Earlier this week, the new trade commissioner for the European Union made headlines by vowing to do all he could to head off a trade war over the Boeing-Airbus subsidy dispute.
“We should talk about these matters,” EU commissioner Peter Mandelson said. “Talk across the table and not through megaphones.”
You’ll be hearing a lot in the next month or so about the 1992 bilateral agreement and direct and indirect aircraft subsidies. Here’s a primer.
The 1992 agreement between the United States and the European Commission (now the European Union) spelled out how governments on each side of the Atlantic could assist their respective aerospace industries. It put caps on the amount of government aid each could receive, and committed both sides to reducing taxpayer assistance to the aircraft industry.
The agreement deals with two kinds of subsidies, direct and indirect.
Direct subsidies are simple. In Europe, governments just hand over cash to help Airbus cover the cost of designing new airplanes and setting up production lines to build them. Typically, they do this by granting Airbus loans under very favorable terms.
Indirect subsidies are a little more complicated to calculate. But it’s obvious that Boeing’s commercial airplanes operation benefits from research and development the U.S. government pays Boeing’s military divisions to do. Under the agreement, that’s an indirect subsidy.
Direct subsidies are capped at 33 percent of the startup costs of any new airplane program, and indirect subsidies are capped at 3 percent of a company’s annual commercial airplane revenues.
Got it? Good, because it gets a lot more complicated.
Boeing says Europe has violated the spirit of the agreement. Instead of reducing subsidies to Airbus, Europe has increased spending to help Airbus get the A380 superjumbo jet under way.
Boeing also says that the government loans Airbus gets are unfair. If Airbus misses its sales targets for those planes – as it has in the past – it doesn’t have to pay back the loans at all.
Boeing says Airbus has received $15 billion worth of loans this way – loans that would have cost $35 billion if it had been forced to obtain them on the commercial market.
Without a major debt load, Airbus is able to undercut Boeing on price, and that’s a major reason Airbus has surpassed Boeing in both orders and deliveries in recent years.
European officials say they’re willing to cut back on direct aid to Airbus – if the U.S. government cuts indirect aid to Boeing. That’s a false argument, Boeing maintains.
In Europe, Airbus’ parent companies – EADS and BAE Systems – benefit from indirect subsidies from defense contracts, just as Boeing does here. Last year, in fact, EADS and BAE combined had bigger revenues from defense than Boeing.
The difference is, Boeing argues, is that nobody’s counting what kind of indirect aid Airbus is getting.
In addition, Airbus benefits from U.S. government-sponsored research in the civilian sector. The new “wing fences” it uses on A320s – a winglet variant with pieces both above and below the wing – are derived from technology developed for NASA and paid for with U.S. tax dollars.
The bottom line, Boeing says, is that Airbus is getting both direct and indirect subsidies from its governments, while Boeing will never get that kind of support. (You can bet there will be moss growing in Tempe before Arizona Republican Sen. John McCain approves a direct cash handout for Boeing.)
So why is Boeing picking a fight over this issue now? I put the question to some folks at Boeing and got a surprising answer: They’re doing it to protect the 7E7.
Airbus has sunk – Boeing would say wasted – a lot of time, money and energy into getting the A380 off the ground. While they were doing that, Boeing may have stolen the march by getting the midsized Dreamliner into development.
If Boeing is right, and airlines want a superefficient jet more than a superjumbo, it has put itself in position to dominate aerospace for the next decade or more – especially if Airbus is saddled with huge bills from a stagnant A380 program.
But if Airbus can simply turn to its European governments for a big slug of cash, it could go to work on its own mostly composite, midsize jet – and thus erase much of Boeing’s head start.
Reporter Bryan Corliss: 425-339-3454 or corliss@heraldnet.com.
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