Subsidy queens: The Boeing v. Airbus financing dispute can only expose each side's subsidy dependence

Subsidy queens: The Boeing v. Airbus financing dispute can only expose each side's subsidy dependence

Carney Op-Ed in the Financial Post
November 10, 2005

The <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />United States and the European Union may be on the brink of the largest transatlantic trade war ever. At issue are government subsidies for the makers of passenger jets—Boeing in the United States and Airbus in Europe.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

 

Each side claims the moral high ground, but in fact governments on both sides of the Atlantic heavily subsidize their jet-makers. Washington launched the dispute, even though Boeing may be the largest U.S. beneficiary of corporate welfare. Meanwhile, Airbus resembles more a government agency than a private business.

 

On May 31, a year of negotiations between U.S. and EU trade officials escalated into the first stages of a trade war when U.S. trade representative Rob Portman asked the World Trade Organization to establish a dispute settlement panel.

 

The Bush administration made this decision after the EU's announcement that France, Germany and Britain would provide well over US$1-billion in aid for Airbus's next big project—the A350. This news came only four months after Airbus unveiled its "super-jumbo" A380, the first jet ever built to directly compete with Boeing's 747 jumbo jet.

 

At that time, Boeing was preparing to unveil its 787—a mid-sized jet capable of long journeys. Airbus did not want the 787 to go unanswered, so the EU turned its efforts to building the mid-sized A350. When European governments said this year they would subsidize the A350, the United States decided to take the EU to court. In response, the EU filed a counter-complaint at the WTO against U.S. subsidies to Boeing.

 

The WTO will soon find itself sorting through the subsidies that flow to the two jet-maker giants -- and there will be no shortage of material on either side. The truth is, there's plenty more corporate welfare than either complaint suggests.

 

Europeans complain primarily about the boost that Boeing's research and development receives indirectly from military and civil government contracts, but many other subsidies are more direct, and far more market-distorting.

 

Boeing is one of the largest Pentagon contractors, second only to Lockheed Martin. From fiscal year 1998 through 2003, Boeing received US$82-billion in contracts from the Department of Defense. About half of that money was for aircraft components; slightly less than one-fourth was for R&D.

 

EU officials claim Boeing's research and development numbers amount to a subsidy, because R&D done on the Pentagon's dime can reap benefits for Boeing's commercial undertakings. With higher defence spending in the United States, Boeing has more chances for defence contracts, Airbus says.

 

But to the degree some Boeing contracts appear illegitimate, "subsidy" just might be the correct word. The Pentagon characterizes 60% of Boeing's military contracts between 1998 and 2003 as "not full and open," suggesting Boeing may have received favouritism in awarding contracts.

 

Boeing also benefits from civil government contracts, including research programs from NASA and the Federal Aviation Administration. On these contracts, the definition of "subsidy" is nuanced. But one aspect of the federal government 's support for Boeing is unquestionably a subsidy: Export-Import Bank financing.

 

The Export-Import Bank of the United States (Ex-Im) is a government agency that loans money or guarantees private loans to foreign buyers of U.S. goods. Ex-Im is known as "Boeing's Bank," and for good reason. Between 1998 and 2004, it issued loans and long-term guarantees for US$53-billion of U.S. exports. Just under US$28-billion of those deals were Boeing sales. Ex-Im exists not just primarily, but mostly, to subsidize Boeing's overseas aircraft sales.

 

Boeing also receives generous corporate welfare from local and state governments. In Washington State, the current senior Senator, Patty Murray (D), is known as the "Senator from Boeing."

 

Europe, meanwhile, sees the success of Airbus as an intense matter of European pride. To most Americans, Boeing is just another business. But Europeans seem willing to lose money in helping Airbus, as part of the cost of beating the U.S.

 

Airbus is significantly a government-owned company. Since 2001, the European Aeronautic Defence and Space company (EADS) has owned 80% of the company and British Aerospace (BAE) the other 20%. EADS is 20.5% government-owned, making Airbus 16.4% state-owned.

 

The U.S. WTO complaint against Airbus centres around the R&D money Airbus receives that has no real U.S. counterpart: "launch aid." European nations issue low-interest loans to Airbus for a portion of the cost of developing new planes. Airbus pays back the loans depending on its ability to sell the planes. If the research doesn't pan out or the plane doesn't sell, the governments forgive all or part of the loan.

 

For the Airbus A380, launch aid totalled US$4-billion—one-third of the total R&D cost—from the governments of France, Germany, Great Britain, Spain, Holland, Finland, Belgium, Italy and Sweden. European leaders have made it clear they also will support the A350.

 

On top of launch aid comes support from the European Investment Bank, a government-capitalized lender. EIB has helped fund the development of Airbus planes, including about US$840-million for the A380.

 

While the U.S. is not objecting to Airbus's government contracts, the parent companies of Airbus, like Boeing, are also top military contractors. The combined military sales of EADS and BAE just about equalled those of Boeing in recent years.

 

Individual European nations also provide R&D money to Airbus, and cities in Europe are eager to accommodate it. Between the A380 factory in Toulouse, France, a massive landfill on the Elbe River in Hamburg, Germany, and other new construction in Germany, Spain, France, and the U.K., the U.S. Department of Commerce finds more than US$1-billion in infrastructure aid.

 

Airbus's main government patrons—France, Germany, the U.K. and Spain—also subsidize Airbus Ex-Im style. Each has its own counterpart to the U.S export finance agency. As well, European governments use their clout to pressure foreign airlines to buy Airbus. European governments have even suggested favouritism to Airbus was a condition for accession to the EU.

 

And Germany, in 1998, forgave nearly US$4-billion in debt. According to the USTR, such debt forgiveness is not unique.

 

As it sifts through the benefits Airbus and Boeing each receive, the WTO may find it difficult to judge which is the worse offender.

 

Considering how heavily subsidized Boeing is, though, one must wonder whether the U.S. complaint is throwing stones from the front porch of a glass house. One could read a boldly clever agenda into the White House's actions: A WTO rebuke to Boeing's subsidies would give the administration political cover for rolling back corporate welfare.

 

Even if the President's complaint is not a shrewd anti-subsidy tactic, this threat of a trade war could have the effect of tearing down subsidies on both sides of the Atlantic. If all Boeing and Airbus subsidies are put on the table, at least the world will have the chance to see just how dependent on taxpayers these corporate welfare titans really are.