- History of a long-drawn battle between two biggest aircraft manufacturers: Boeing and Airbus.
- US claims victory in Boeing vs Airbus feud.
On October 14th, 2019, World Trade Organization (WTO) formally authorized the US to impose tariffs on the EU and other European countries worth about USD 7.5 billion of exports annually. The new tariffs came into effect from October 18th, 2019, with a rate of 10% on civil aircrafts originating from UK, France, Germany & Spain and a tariff of 25% on various agricultural, dairy, liquor, clothing and other goods originating from various European countries.
History of Dispute:
The illegal aid dispute is a 15-year-old feud between the US and the EU. In 2004, the US filed a complaint with WTO regarding unfair advantage provided to Airbus by European government in the form of launch aid of about USD 22 billion, which are subsidized loans provided to Airbus for new product development. These loans were given at below market rates while their repayment started after several years, typically tied up with the plane delivery targets. In June 2010, WTO ruled that Airbus received USD 18 billion of illegal subsidies and were given two years to remove all the adverse effects from the same. However, the EU didn’t comply with the WTO rulings and provided further aid to Airbus of around USD 4 billion, which led the company to gain market share by introducing A350 XWB and A380. Notwithstanding the gains in the market share by Airbus, the US government claimed that the company would not have even existed without the help of illegal subsidies. Furthermore, the US in its plea against the EU, requested WTO to authorize the adoption of countermeasures of about USD 11 billion, equivalent to the estimated annual trade damages, however, WTO approved USD 7.5 billion.
Separately, while the proceedings against Airbus were being studied by WTO, the EU in a counter move in 2005, filed a complaint with WTO for illegal subsidies granted by the US federal and state governments to Boeing’s large civil aircrafts. As per EU’s claims, these aids contributed about USD 19.1 billion in the form of research grants by NASA, USDOD and Department of Commerce, tax breaks by state governments and access to government facilities & intellectual property rights. During March 2011, WTO circulated a report by upholding the claims made by the EU over illegal US subsidies, however, the value was determined by WTO to be about USD 5.3 billion. In March 2012, the US agreed to abide by the WTO ruling for withdrawal of illegal subsidies. Nevertheless, upon release of outcome of the compliance report in June 2017, the EU appealed to WTO regarding non-compliance for removal of adverse effects of subsidies by the US. Furthermore, in a later report dated March 2019, WTO established that the US failed to remove the adverse effects of illegal aid to Boeing and in June 2019, WTO resumed arbitration proceedings upon request by the EU on which decision is expected in the year 2020.
Notwithstanding the above dispute, the US and the EU have benefited immensely from global trade and have historically been cohesive in mutual trade through various trade agreements. Both are one of the biggest trading partners for each other with total trade of goods amounting to USD 807 billion in 2018. US export of goods to the EU totaled USD 319 billion and imports totaled USD 488 billion, amounting to total goods trade deficit of USD 169 billion. However, the US had a net surplus of USD 60 billion in services trade with the EU. Below is a summary of the cross-border trading between the US and the EU, which highlights the major categories of traded goods between them.
US-EU trade of major goods by categories:
Top merchandise export by product category for the US are aircrafts, engines and parts, which constitute about USD 44 billion to the EU and include products made by Airbus in its US factory. Other products include human & animal blood and vaccines, crude oil, medical instruments and medicaments respectively.
Top 5 products imported from the EU (%; USD billion):
Major import category for the US includes automobiles, medicaments, human & animal blood and vaccines and other machine articles respectively.
US tariff enacted on goods imported from EU:
Following the WTO approval, the US has enacted tariffs on different products which are summarized under the major categories:
The import duty placed by the US on new airplanes and other new aircrafts other than military from four countries: UK, France, Germany & Spain (which majorly support Airbus) is 10%. These four countries trading with the US in the above product category is:
Although it would not put much of a dent in the export revenue of tariffed countries, these measures are sure to create displeasure among US airlines, which buy Airbus planes and since the import duty started from October 18, 2019, the pending orders would also fall in the ambit of the new tariff. Furthermore, other products placed under hefty 25% tariff include olives & olive oil, a major Spanish export totaled USD 662.6 million (15% of category) to the US in 2018, dairy products including cheese from different European countries, wines and liquors, clothing from the UK, machine tools from Germany amongst others. These tariffs will harm mostly farmers and other small manufacturers, entirely unrelated to aviation industry.
EU, on the other hand, has also prepared its own list to tariff US products including airplanes, chemicals, ketchups, fruits etc. amounting to USD 20 billion in its countermeasure and requested WTO to authorize USD 12 billion in tariffs, estimated in trade damages to Airbus caused by US support of Boeing. However, the exact amount will ultimately be decided by WTO.
In the aftermath of this dispute between two behemoths, the end-consumers are generally the ones paying the price. As can be noticed from the new tariffs, the US has left aircraft parts from its list of tariffed products, which highlights the fact that global trade is highly integrated and no aircraft is manufactured without importing various parts from different countries, including both Boeing and Airbus. Therefore, the rational way out would likely be through consultation and, negotiations thereby making trade pacts work more effectively rather than putting caps or tariffs on imports, which negatively impact jobs and consumers. From a macro perspective, the populist arguments against free trade prove to be counterproductive in a way that hurts the very thing which economies were trying to protect in the first place.