TWN Info Service on WTO and Trade Issues (Jun17/09)
16 June 2017
Third World Network
       
WTO rules US failed to fully comply in Boeing dispute
Published in SUNS #8480 dated 13 June 2017

Geneva, 12 Jun (Kanaga Raja) - A compliance panel at the World Trade Organisation has ruled that the United States has failed to comply with an earlier ruling that had called on it to take appropriate steps to remove the adverse effects of, or withdraw, the subsidies that it has granted to its aircraft manufacturer Boeing.

In a 624-page ruling (WT/DS353/RW) issued on 9 June, the compliance panel found fault with one subsidy program, namely the Washington State B&O (Business and Occupation) tax rate reduction.

It ruled that the European Union has established that the effects of the Washington State B&O tax rate reduction are a genuine and substantial cause of significant lost sales within the meaning of Articles 5(c) and 6.3(c) of the SCM (Subsidies and Countervailing Measures) Agreement of A320neo and A320ceo families of LCA (large civil aircraft) in the single-aisle LCA market, in respect of the sales campaigns for Fly Dubai in 2014, Air Canada in 2013, and Icelandair in 2013, in the post-implementation period.

It also ruled that the European Union has established that the effects of the Washington State B&O tax rate reduction are a genuine and substantial cause of a threat of impedance of imports of the A320ceo to the United States single-aisle market, and a threat of impedance of exports of Airbus single-aisle LCA in the United Arab Emirates third country market, within the meaning of Articles 5(c) and 6.3(a) and (b) of the SCM Agreement in the post-implementation period.

The compliance panel however rejected other significant aspects of the EU's complaint.

The Panel concluded that by continuing to be in violation of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement, the United States has failed to comply with the Dispute Settlement Body (DSB) recommendations and rulings and, in particular, the obligation under Article 7.8 of the SCM Agreement to "take appropriate steps to remove the adverse effects or ... withdraw the subsidy".

"We conclude that, to the extent that the measures at issue are inconsistent with the SCM Agreement, they have nullified or impaired the benefits accruing to the European Union under that Agreement."

The Panel therefore concluded that the United States has failed to implement the DSB recommendations and rulings to bring its measures into conformity with its obligations under the SCM Agreement.

To the extent that the United States has failed to comply with the DSB recommendations and rulings in the original dispute, those recommendations and rulings remain operative, said the Panel.

Either party can appeal any of the panel's findings within 60 days of the circulation of the report. The US has indicated that it plans to appeal the ruling.

Both the European Union and the United States claimed victory in the dispute.

"Today's ruling is another victory for the EU, its industry and EU workers in this strategic sector. The panel agrees that the US has simply ignored existing WTO rulings and has continued to subsidise Boeing," said EU Trade Commissioner Cecilia Malmstrom, in a press release.

"We will continue to firmly defend our industry to ensure we have a level-playing field. EU companies must be able to compete on fair and equal terms. Today's panel report is an important step in that direction," she added.

According to the EU press release, the ruling has backed the EU position, finding that the US has not only failed to remove the existing subsidies but has extended them and added significant new distorting subsidies, including incentives from South Carolina and a US Federal Aviation Administration R&D programme.

A separate press release issued by the Office of the US Trade Representative said that the compliance panel rejected almost all claims by the EU that US subsidies to Boeing harmed Airbus's ability to sell large civil aircraft.

It maintained that the EU challenged 29 US state and federal programs that allegedly conferred $10.4 billion over six years in subsidies to Boeing, but the panel found that 28 of the 29 programs were consistent with WTO rules.

The panel found only one state-level program, which had an average value of $100-110 million in the 2013-2015 period, to be contrary to WTO rules. The United States disagrees and plans to appeal this limited finding, it said.

"For years, European governments have tried to justify their massive subsidization of Airbus by falsely claiming a need to offset US subsidies to Boeing," said USTR Robert Lighthizer, in the press release.

"The WTO report confirms what we have always said: the United States does not provide subsidies even remotely comparable to the uniquely large and uniquely harmful EU subsidies to Airbus. It is time for the EU to stop making excuses and instead to join us in negotiating a settlement to remove all WTO-inconsistent subsidies so that our world-class aircraft manufacturers can compete on a level playing field," he added.

