to allow Airbus to transport wings and other facilities for aircraft assembly, and transforming agricultural land in Toulouse into industrial facilities for the assembly of the A380.

According to the US, the panel also found that France and Germany provided billions of dollars of share transfers and equity infusions to Airbus between 1987 and 1998, and that the EU, France, Germany, Spain and the United Kingdom provided over 1 billion euros in funding between 1986 and 2005 for research and development directed specifically to the development of Airbus aircraft.

"This important victory will benefit American aerospace workers, who have had to endure watching Airbus receive these massive subsidies for more than 40 years. These subsidies have greatly harmed the United States, including causing Boeing to lose sales and market share. Today's ruling helps level the competitive playing field with Airbus," said US Trade Representative Ron Kirk.

"What emerges clear as day from this panel report is that Europe has never been able to provide launch aid in a manner that is consistent with its WTO obligations," said Office of the United States Trade Representative General Counsel Tim Reif. "This panel report should therefore be a strong signal to the European Union and the member states to refrain from future launch aid disbursements."

In its statement following the public release of the panel report, the European Commission said that the panel found that European support did not result in any job losses in the United States or lost profits to the US aircraft industry.

According to the EC, the panel rejected the allegation that support for Airbus caused "material injury" to the US aircraft industry. It has found that EU support did not damage Boeing's pricing or profitability and did not lead to a loss of jobs at the company.

"This final report needs to be read together with the forthcoming interim report on subsidies provided in the US to Boeing. Only then will we have a fuller and more balanced picture of this dispute. The EU remains committed to a negotiated outcome to the dispute with no pre-conditions on either side," said EU Trade Commissioner Karel de Gucht.

According to the EC, the panel has found that the use of Repayable Launch Investment (RLI) as a financing system is fully compatible with WTO rules, as long as the terms of financing are based on market conditions. It has nevertheless found certain RLI measures, in particular contracts dating from the 1970s and 1980s, when Airbus was being established, to have contained en element of subsidy.

The EC however expressed disappointment with certain of the panel's findings, in particular its finding that part of the RLI provided for the A380 aircraft constitutes an export subsidy and that certain infrastructure measures of a general nature can be classified as actionable subsidies.

In a background to the dispute, the panel report highlighted several measures at issue that were identified by the US, amongst others, the provision by certain member States of the European Communities (Germany, France, the United Kingdom, and Spain) of financing for large civil aircraft design and development to the Airbus companies (referred to by the US as "Launch Aid"). This financing is alleged to provide benefits to the recipient companies including financing for projects that would otherwise not be commercially feasible.

Among the examples of financing cited are French financing for the Airbus A300, A310, A320, A330/340, A330-200, A340-500/600, A380, and A350; German financing for the Airbus A300, A310, A320, A330/340, A380, and A350; United Kingdom financing for the Airbus A300, A310, A320, A330/340, A340-500/600, A380, and A350; and Spanish financing for the Airbus A300, A310, A320, A330/340, A340-500/600, A380, and A350.

In addition to Launch Aid, the provision by the EC and the member States, through the European Investment Bank (EIB), to the Airbus companies, of financing for large civil aircraft design, development, and other purposes. Examples include financing to British Aerospace for the A320 and the A330/A340; financing to Aerospatiale for the A330/340; and financing to EADS for the A380.

Also included are the provision by the EC and the member States of financial contributions to develop, expand, and upgrade facilities and other infrastructure for the Airbus companies. Specific instances include public investments by German authorities in Hamburg, Nordenham, Bremen, and Varel, by French authorities in the Toulouse region, by UK authorities at Broughton, Wales and by Spanish authorities at numerous locations in Spain.

Also mentioned are the provision by the EC and the member States of equity infusions and grants, including through government-owned and government-controlled banks, as well as the provision by the EC and the member States of financial contributions for aeronautics-related research, development, and demonstration (R&D), undertaken by Airbus, whether alone or with others, or in any other way to the benefit of Airbus.

