Wednesday, May 28, 2008

More EU Subsidies for Airbus and EADS

Bloomberg reported yesterday that the Airbus SAS request for European governments to contribute $18.2 billion in development costs for the A350, which will directly compete against Boeing's 777 and 787, has been tentatively approved.

The article states that:
Airbus approached European nations for aid and ministers have agreed "in principle" to the idea, Peter Hintze, Germany's deputy economy minister, told reporters today at the Berlin Air Show. His comments were echoed by Dominique Bussereau, junior minister for transport in France.

Loan commitments for the new A350 widebody jet may exacerbate a trade dispute between the European Union and U.S. over aid for planemakers. The U.S. filed a complaint with the World Trade Organization in 2005 about European assistance to aerospace companies. The EU filed a countersuit against the U.S. and the dispute is still being weighed at the WTO in Geneva.

"It's not going to do trade diplomacy any favors, but it's not like they have a choice," said Richard Aboulafia, vice president at Teal Group, a consultant in Fairfax, Virginia. "Delaying the most important product for the company in the name of diplomacy doesn't sound like a smart move."

I know what Mr Aboulafia means, but I disagree that Airbus does not have a choice. They can choose to compete fairly without asking for a government handout every time they want to develop a new product. Airbus chooses not to forgo subsidies because its state-ownership and shared-production business model is not competitive without them.

This new round of subsidies comes in addition to other announced government "investments" in A350 components such as the Welsh government's contribution to $14.8 million to develop the next generation composite wing technology for Airbus.

The Bloomberg article quotes EADS Chief Executive Officer Louis Gallois saying that Airbus needs more state aid to compete fairly with Boeing.

"We are asking only for a level playing field with the competitor," Gallois said in an interview. "We feel the competitor is getting support from its government for research and development, and from the states of Kansas and Washington."

Gallois said yesterday at the company's annual meeting in Amsterdam that EADS doesn't need to seek a capital increase from investors for A350 funding because the company has 8.3 billion euros in cash.

It is hard to fathom how a company that has over $11 billion is cash, with which it could finance any development, still needs an $18 billion government handout.

Also, I must have missed the billions of dollars in US government support for commercial products Boeing is supposedly getting when the appropriations bills were signed into law last year. Maybe Mr. Gallois knows more about this than those who help write the bills. It is also funny to see he no longer mentions defense contracts as a Boeing subsidy like the original EU WTO countersuit.

One of the most absurd parts of this dispute though is how those in the executive branch, who talk of using all elements of national power, would seemly surrender our nation's economic power and all its leverage over EADS to give up its illegal subsidies.

Why should EADS give up its subsidies when DoD would rather myopically take advantage of the lower the System Development and Demonstration (SDD) cost and reduced unit prices these subsidies provide? No need to look out for the economic interest of the country as a whole if you can cut yourself a good deal.

In fact, DoD seems intent on rewarding EADS as quickly as possible and support the EU's economic war against America's largest manufacturing exporter. You're doing a heck of a job, Brownie...oops I mean Robbie.

Better watch out, next thing you know Kanye West will be saying Bush doesn't care about American workers either.

[Note: The commentary to this post is not the consensus view of Tanker War Blog. While we are all in full agreement on the Airbus subsidy issue, many members are not convinced the SecDef has had much of a role in the tanker dispute. But, we do respect the member's right to make their view known and we believe their perspective is a valid contribution to the tanker debate.]


Anonymous said...

Meanwhile... in other news...
Congress makes provisional funding for 15 additional Boeing C-17's that the Pentagon Says it does not need nor want, key backers behind the push for extra funding, come from the states of manufacture.

In other news, Lockheed gets billions of dollars in funding for F-35 from multiple nations.

What was that about the pot calling the kettle black?

Tanker War Blog said...
This comment has been removed by the author.
Tanker War Blog said...

Dear Anonymous, you are obviously not from DC. (That's a compliment by the way.)

On C-17s the Air Force plays this game every year where they do not put them in their budget, but they tell everyone who will listen on Capitol Hill that they want them.

Each service has what is called an unfunded priorities list, those items they need, but DoD will not give them money to buy. So Congress ends up finding the money themselves and writes these items in the appropriations bills.

Why would the services do this? Why to them it is free money.

The services also often game the system by choosing not to fund items they know have enough political support to be funded by Congress. The C-17 is a prime example.

So often it is not that the service does not want an item, they just rather have Congress appropriate them a bigger budget than DoD submitted for approval.

Now, on the F-35 issue you are making the mistake of comparing a subsidy for a commercial product, which is mostly against WTO rules; and development money for a military item, which is almost always allowed under WTO rules.

These are complex issues so we don't fault you for making some mistakes, but if your kettle is black we would suggest you clean it.

Tanker War Blog

Anonymous said...

Dear Tanker War Blog. That is Very funny I really think if they tryed to clean it with ajax or a magic eraser well it still comes out Black.