Providing some background, the compliance panel report noted that the panel report and Appellate Body report in the original proceeding were circulated to Members on 31 March 2011 and 12 March 2012, respectively. The DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, on 23 March 2012.

In its report, as modified by the Appellate Body report, the original panel found that certain measures of the United States, including measures adopted at a sub-federal level, constituted specific subsidies to the US large civil aircraft (LCA) industry and were inconsistent with the Agreement on Subsidies and Countervailing Measures (SCM Agreement). (See SUNS #7329 dated 14 March 2012 for details of the Appellate Body ruling.)

On 23 September 2012, the United States provided a notification to the DSB identifying "a number of actions to withdraw the subsidies found to have caused adverse effects or to remove their adverse effects", in light of which the United States considered that it "ha(d) fully complied with the recommendations and rulings of the Dispute Settlement Body in this dispute".

On 25 September 2012, the European Union requested consultations with the United States, explaining that it was of the view that "(t)he actions and events listed by the United States in its 23 September 2012 notification do not withdraw the subsidies or remove their adverse effects, as required by Articles 4.7 and 7.8 of the SCM Agreement" and that "the United States has failed to achieve compliance with the recommendations and rulings of the DSB".

The European Union and the United States held consultations on 10 October 2012, but the consultations failed to resolve the dispute. At the European Union's request, a compliance panel was established on 23 October 2012. (The panel's ruling came on Friday, 9 June 2017.)

According to the compliance panel report, the European Union requested that the Panel find that the United States has failed to implement the DSB recommendations in US - Large Civil Aircraft (2nd complaint) to withdraw the subsidies or take appropriate steps to remove the adverse effects, pursuant to Article 7.8 of the SCM Agreement.

In particular, the European Union requested that the Panel find that:

a. subsequent to the end of the implementation period, the United States grants or maintains the subsidies to the US LCA industry through the following programmes and measures:

(i) NASA aeronautics R&D measures;

(ii) the Federal Aviation Administration's Continuous Lower Energy Emissions, and Noise Program (FAA CLEEN);

(iii) the DOD RDT&E (Research, Development, Test and Evaluation) Program;

(iv) income tax exemptions/exclusions pursuant to FSC/ETI (Foreign Sales Corporation/Extraterritorial Income) legislation and successor acts;

(v) property and sales tax concessions for LCA component production facilities associated with IRBs (Industrial Revenue Bonds) issued by the City of Wichita;

(vi) certain tax and other measures applied by the State of Washington and municipalities therein; and

(vii) measures applied by the State of South Carolina and municipalities therein in the context of "Project Gemini" and "Project Emerald" as well as "Phase II";

b. each of these subsidies is also inconsistent with Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and Article III of the GATT 1994; and

c. the subsidies collectively cause present adverse effects to LCA-related interests of the European Union, in violation of Article 5 of the SCM Agreement.

In particular, the subsidies are a genuine and substantial cause of:

i. displacement and impedance, or threat thereof, in the LCA product markets of the United States, within the meaning of Article 6.3(a) and footnote 13 of the SCM Agreement;

ii. displacement and impedance, or threat thereof, in the LCA product markets of several third countries, within the meaning of Article 6.3(b) and footnote 13 of the SCM Agreement;

iii. significant price suppression, or threat thereof, in the LCA product markets, within the meaning of Article 6.3(c) and footnote 13 of the SCM Agreement; and

iv. significant lost sales, or threat thereof, in the LCA product markets, within the meaning of Article 6.3(c) and footnote 13 of the SCM Agreement.

FINDINGS AND CONCLUSIONS

The Panel recalled that its task in this proceeding under Article 21.5 of the DSU is to resolve a "disagreement as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings" of the DSB.

The European Union claims that the United States has failed to implement the DSB recommendations in US - Large Civil Aircraft (2nd complaint) to withdraw the subsidies or take appropriate steps to remove the adverse effects, pursuant to Article 7.8 of the SCM Agreement.

The European Union also claims that the measures at issue in this proceeding are inconsistent with Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994.