Examining the argument of "material injury" to the US aircraft industry, the panel said that having reviewed the evidence and arguments of the parties, it concluded that overall, Boeing's performance in 2006, and in 2005 with respect to a number of factors, reflects significant improvement over the earlier part of the period. While it is true that the levels reported in 2006 for production, capacity utilization, sales, and cash flow were lower in 2006 than in 2001, figures for operating income, and return on assets not only improved after the early declines, but were well above the levels reported in 2001. Productivity also showed significant improvement after the early declines, and was well above the 2001 level in 2006.

"The data demonstrate that following the collapse of demand in the LCA (large civil aircraft) market after the events of 9/11, Boeing's performance began to recover in 2004, and by the end of the period we examined, it was operating at levels which, in our view, do not warrant a finding that the United States' domestic industry producing LCA is materially injured."

Having concluded that the United States' LCA industry is not materially injured, the panel said that it does not consider it necessary to make findings on the question of whether subsidized imports, in view of their volumes and effects on prices, and consequent impact on the domestic industry, are causing material injury.

The panel went on to discuss the principal evidence and arguments concerning import volume, effects on prices, and causal link, in order to establish a factual basis for further consideration of that issue.

As the panel has previously discussed in the context of its analysis of price undercutting in the serious prejudice analysis, it said that this type of anecdotal public evidence is of limited value in determining which manufacturer's LCA were lower priced, as opposed to determining which offer the customer considered to be of higher value to it overall. While the evidence clearly indicates that price was an important element of these sales campaigns, the conclusion posited by the United States, that each airline, based on having monetized all elements of an offer, makes a purchase decision that will maximize its profitability in operating the LCA purchased does not, in the panel's view, demonstrate that the price of the LCA of the successful manufacturer undercut the competing manufacturer's price.

The panel noted that the European Communities argues that "for purposes of the US Article 5(a) claim it is essential to examine the collective effects of any subsidies on Boeing's commercial health", which the European Communities maintains requires a "world-wide assessment" of the effects of the subsidies, and, therefore, the European Communities incorporates all of the arguments and evidence presented to rebut the United States' serious prejudice claims by reference.

In the European Communities' view, this evidence is "highly relevant to show the absence of any effects from the largely de minimis magnitude and old age of any subsidies {a}nd ... is sufficient to refute any United States' arguments that subsidized Airbus LCA' cause material injury to Boeing".

The European Communities also refers to its discussion of sales campaigns involving United States' customers in the context of its response to the United States' serious prejudice claims to argue that those sales were lost for reasons "entirely unrelated to alleged Airbus subsidies", and asserts that the de minimis magnitude and age of subsidies would not have resulted in price effects sufficient to make a difference for an airline choosing between Airbus or Boeing LCA when ordering.

The panel said that it is in something of a quandary with respect to the European Communities' arguments in this regard, as they focus on whether the effect of subsidies to Airbus LCA is serious prejudice to the United States' interests, while the panel is considering whether the subsidized imports of Airbus LCA into the United States cause material injury to the United States' LCA industry.

"Thus, in our view, arguments concerning the age and magnitude of the subsidies, even if accepted as a matter of fact, have little if any relevance to the question whether subsidized imports caused price suppression or depression in the US market. With respect to the sales campaigns... the information provided by the European Communities makes clear that pricing was an important factor in each of those sales, as indeed would be expected, as the cost of aircraft, both in terms of purchase costs and operating costs, is a major component of an airlines' ability to operate, and to operate profitably, but that there were a number of elements considered by the customers in choosing between competing offers from Airbus and Boeing in the first instance."

"It is clear that both Airbus and Boeing were badly affected by the collapse of the LCA market following the events of 9/11 (terrorist attack on the twin towers in New York and Pentagon in Washington). However, we agree with the European Communities that the US market was particularly badly affected, and Boeing was particularly hard hit in the US market, resulting in the significant decline in its market share from 2001 to 2003. In this regard, we note that Airbus principally gained market share in the early part of the period we are considering, with its market share increasing by 14 percentage points during this same period, from 30 percent in 2001 to 44 percent in 2003," said the panel.

