The WTO, Boeing, Airbus And KC-X

One of the most significant issues facing the World Trade Organization (WTO) are dueling complaints relating to government subsidies to the two major civil aerospace companies: Airbus and Boeing. Both companies with the support their respective governments have filed complaints with the WTO about the fact that they received direct or indirect government support to develop and build airliners. These subsidies it is alleged provide a competitive advantage to the other company in sales of aircraft to airlines.

The first case of the Boeing complaint was recently decided. Supposedly it was decided in Boeing’s favor that “said Airbus received illegal European government subsidies to develop its A380 jet plane”. The decision was only released to the companies and government officials so any discussion of it is based on leaks and background statements. If the WTO decision stands then EADS and Airbus will be liable to repay the several billion dollars they received from European governments as development aid.

Airbus and the European Union have filed an appeal as well as accusing Boeing through its military contracts and state and Federal tax breaks of receiving the same sort of illegal subsidies. The appeal process could take up to five years so that any final decision won’t be made until 2013 or later.

The punishment of paying back the money also won’t affect the sales of the aircraft or the money that the company has been making off of it. EADS has significant cash reserves due to the need to hold money in case of the A400M contract requiring payback to those customers for the new transport. Despite this it is quite a blow to EADS and how they develop their new aircraft.

Both Boeing and EADS are working on new wide body transports and both are continuing to receive aid for the 787 and A350. The ruling may also not really impede other countries trying to gain more of the market as it is still a long way off for any effect to happen. Of course there is also the option of a country just ignoring the WTO although to do that would undermine the whole modern structure of trade regulation.

The key issue this raises for EADS and Northrop Grumman is that it will allow Boeing supporters in Congress to argue that the new tanker contract should go only to that company. The WTO ruling will aid arguments that the price being offered is artificially low. This will make it hard for the Air Force to reaward the contract to the Northrop team. It will also provide impetus for Boeing to protest again using this as part of their argument. In the long run the KC-X replacement program will be delayed even further.