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.]

HASC Bill Includes WTO Language

In what will be the first of many attempts to include tanker dispute language in this year's bills, the House Armed Services Committee (HASC) is directing the Air Force to review whether illegal government subsidies played any role in a contentious refueling tanker contract pending any adverse WTO rulings.

The Hill reports that this legislation though will most likely up in a clash with Senate that would rather not include the tanker dispute in their version of the 2009 Defense Authorization Bill. Also, the Hill reports that HASC Chairman Ike Skelton (D-Mo.) caveatted the inquiry in his mark:

Any inquiry would be done after the World Trade Organization (WTO) delivered its rulings on trade disputes between the United States and the European Union over illegal subsidies to Airbus and tax breaks for Boeing . The two bitter rivals on the world’s commercial aircraft market are also at the center of the tanker controversy.

Since the U.S. WTO case against Airbus will be ruled on first, the Air Force Secretary would have 90 days from that ruling to conduct its first review. The article goes on to state that:

If the Air Force determines the illegal subsidy had a “material impact” that calls into question the “fairness” of the contract award, the service leaders have the right to take “appropriate measures” to remove the impact of the illegal subsidy and make the process “fair to all,” according to the legislative language in the chairman’s mark.

But the provision leaves that to the discretion of the Secretary of the Air Force. It is unclear when the WTO would rule on either of the cases, but it could be several more months until that happens. The discussion could spill into the next presidency and a new Secretary of the Air Force with a different approach than the current secretary, Michael Wynne.

As our previous post indicated, the WTO ruling against the European Union could come as early as next month.

If the WTO ruling comes out against Airbus, we at Tanker War Blog expect Congress would not idly wait by while the Air Force review is conducted. Instead, we would hope funding for the tanker would be cut and not restored until the contract excludes the use of illegally subsidies Airbus planes.

WTO Rejects Request to Stall Airbus Subsidies Case

World Trade Online (Note: This not a free service; you must pay to see the full article) in a 9 Mar headline story "EU Rebuffed In Attempt To Harmonize Boeing-Airbus Cases", reported that its sources say that the World Trade Organization denied an EU request to harmonize the content and timing of the U.S. case against alleged EU subsidies to Airbus and EU case against alleged U.S. subsidies to Boeing.

The EU sought this request to possibly delay the WTO ruling and to possibly force the US into negotiating a settlement. But as the article states:

Within days of making the request, the panel reviewing the U.S. case (DS316) denied it, sources said, giving some credence to the notion it may deliver its interim ruling in the case by June. The EU case (DS353) is on a slower track than the other case, with both sides submitting comments on answers to panel questions earlier this week. The DS316 panel saw the last filings by the parties in March.

The EU argument to the WTO included claims that the parties would be unable to keep the interim rulings confidential in the time between the two rulings. "Parts of the case are very similar," one source argued.The U.S. responded to the brief, arguing that WTO law permits harmonization of cases brought by multiple members against the same alleged WTO violation, but does not prescribe the type of harmonization sought by the EU.

While one source close to the EU sees a DS316 ruling in September, another source said the swift response on the EU request was a sign the DS316 panel is approaching a decision by June.

Many eyes are on the GAO ruling on the tanker competition due by June 19th, but the WTO case ruling may have an even greater impact. Even a partial victory for the U.S. in the first case could spell the end of the $35 billion refueling tanker contract awarded by the U.S. Air Force to EADS and Northrop Grumman over Boeing.

It is an election year and very few in Congress will want to be seen as aiding a foreign company that undermines free trade to the detriment of US companies and their workers, especially when the economy is faltering.

The EADS team has been successful to date in its efforts to spin the tanker controversy as simple protectionism vs. free markets. If the WTO determines that Airbus has broken the rules of free trade, EADS's strongest point now becomes their weakest. Expect the public backlash to be justifiably merciless.

Timber! Falling Faith In US Trade Policy

A central theme of this blog has always been that the tanker issue is not really about Boeing vs. Northrop Grumman or Boeing vs. the USAF, but in fact Boeing and US aerospace workers vs. Airbus and the illegal subsidies it receives.

At Tanker War Blog we contend that the US government has a duty to balance the promotion of free trade with enforcement of free trade. Blindly clinging to the idea that competition and market forces will result in fair trade is folly. Competition doesn't work when the playing field is tilted toward one side or one of the competitors is given an unfair advantage.

Some of us at TWB had hoped that the Executive Branch would realize its mistake in buying an illegally subsidized product like the EADS/Airbus A330 and stop the tanker contract. But others here, who have long since lost faith in US trade policy, have pointed out that even when the administration seemingly stands up for fair trade it may in fact be just lining insider's pockets.

A case in point is the 2006 timber trade settlement with Canada. The Seattle Post-Intelligencer in a recent article by Robert McClure asks the question:

Is it an illegal $1 billion slush fund for Bush administration friends in the timber industry, extorted from Canada and designed to evade congressional oversight?

Or is it a fairly negotiated end to an expensive trade war that's "the best thing that has happened to private forest land conservation in the United States in 100 years?"

Given that at least one of the groups to receive money from the settlement, the U.S. Endowment for Forestry & Communities ($200 million), was hastily set up during the settlement and established just before the deal was finalized, it is probably right to ask these questions. The article also notes that the deal was monitored by Harriet Myers, then still the President's chief lawyer, so suspicions should be heightened all the more.

At Tanker War Blog we believe our government should stand for fair trade and look after the interests of US workers and consumers in trade disputes and not just industry and party insiders. We firmly believe this is also what the American people want.

We further believe that if there was proper enforcement of free trade EADS would never have been allowed participate in the tanker contract.

It is also becoming clearer to us that only Congress has the will and the ability to properly solve disputes such as the tanker controversy.