The United States maintains that it has complied fully with the DSB recommendations and rulings by either withdrawing the relevant subsidies or taking appropriate steps to remove their adverse effects.

In respect of whether certain measures, and claims with respect to certain measures, are outside its terms of reference for purposes of Article 6.2 of the DSU, the Panel made the following rulings:

a. the European Union's claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement, and under Article III:4 of the GATT 1994, are within the Panel's terms of reference;

b. the South Carolina Phase II measures are outside the Panel's terms of reference, owing to the failure of the European Union's panel request to meet the requirements of Article 6.2 of the DSU in respect of such measures; and

c. the Washington State tax measures, as amended by SSB 5952, are outside the Panel's terms of reference, owing to the failure of the European Union's panel request to meet the requirements of Article 6.2 of the DSU in respect of such measures.

In respect of whether certain measures are outside the scope of this compliance proceeding, the Panel concluded as follows:

a. the following measures are within the scope of this compliance proceeding:

i. the Washington State B&O (Business and Occupation) tax credits for preproduction/ aerospace product development; the Washington State B&O tax credit for property taxes and leasehold excise taxes; the Washington State sales and use tax exemptions for computer software, hardware, and peripherals; and the City of Everett B&O tax rate reduction;

ii. DOD (US Department of Defence) procurement contracts funded under the 23 original RDT&E (Research, Development, Test and Evaluation) program elements;

iii. DOD procurement contracts HR0011-06-C-0073 and HR-0011-08-C-0044 SOW and assistance instruments HR0011-06-2-0008, FA8650-07-2-7716, and HR0011-10-2-0001 funded under the Materials Processing Technology Project of the Materials and Biological Technology program element;

iv. the provision of access to DOD equipment and employees through the post-2006 DOD procurement contracts and assistance instruments funded under the 23 original RDT&E program elements and the "additional" program elements that the Panel found to be within the scope of this proceeding;

v. the FAA (US Federal Aviation Administration) aeronautics R&D measure; and

vi. the South Carolina Project Gemini measures and the Project Emerald measures.

b. the following measures are outside the scope of this compliance proceeding:

i. the Washington State JCATI (Joint Center for Aerospace Technology Innovation) measure;

ii. Air Force Contract F19628-01-D-0016 funded under the DRAGON Project of the Airborne Warning and Control System (AWACS) (PE 0207417F) program element; Air Force Contract FA8625-11-C-6600 funded under the KC-46, Next Generation Aerial Re-fueling Aircraft (PE 0605221F) program element; and measures funded under the Multi-Mission Maritime Aircraft (P-8A) (PE 0605500N) program element, including Navy contracts N00019-04-C-3146, N00019-09-C-0022, and N00019-12-C-01123528; and

iii. the provision of access to DOD equipment and employees through the pre-2007 procurement contracts and assistance instruments funded under the 23 original RDT&E program elements.

With respect to whether claims of the European Union with regard to certain measures are outside the scope of this compliance proceeding, the Panel made the following rulings:

a. the European Union is precluded from bringing claims under Articles 3.1(a) and 3.2 of the SCM Agreement against the following four original Washington State tax measures enacted under HB 2294: the Washington State B&O tax rate reduction; the Washington State B&O tax credits for preproduction/aerospace product development; the Washington State B&O tax credit for property taxes; and the Washington State sales and use tax exemptions for computer hardware, peripherals, and software.

b. the European Union is precluded from bringing claims under Articles 3.1(b) and 3.2 of the SCM Agreement, and under Article III:4 of the GATT 1994, in respect of the following four original Washington State tax measures enacted under HB 2294: the Washington State B&O tax rate reduction; the Washington State B&O tax credits for preproduction/aerospace product development; the Washington State B&O tax credit for property taxes; and the Washington State sales and use tax exemptions for computer hardware, peripherals, and software; as well as the FSC/ETI (Foreign Sales Corporation/Extraterritorial Income) measures.

c. the European Union is precluded from bringing claims under Articles 3.1(a), 3.1(b), and 3.2 of the SCM Agreement and under Article III:4 of the GATT 1994 in respect of:

i. the City of Everett B&O tax rate reduction, the tax abatements related to the City of Wichita IRBs (Industrial Revenue Bonds), and the pre-2007 NASA Space Act Agreements and DOD procurement contracts at issue in the original proceeding; and

ii. the pre-2007 NASA procurement contracts and DOD assistance instruments at issue in the original proceeding, as amended by the respective Boeing Patent Licence Agreements.

