Trade War Between Europe and the US: WTO Complaint Comes at a Bad Time for Airbus

At the end of April, the United States brought its complaints against Airbus subsidies before the World Trade Organization. With France and Germany both dealing with their own political problems, the move couldn't have come at a worse time for the Europeans.

The Airbus tanker aircraft may be shut out from Pentagon contracts.
Airbus

The Airbus tanker aircraft may be shut out from Pentagon contracts.

When Boeing introduces its novelties this week at the Paris Air Show in Le Bourget, the company will essentially be operating in enemy territory. After all, it was only recently that the firm, in tandem with the United States government, intensified its trade conflict with European plane-maker Airbus.

At the end of May, Washington filed its case against Airbus before the World Trade Organization (WTO) -- a move that the European Union is set to answer with its own formal complaint. The US accuses four European countries and Airbus participants -- France, Germany, Spain and Great Britain -- of providing financing to the tune of 1.4 billion ($1.7 billion) for the development of the new Airbus A350 and contests the loans that have already been made. On the flip side of the coin, the Europeans are accusing the United States of aiding substantially in the development and production of the Boeing 787 Dreamliner through tax cuts and start-up help amounting to $5 billion.

The American attack has set off particularly rough turbulence within the leadership of Airbus's parent company, EADS. Taking the case to the WTO will "lead to a trade war that is not in the interest of any of the stockholders," EADS and its British partner and shareholder BAE Systems. The announcement by US diplomats makes it appear doubtful that America was really interested in reaching a negotiated solution, the two companies said in a joint statement.


A Handful of Dilemmas for Airbus

Part I -- Internal Squabbling: Airbus's Leadership Problem
Part II -- Losing Ground to Boeing: Airbus's A350 Problem
Part IV -- Costly Delays: Airbus's A380 Problem
Part V -- Currency Fluctuation: Airbus's Dollar Problem

Now it is the Europeans who are trying to avoid an escalation. EU Trade Commissioner Peter Mandelson proposed a step-by-step elimination of the subsidies. Airbus itself offered to forego state aid -- but in return, the company expects a pledge from Boeing that it would likewise abstain from such benefits. The US government hasn't yet felt the need to respond to the two offers.

The Europeans have good reasons for wanting to settle the dispute. The European Union, after all, is currently dealing with existential questions about its own future. Any major trade dispute would only serve to distract from even more important issues. The rejection of the European constitution in France and the domestic political situation in Germany -- where Chancellor Gerhard Schroeder has called for early elections to be held this autumn amid plunging public support for his government -- are monopolizing the attention of the two largest Airbus players. Given such a situation, a successful battle against the subsidies offered to Boeing in the US looks difficult at best.

The bottom line is that a possible trade war against the United States -- with the boycotts and sanctions that would go along with it -- couldn't come at a worse time. Airbus's mother ship, EADS, has been trying for years to establish itself in the lucrative US defense market. A large contract from the Pentagon -- an order for tanker aircraft for example -- would be a huge coup. Not only would it be financially beneficial for the Europeans, but it would also be a painful defeat for Boeing in its own backyard.

But the American competition is painfully aware of that reality -- and it is doing everything it can to prevent that scenario. Under pressure from Boeing, the US House of Representatives last month voted to exclude foreign companies that receive state subsidies from defense contract consideration. Were Europe to open the case against the US in the WTO, Europe's dream of entering into into the US arms market would recede even further into the future.

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