OP/ED: Airbus and Its Continued Subsidies By Europe (Part II) - The 1992 LCAA and Japan

The 1992 Large Civil Aircraft Agreement (LCAA) was intended to limit and eventually eliminate Europe�s support for Airbus in return for the U.S. dropping a pending GATT Subsides case. These events preceded the founding of the WTO. The agreement was never intended to balance European Subsides against the defense spending of the United States. Defense spending as I pointed out in part I is not a subside. At any rate, the defense contracts of both companies are nearly dead even. Boeing has to compete with the like of Lockheed, Northrop, BAE, and the like for every defense dollar the U.S. spends. However, the launch aid et al, payed for by the European taxpayers, on top of the European defense expenditures is a direct subside.



As U.S. Trade Representative Robert B. Zoellick stated in a press conference:

This is about fair competition and a level playing field. Since its creation thirty-five years ago, some Europeans have justified subsidies to Airbus as necessary to support an �infant� industry. If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing,(1)

Despite repeated attempt by the United States to renegotiate the 1992 Agreement, European Commission has stubbornly refused to do so. The 1992 agreement envisioned a reduction of Subsides for the production of aircraft. However, Europe has failed to do so, Indeed the Airbus A380 was the most heavily subsidized aircraft in history. As I pointed out in part I Airbus is already saying they will seek the same level of support for the launch of the A350. These thinly veiled subsides in the form of launch aid and the like qualify under the WTO Agreement on Subsidies and Countervailing Measures (SCM) (2)

The subsidies are actionable because they are causing adverse effects to U.S. interests or �prohibited� because they are export-contingent or both. In 1999, in a case by Brazil, the WTO found that Canadian financing with launch aid-type terms was a prohibited export subsidy. Another panel, reviewing a case brought by Canada, found that Brazil�s interest rate subsidies to its aerospace industry were also an export subsidy. (2)

Airbus has used the 1992 agreement to further increase the amount of Subsides it receives. In light of its overtaking Boeing in the commercial aircraft field one has to wonder why the governments of Europe continue to provide the now clearly not needed Subsides. However, it makes sense if this is simply an elaborate jobs program.

Over its 35 year history, Airbus has benefitted from massive amounts of EU member state and EU subsidies that have enabled the company to create a full product line of aircraft and gain a 50 percent share of large commercial aircraft ("LCA") sales and a 60 percent share of the global order book. Every major Airbus aircraft model was financed, in whole or in part, with EU government subsidies taking the form of "launch aid" � financing with no or low rates of interest, and repayment tied to sales of the aircraft. If the sales of a particular model are less than expected, Airbus does not have to repay the remainder of the financing. EU governments have forgiven Airbus debt; provided equity infusions; provided dedicated infrastructure support; and provided substantial amounts of research and development funds for civil aircraft projects. (1)

Indeed both parties were signatories to a 1994 WTO agreement, along with 100 countries, that declared that launch aid and other forms of anti-competitive subsidy should not be tolerated (3). All fact point to Europe, not only interested in an elaborate taxpayer jobs program, never had any intent to comply with the spirit of the 1992 LCAA. Nor it seems can it wean itself from the teat of �Subsides�. One has to wonder, how quickly it could respond and develop new aircraft if it had to assume actual market risk in is ventures.

Japan

Airbus supporters are quick to point to Boeing�s contractual agreement with japan and cite them as an unfair subside. However, that is a simplistic view and they often fail to point out quite a few realities of Boeing trade with japan.

The actions between the Japanese government an Japanese Industrial concerns is not directed by Boeing, rather they represent a national initiative. Boeing is required to negotiate and pay fair market price for the good and services that they receive from their Japanese suppliers. Boeing does not have a formal relationship between its Japanese suppliers beyond the contractual agreements that it has.

Indeed Airbus also has Japanese suppliers for its range of products. If the Japanese government is offering incentives like the state of Washington, they are no doubt open to any and all producers of commercial aircraft.

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(1) Press Release: October 6, 2004, U.S. Files WTO Case Against EU Over Unfair Airbus Subsidies, Office of the United States Trade Representative

(2) Trade Facts, October 6, 2004 �No New Subsidies� , Office of the United States Trade Representative

(3) AIRBUS Subsidies, Boeing Corporation Background Information Press Release, No Date


Further in this series:
Airbus and Its Continued Subsidies By Europe (Part III) - The Case of Pratt & Whitney

[edit on 16-12-2004 by Banshee]

Fred matey you keep referring to loans as subsidy.

They aren't subsidy they are repayable loans. Which will be repaid (and what will you have to complain about then, huh?)

.....and the US gov's outright subsidy, billion $ cash gifts to airlines, tax breaks and all the other 'soft money' your industry gets is little or no different.

(Oh and by the way, the aircraft industries' sales tax system is one ridiculous bit of chicanery after another......there's no point making claims about how Europe does things when Boeing signs over ownership and does deals in international airspace etc etc, for instance, to dodge taxes.

They're all at it one way or another. A single instance of difference is hardly representitive of the entire picture. Come on, huh? )

Leave it with the WTO, you'll have to wait a while cos it takes a little time and then lose (again, for the umteenth time).

Tough luck America, you had 40yrs dominating the civil aero-industry and now you don't.

It isn't your 'right'; you simply can't do the best kit at the best price anymore.

Get over it cos it ain't changing anytime soon.

We had to stomach the corrupt and politial crap your industry and gov pulled and the decades of damage it caused Europe's old individual national industries (and the wreaked umteen 10's X 1000's who's jobs were destroyed too) so just be glad this is nothing like that.

No one likes a sore loser.

(and for those who don't know out there; Airbus is not the EU, it is a conglomerate of aerospace companies voluntarily operating as one company within the EU, OK?)

[edit on 16-12-2004 by sminkeypinkey]

Originally posted by sminkeypinkey
(and for those who don't know out there; Airbus is not the EU, it is a conglomerate of aerospace companies voluntarily operating as one company within the EU, OK?)

I beg to differ. As part of what seems to be a concerted effort to create a European Jobs program which in the spirit of FDR's "New Deal", I will hereby name "The EU Deal", I submit that BAE and EADS are much more integrated to the the EU's needs much like the system is in Japan.

The EU Deal that is in place for Aibus is the ultimate in sweetness. Not only do they not have to pay off the launch aid if the aircraft does not come to fruition, they don't have to give back a cent untill the plane meets profitiability on sales. While you can point all you want to the breaks that Boeing got in Washington, which I repeat is avalible if Airbus wishes to porduce say the A350 there, care to explain the multi million dollar facility built by the city of Hamburg for Airbus? I did'nt see Renton providing the same level of support for the 7E7.

You can talk about sore losers all you want, but the bottom line is that Airbus thanks to the grossly unfair playing field put in place, and propigated by the "EU Deal" has no intention of playing fairly in the past, in the present, or in the future.

Speaking as an aviator and economist, every aviation operation on Earth is directly or indirectly supported by government subsidy. Its the way aviation works. Tax write offs, tax breaks, regulatory breaks, sweetheart contracts, airmail cargo, loans or direct subsidies and any number of other 'props' is how the game is played from the guy down the street flying helicopter rides to Airbus and Boeing. Aviation, if done safely, cannot make a profit in the traditional sense. It is considered a strategic asset (yes, even Ma's Flight School trains potential combat pilots), and so merits obvious and not-so-obvious Government support.

Want to make a small fortune? Invest a large one in Aviation

[edit on 16-12-2004 by Chakotay]