With respect to the European Union's claim that the United States has failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement, the Panel concluded as follows:

a. with regard to pre-2007 NASA and DOD aeronautics R&D subsidies that were the subject of the DSB recommendations and rulings, the European Union has established that the modifications made by the United States through the Boeing Patent Licence Agreements to the terms of the pre-2007 NASA procurement contracts and DOD assistance instruments do not constitute a withdrawal of the subsidy within the meaning of Article 7.8 of the SCM Agreement and that the United States, having taken no action in respect of pre-2007 Space Act Agreements, has failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement.

b. with regard to the post-2006 measures of the United States challenged in this proceeding, the European Union has established that the following measures involve specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement, and that by granting or maintaining these specific subsidies after the end of the implementation period, the United States has failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement:

i. certain transactions between NASA and Boeing pursuant to post-2006 NASA procurement contracts, cooperative agreements, and Space Act Agreements, with respect to which we are unable to estimate the amount of the subsidy on the basis of the evidence on the record, but consider the United States' estimate of the amount of the financial contribution at [***] between 2007 and 2012 to be a credible estimate;

[*** denotes Business Confidential Information, which the Panel report has deleted.]

ii. certain transactions between DOD and Boeing pursuant to post-2006 DOD assistance instruments, with respect to which we are unable to estimate the amount of the subsidy on the basis of the evidence on the record, but consider the United States' estimate of the amount of the financial contribution at [***] between 2007 and 2012 to be a credible estimate;

iii. transactions pursuant to the Boeing CLEEN (FAA Continuous Lower Energy Emissions, and Noise Program) Agreement with respect to which we are unable to estimate the amount of the subsidy on the basis of the evidence on the record, but consider the European Union's estimate of the amount of the financial contribution at USD 27.99 million between 2010 and 2014 to be a credible estimate;

iv. Washington State B&O tax rate reduction for the aerospace industry, in the amount of USD 325 million between 2013 and 2015;

v. Washington State B&O tax credits for preproduction/aerospace product development, as amended by section 7 of SSB 6828, in the amount of [***] between 2013 and 2015;

vi. Washington State B&O tax credit for property taxes, as amended by HB 2466 to include leasehold excise taxes, in the amount of [***] between 2013 and 2015;

vii. Washington State sales and use tax exemptions for computer software, hardware, and peripherals, in the amount of [***] between 2013 and 2015;

viii. City of Everett B&O tax rate reduction, in the amount of USD 54.1 million between 2013 and 2015;

ix. payments made by South Carolina pursuant to commitments made in the Project Gemini Agreement to compensate Boeing for a portion of the costs incurred by Boeing in respect of the construction of the Gemini facilities and infrastructure through air hub bond proceeds, in the amount of USD 50 million;

x. South Carolina property tax exemption for Boeing's large cargo freighters, in the amount of USD 25.82 million between 2013 and 2015; and

xi. South Carolina sales and use tax exemptions for aircraft fuel, computer equipment, and construction materials, in the amount of USD 2.25 million between 2013 and 2015;

c. the European Union has failed to establish that the following measures involve specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement, and has therefore failed to establish that by granting or maintaining these specific subsidies after the end of the implementation period, the United States has failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement:

i. certain transactions between DOD and Boeing pursuant to pre-2007 and post-2006 DOD procurement contracts, on the grounds that, assuming arguendo that these measures were to involve financial contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement, they do not confer a benefit on Boeing within the meaning of Article 1.1(b) of the SCM Agreement;

ii. tax exemptions and exclusions under FSC/ETI legislation and successor legislation, on the grounds that the European Union has failed to establish that Boeing actually received the FSC/ETI tax benefits after 2006, and that the measure therefore involves a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement;

