What’s Driving the Boeing vs. Airbus Trade Dispute?

(Bloomberg) -- Making airplanes is a prestigious business, testimony to a country’s technical skills, its engineering prowess and aspirations on the world stage. It can be a source of national pride, but also a trade flashpoint. Nothing illustrates this more than the global rivalry of Boeing Co. and Airbus SE, the Coke and Pepsi of the skies. The U.S. and European Union have been fighting over subsidies to their respective aircraft industries for nearly two decades, with many companies on both sides of the Atlantic suffering collateral damage. Now, finally, the two sides have found a way forward -- just as a new potential rival to the planemakers’ duopoly appears on the horizon.

1. What’s the fight been about?

State aid -- the increasingly common practice of governments doling out support to key manufacturers or industries. In 2004 the U.S. lodged a case at the World Trade Organization against the EU for its member state support to Airbus. In 2011 the WTO ruled that the EU provided Airbus with billions of dollars of illegal subsidized financing that enabled Airbus to launch its widebodied and short-haul planes. The EU opened a parallel case against the U.S. that successfully argued Boeing benefited from state subsidies as well as space and military contracts, which defrayed the cost of civilian aircraft development. The cases continued to wind their way through the WTO until 2019 -- when the trade body authorized the U.S. to retaliate with tariffs against $7.5 billion worth of EU exports annually. In October 2020 the EU won permission from the WTO to strike back with annual tariffs on $4 billion of U.S. goods.

2. What kind of state aid did they get?

The governments of Germany, France, Spain and the U.K. provided Airbus with subsidies via launch-aid loans for aircraft development, equity infusions, debt forgiveness and various other financial contributions. The U.S. handed Boeing subsidies via federal research and development funding, state and local tax programs and infrastructure-related funding. Both the U.S. and EU alleged that the other’s measures failed to adhere to the WTO’s Agreement on Subsidies and Countervailing Measures, which governs the use of state aid programs.

3. What changed?

On June 15, 2021, the U.S. and EU reached a ceasefire agreement, suspending those tariffs on $11.5 billion worth of products for five years from July 11, 2021 and parking the dispute over airport subsidies. The tariff suspension will benefit key European products like French wine and Spanish olives as well as U.S. exports such as tractors, nuts and fruit. In addition, the EU and U.S. agreed to establish new bilateral rules on subsidies for the civil aviation sector and agreed to cooperate to counter what they called China’s “non-market” behaviors. The accord turns the page on a key conflict in former U.S. President Donald Trump’s trade war and sets the stage for a new era of transatlantic cooperation over state aid.

4. Why did the breakthrough come?

Joe Biden’s first visit to Brussels as U.S. president for an EU-U.S. summit provided the focus. But some of the impetus may have come from China’s attempt to shake up the Boeing-Airbus duopoly in the large civil aircraft market, a dominance that has lasted more than 20 years. There’s growing awareness among policy makers in Brussels and Washington that the state-sponsored aerospace manufacturer Commercial Aircraft Corp. of China, or Comac, is on track to become a legitimate rival in global planemaking by the end of the decade. Furthermore, the market is being squeezed as the Covid-19 pandemic reduces demand for new planes.

5. What does the deal mean for Boeing and Airbus?

Most immediately the agreement removes the threat of future tariffs on Boeing and Airbus planes and parts. That will provide business certainty that the companies need in order to invest, market and sell their aircraft. The deal also establishes a working group to try to resolve any disagreements bilaterally instead of engaging in costly litigation. More broadly, the accord creates a forum for the U.S. and EU to cooperate on how to deal with China’s state-funded efforts to build large passenger planes, with an eye to creating what they see as a level playing field for global aircraft manufacturing.

6. Why are these aircraft manufacturers so important?

Sales are commercially and politically important because they support thousands of jobs and represent a critical component of Europe and America’s overall trade balance. Geopolitical rivalry is baked into the relationship between the two companies. Airbus, based in Toulouse, France, was created half a century ago as a consortium bringing together the resources of European aerospace companies, including France’s Aerospatiale, Germany’s Deutsche Airbus and Spain’s Construcciones Aeronauticas SA. The aim was to challenge the dominance of U.S. passenger jet manufacturers: Boeing with its 707, 737 and 747 models, McDonnell Douglas with the DC-8, DC-9 and DC-10 range and Lockheed with its three-engined Tristar.

7. How did the U.S. position change?

The original goal was to thwart launch aid financing for the Airbus A350 -- a rival to Chicago-based Boeing’s 787 Dreamliner. But Airbus had delivered more than 400 A350 aircraft by the start of 2021. The only real potential benefit for the U.S. of prolonging the dispute, aside from applying retaliatory tariffs on European exports, would have been to prevent European launch aid financing for any new Airbus series at non-market rates.

8. Where does the U.K. come in?

The U.K., which was sued by the U.S. both individually and as an EU member, has been subject to 25% U.S. tariffs on key exports like Scotch whisky since 2019. In January the U.K. unilaterally dropped its retaliatory duties against the U.S. stemming from the Boeing dispute as a means to reduce trade tensions between the two countries. In March, the Biden administration reciprocated by suspending its duties on U.K. exports for four months so the U.S. and U.K. can focus on negotiating a “balanced settlement.”

The Reference Shelf

• A Bloomberg report on the accord between the EU and U.S., and a story on the U.S. adjusting tariffs on French and German aircraft parts and wine.
• A 2019 QuickTake on Comac, China’s answer to Boeing and Airbus.
• An article on Airbus’s new A321XLR single-aisle longer-range jet.
• A book on “Boeing versus Airbus: The Inside Story of the Greatest International Competition in Business,” by John Newhouse.

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