The panel further noted the United States argument that improvements in Boeing's financial condition in 2006, relied upon by the European Communities to argue that there is no present material injury, are irrelevant, as the relevant question for an adverse effects claim under the DSU (Dispute Settlement Understanding) and the SCM (Subsidies and Countervailing Measures) Agreement is whether the European Communities was in breach of its obligation under Article 5(a) when the Panel was established, and thus that the Panel must make its determination as of 2005.

However, said the panel, "As we have discussed, we do not agree (that the determination has to be as of 2005), and consider the period 2001-2006 is appropriate for purposes of determining whether subsidized imports of Airbus LCA cause present material injury to the United States' industry producing LCA."

On the US argument that but for the presence of subsidized Airbus imports in the US market, and the prices of those imports, during the period 2001-2005 and continuing in 2006, Boeing would have been in a materially better position in terms of its performance, and thus considers that the subsidized imports caused material injury to Boeing, the panel said that it has serious doubts about the appropriateness of such an analysis in the context of this case.

In a duopoly market, with one supplier of subsidized imports and one domestic producer, it could be argued that subsidized imports will always cause material injury, because in the absence of such imports, the domestic industry would capture the entire market.

The panel said: "Having found that the United States' domestic industry is not in a condition that can be considered 'material injury', we consider that we need not resolve the question of the validity of the proposition we raised with the parties. We note, however, that, as suggested by our conclusion, we agree with the view that it is possible for a domestic industry to compete with subsidized imports and not be materially injured. That is, in our view, what the facts show in this case - following the collapse of the LCA market after the events of 9/11, Boeing has managed to successfully compete with subsidized imports and better its performance to the extent that we cannot conclude that there is materially injury as of the end of the period we examined."

The panel said that it has concluded, based on its consideration of information concerning relevant Article 15.4 factors, that the United States' industry producing LCA is not presently materially injured.

"Based on that same information, and in particular considering the trends over the most recent period and information concerning future trends in deliveries of Boeing LCA presented by the European Communities, we see no indication that the condition of the United States' industry is likely to deteriorate in the near future to a degree that would result in it experiencing material injury. The information before us shows improvements in Boeing's performance in 2006 over 2005, and the significant number of orders booked in 2005 and 2006 suggests that Boeing's performance will continue to be strong, if not even further improved. Thus, we do not consider the United States' industry to be vulnerable to injury caused by subsidized imports in the near future."

"On balance, therefore, and considering all the evidence and arguments before us, we conclude that the United States has not demonstrated a threat of material injury to the United States' LCA industry," the panel concluded.

The panel also noted that merely because an order is booked as a US order does not mean that the aircraft involved will actually be delivered to a customer in the United States, and thus it remains unclear whether that order actually represents a future import. While the impact of this latter factor is incalculable, given the significant number of LCA purchased by leasing companies, the panel considers it likely to be significant. "Thus, we do not consider that this information demonstrates a likelihood of substantially increased importation in the near future, although it clearly demonstrates that there will continue to be a substantial number of subsidized imports of Airbus LCA."

In its overall conclusions and recommendations, the panel concluded, amongst others, that the United States has established the following concerning the existence of subsidies:

-- concerning the provision of LA/MSF (Launch Aid/Member State Financing): (I) that each of the challenged LA/MSF measures constitutes a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, and (ii) that the German, Spanish and UK A380 LA/MSF measures are subsidies contingent in fact upon anticipated export performance, and therefore prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement.

-- concerning the provision of infrastructure and infrastructure-related grants: that the provision of the Muhlenberger Loch site constitutes a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, that the provision of the lengthened Bremen Airport Runway constitutes a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, that the provision of the ZAC Aeroconstellation site and associated EIG facilities constitutes a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, and that challenged grants provided by authorities in Germany and Spain for the construction of manufacturing and assembly facilities in Nordenham, Germany, and Sevilla, La Rinconada, Toledo, Puerto de Santa Maria and Puerto Real, Spain, and by the governments of Andalusia and Castilla-La Mancha to Airbus in Puerto Real, Sevilla, and Illescas (Toledo) are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.