iii. tax abatements provided through IRBs issued by the City of Wichita, on the grounds that these tax abatements are no longer specific within the meaning of Article 2.1(c) of the SCM Agreement and, as a result, the measure is no longer subject to the provisions of the SCM Agreement on actionable subsidies;

iv. South Carolina sublease of the Project Site, on the grounds that the European Union has failed to establish that the sublease involves a subsidy to Boeing;

v. South Carolina provision of Gemini and Emerald facilities and infrastructure, on the grounds that the European Union has failed to establish that these measures involve financial contributions within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement;

vi. South Carolina fee-in-lieu-of-taxes arrangements set forth in the Boeing FILOT (fee-in-lieu-of-taxes) Agreement and Project Emerald FILOT Agreement, on the grounds that these arrangements are not specific within the meaning of Article 2 of the SCM Agreement;

vii. South Carolina corporate income tax credits in connection with the designation of the Project Gemini and Project Emerald portions of the Project Site as part of the same multi-county industrial park, on the grounds that the tax credits are not specific within the meaning of Article 2 of the SCM Agreement;

viii. South Carolina Income Allocation and Apportionment Agreement, on the grounds that the European Union has failed to establish that the agreement involves a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement; and

ix. South Carolina workforce recruitment, training and development programme, on the grounds that the programme is not specific within the meaning of Article 2 of the SCM Agreement.

With respect to the European Union's claim that the United States has failed to comply with its obligation to take appropriate steps to remove the adverse effects within the meaning of Article 7.8 of the SCM Agreement, the Panel concluded as follows:

a. the European Union has failed to establish that the effects of certain aeronautics R&D subsidies and other subsidies are a genuine and substantial cause of significant lost sales, significant price suppression, impedance of imports to the United States market or impedance of exports to various third country markets, or threats of any of the foregoing, within the meaning of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement in respect of the A350XWB in the post-implementation period;

b. the European Union has failed to establish that the original adverse effects of the pre-2007 aeronautics R&D subsidies in respect of the A330 and Original A350 continue in the post-implementation period as significant price suppression of the A330 and A350XWB, significant lost sales of the A350XWB, or a threat of impedance of exports of the A350XWB in the twin-aisle LCA (large civil aircraft) market, within the meaning of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement in the post-implementation period;

c. the European Union has established that the effects of the Washington State B&O tax rate reduction are a genuine and substantial cause of significant lost sales within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement of A320neo and A320ceo families of LCA in the single-aisle LCA market, in respect of the sales campaigns for Fly Dubai in 2014, Air Canada in 2013, and Icelandair in 2013, in the post-implementation period;

d. the European Union has established that the effects of the Washington State B&O tax rate reduction are a genuine and substantial cause of a threat of impedance of imports of the A320ceo to the United States single- aisle market, and a threat of impedance of exports of Airbus single-aisle LCA in the United Arab Emirates third country market, within the meaning of Articles 5(c) and 6.3(a) and (b) of the SCM Agreement in the post- implementation period; and

e. the European Union has failed to establish that the effects of the pre-2007 aeronautics R&D subsidies and the post-2006 subsidies are a genuine and substantial cause of significant price suppression of the A320neo or A320ceo, impedance of imports of the A320neo or A320ceo to the United States market, or displacement and impedance of exports of the A320neo or A320ceo to the third country markets of Australia, Brazil, Canada, Iceland, Indonesia, Malaysia, Mexico, Norway, Russia, and Singapore, within the meaning of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement, or threats of any of the foregoing, in the post-implementation period.

With respect to the European Union's claims under Articles 3.1 and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994, the Panel concluded as follows:

a. to the extent that the Panel has found that the claims are within the scope of this proceeding, and that the measures at issue are subsidies within the meaning of Article 1 of the SCM Agreement, the European Union has not established that the subsidies are inconsistent with Articles 3.1(a) and 3.2 or 3.1(b) and 3.2 of the SCM Agreement; and

b. to the extent that the Panel has found that the claims are within the scope of the proceeding, the European Union has not established that the measures at issue are inconsistent with Article III:4 of the GATT 1994.