What Happened: The U.S. government is planning to impose tariffs on a list of $11.2 billion worth of imports from the European Union as part of a broader subsidy dispute between the United States and the European aerospace group Airbus, The Wall Street Journal reported April 8. The tariffs come under Section 301 of the Trade Act of 1974 and cover aircraft and their parts, as well as cheese, olives and olive oil, although Washington said it would not move forward with the tariffs until the World Trade Organization (WTO) confirms the damage estimate.
Why It Matters: Although the United States is using Section 301 of the Trade Act of 1974 to proceed with the tariffs under U.S. law, Washington is relying on backing from the WTO and appears to be proceeding in line with the organization’s regulations. The U.S. government will likely use the tariffs as leverage in trade talks with the European Union, but the WTO found last month that the United States had not fully complied with dictates as it had not entirely removed its own support for Boeing in the long-running Airbus-Boeing subsidy dispute.
Background: Since 2004, the United States has been accusing European countries of supporting Airbus with subsidies and other support mechanisms that are barred under the WTO. Brussels, in turn, has accused the United States of instituting the same measures to aid Boeing. After the WTO ruled that both sides’ actions were prohibited, Washington and Brussels said they had complied and eliminated the banned support mechanisms.
In 2006, after attempts to negotiate a bilateral agreement, the U.S. Government (USG) filed a case with the World Trade Organization claiming Airbus had received $22 billion in illegal subsidies. U.S. officials estimated the economic benefit of those subsidies (in 2006 dollars) at more than $200 billion.
The biggest and most impactful of the subsidies is known as launch aid – highly subsidized loans to Airbus for the development of new products. Repayment is tied to airplane delivery targets, so typically does not begin until several years after a program is launched. What’s more, the interest rates on the loans are significantly less than commercial lenders would charge, and in the event a product does not hit a pre-determined sales target, remaining loans on the product are forgiven.
Launch aid provides significant advantages to Airbus, among them artificially low cost of capital, lower program risk, and the ability to price its products lower than the competition. It also enables Airbus to introduce new products faster than it would be able to do otherwise. The continuation of launch aid and other European subsidies to Airbus poses a significant risk to America’s ability to compete successfully in the global commercial airplane market.
The WTO Decision against European Subsidies
In June of 2010 the WTO ruled in favor of the United States on 80% of the total alleged subsidy amounts, and in May of 2011 a WTO appellate panel upheld all of the key findings of the earlier panel. The WTO ruled that Airbus had received $18 billion of illegal subsidies, including $15 billion of launch aid. Airbus-sponsor governments were given until December of 2011 to remove the harmful effects of all illegal subsidies. On September 22, 2016, the WTO confirmed the European governments not only failed to meet the compliance deadline to remedy $17 billion worth of past subsidies provided to Airbus, but that an additional $5 billion in illegal launch aid has since been provided to support the A350. In a last ditch effort, the EU appealed that ruling. The WTO rejected the appeal in May 2018, opening the door for the U.S. Government to initiate the WTO process for imposing tariffs on European exports to the United States to mitigate these violations.
If illegals subsidies were given aren’t the costs higher as airbus is very successful today? Without the subsidies would airbus be in business today?