-- concerning the German government's transfer of its ownership share in Deutsche Airbus to the Daimler Group: that the 1989 acquisition by KfW of a 20 percent equity interest in Deutsche Airbus is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, and that the 1992 transfer by KfW of its 20 percent equity interest in Deutsche Airbus to MBB is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement.

The panel also concluded that the United States has established the following with respect to adverse effects:

-- that the effect of the subsidies is to displace the imports of a like product of the United States into the European market within the meaning of Article 6.3(a) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5( c) of the SCM Agreement,

-- that the effect of the subsidies is to displace the exports of a like product of the United States from the markets of Australia, Brazil, China, Chinese Taipei, Korea, Mexico, and Singapore within the meaning of Article 6.3(b) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5( c) of the SCM Agreement,

-- that the effect of the subsidies is likely displacement of exports of a like product of the United States from the market of India within the meaning of Article 6.3(b) of the SCM Agreement, constituting a threat of serious prejudice to the interests of the United States within the meaning of Article 5( c) of the SCM Agreement, and

-- that the effect of the subsidies is significant lost sales in the same market within the meaning of Article 6.3( c) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5( c) of the SCM Agreement.

On the other hand, in light of the findings set out in the foregoing sections of the report, the panel concluded amongst others that the United States has not established the following concerning the existence of subsidies:

-- concerning the provision of LA/MSF: the existence, as of July 2005, of a LA/MSF commitment measure for the A350 constituting a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, that the French A380, French A340-500/600, Spanish A340-500/600 and French A330-200 LA/MSF measures are subsidies contingent in fact upon anticipated export performance within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement, that the French A380, German A380, Spanish A380, UK A380, French A340-500/600, Spanish A340-500/600 and French A330-200 LA/MSF measures are subsidies contingent in law upon anticipated export performance within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement, and the existence of an unwritten LA/MSF Programme measure constituting a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement.

-- concerning the challenged EIB Loans: that each of the challenged loans and the 2002 credit facility for the A380 constitutes a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement.

-- concerning the provision of infrastructure and infrastructure-related grants: that the road improvements by French authorities constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement, that the GB Pounds 19.5 million provided to Airbus UK in respect of its operations in Broughton, Wales, is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, and that the grant provided by the government of Andalusia to Airbus in Puerto Santa Maria is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement.

Furthermore, the panel concluded that the United States has not established the following with respect to adverse effects: that the effect of the subsidies is significant price undercutting by the subsidized product as compared with the price of a like product of the United States in the same market within the meaning of Article 6.3( c) of the SCM Agreement, that the effect of the subsidies is significant price suppression within the meaning of Article 6.3( c) of the SCM Agreement, that the effect of the subsidies is significant price depression within the meaning of Article 6.3( c) of the SCM Agreement, and that, through the use of the subsidies, the European Communities and certain EC member States cause injury to the United States' domestic industry within the meaning of Article 5(a) of the SCM Agreement.

The panel said that under Article 3.8 of the DSU, in cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment.

"We conclude that, to the extent that the European Communities, France, Germany, Spain and the United Kingdom have acted inconsistently with the SCM Agreement, they have nullified or impaired benefits accruing to the United States under that Agreement."

Taking into account the nature of the prohibited subsidies it has found in this dispute, the panel recommended that the subsidizing Member granting each subsidy found to be prohibited withdraw it without delay and specify that this be done within 90 days.

The panel noted that the special and additional rules applicable under Parts II and III of the SCM Agreement do not require a panel to specify how the implementation of recommendations under Articles 4.7 and 7.8 should be effected by the subsidizing Member(s).

Further noting that it is possible to speculate as to the approaches that might be used to implement its recommendations, the panel said: "However, in the absence of any requirement to do so, and given that the United States has not even requested that we do so, we do not make any suggestions concerning steps that might be taken to implement those recommendations." +

 


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