The U.S. Opens Salvo at the WTO in the Airbus-Boeing Dispute
June 07, 2005
On May 30, 2005, the United States announced that it will file a request for the establishment of a panel under the World Trade Organization (WTO) dispute settlement procedure to resolve a long-standing dispute regarding the European Union's (EU) various forms of subsidies for large civil aircraft (LCA) manufactured by the Airbus company. Since October 12, 2004, when the U.S. filed a request for consultations before the WTO, the U.S. and the EU have been negotiating on this issue for a possible settlement, but to no avail. Because the EU had also filed its own request for consultations as to the U.S.' alleged subsidies for LCA manufactured by the Boeing company, the EU soon responded to the U.S.' opening salvo by counter-filing its own request for the establishment of another WTO panel.
What Is at Stake?
The Airbus-Boeing dispute involves a number of alleged "subsidies" in various forms. The U.S. argues that the EU members have subsidized Airbus through financing at sub-market rates, assumption/forgiveness of debts, equity infusion, and/or other grants. The EU argues that U.S. state and federal governments have subsidized Boeing through various research/development grants, tax credits, and/or government contracts. Each party claims that the other violates the WTO Agreement on Subsidies and Countervailing Measures (SCM) on the ground that the other's subsidies either constitute an "export subsidy" (SCM Article 3) or cause adverse effects to its interests (SCM Articles 5 and 6).
The U.S.'s request for the establishment of WTO panel was triggered in part by the EU's recent commitment of $1.7 billon in "launch aid," which finances the cost for design and development of the newest LCA (A350) at low interest rates and with repayment contingent on its commercial success.
The history of this dispute corresponds with that of LCA. Thanks to LCA's economic, political, and military importance, both the U.S. and EU have long supported their LCA champions, i.e., Boeing and Airbus, respectively. While LCAs manufactured by these two big players have shared the global sky, their competition has been intensified and each has accused the other of illegal subsidies. Rounds of negotiations finally culminated in the 1992 bilateral agreement which limits each government's support for new LCA development to 33% of the total development cost.
However, the bilateral agreement has failed to end the dispute. Although the parties agreed in 2004 to confer on a possible revision of the 1992 agreement, negotiations have reached a deadlock amid an ever-increasing competition between Airbus and Boeing over their new ambitious projects, i.e., the Airbus 350 and Boeing 787 Dreamliner. Tedious negotiations and frustrations on both sides finally led to a rather unusual spat between the outgoing U.S. Trade Representative Robert Zoellick and the new EU trade commissioner Peter Mandelson, damaging the atmosphere for any settlement.
The timing of the U.S.' request for the establishment of a WTO panel merits some attention because Airbus plans to launch its new A350 at the Paris Air Show this month.
Thorny Legal Issues
Under the new WTO dispute settlement mechanism, the establishment of a panel is nearly automatic once requested. This case will soon be adjudicated by a panel (and the Appellate Body in case of appeal). However, not only the panel/Appellate Body, but also WTO Members, will confront a daunting challenge over various thorny legal issues.
First, the sheer magnitude of the case and its possible ripple effects tend to force rethinking the conventional wisdom of using the WTO dispute settlement procedure. Considering its politically combustible nature, it might be labeled a "wrong case," a term the late Professor Robert Hudec once coined, for its potential damage to the integrity of the WTO dispute settlement system. A case of this weight might short-circuit the whole system as was seen in the DISC case under the old GATT. Article 3.7 of the WTO Dispute Settlement Understating (DSU) provides that "before bringing a case, a Member shall exercise its judgment as to whether action under these procedures would be fruitful." Yet it seems highly implausible that a panel would refuse to review the case relying on this provision or any other "political question" doctrine.
Second, what would, and should, be the right remedies? A traditional form of WTO remedies is "prospective," not "retrospective," which means that a losing party should, from that time forward, withdraw its illegal subsidies such as export subsidies. Yet, a WTO panel ruled in 2000 that a remedy under the SCM Agreement may include repayment of the prohibited subsidy. Considering the long history of subsidy practices by both parties, this repayment remedy, if sought, might complicate the panel process.
Third, the wing section of the Boeing's ambitious 787 Dreamliner will be built by Japanese companies which are subsidized by Japan. It is unclear whether the Japanese subsidy should be separated from the U.S.' own subsidies for the Boeing 787 in calculating the level of injury. Or should it be deemed an integrated part of the whole subsidy scheme? Should the EU proceed against Japan separately regarding the latter's own subsidy scheme?
Lastly, if a settlement is struck in the middle of the panel process, should the other WTO Members cease to pay attention to this case? A mutually agreed solution may contain WTO-inconsistent components. Under DSU Article 3.5, all solutions should be consistent with the WTO rules, and Article 3.6 opens a road for any Member to question the legality of such a settlement. If that happens, the settlement might be the beginning of a new dispute, not the end. According to an old adage, two wrongs do not make a right.
The two parties still have chances to settle and halt the panel process even after it begins. According to the usual DSU calendar, a panel should issue its decision within 6 months. If appealed, the Appellate Body should deliver its decision within 60-90 days. As for substantive legal issues, both parties and the panel are likely to consult a previous subsidy case involving Canada and Brazil that has fact patterns similar to this dispute. Like the previous case, this dispute is very fact-intensive, including sophisticated issues of adequate market rates and export contingency. As in the earlier case, one would anticipate a quite lengthy panel report.
Finally, what impact would the dispute have on the Doha Round negotiations? Even though the U.S. and the EU tried to downplay any negative effects of this litigation on the Doha negotiations, the "hostility" between these two trade superpowers, as the former head of the GATT Peter Sutherland observed, bodes ill for future negotiations, especially against the backdrop of an already apparent specter of protectionism in these nations.
This case seems another litmus test to evaluate the extent to which the rule of law under the WTO serves its own purpose, i.e., a "more viable and durable multilateral trading system."
About the author
Sungjoon Cho, an ASIL member, is an Assistant Professor of Law at Chicago-Kent College of Law, Illinois Institute of Technology. During the period of 1994-96, he represented the government of South Korea in negotiations under the World Trade Organization and the Organization for Economic Cooperation and Development. He is the author of Free Markets and Social Regulation: A Reform Agenda of the Global Trading System (Kluwer Law International 2003).
United States Takes Next Step in Airbus WTO Litigation, USTR Press Release, May 30, 2005, available at http://www.ustr.gov/Document_Library/Press_Releases/2005/
May/United_States_Takes_ Next_Step_in_Airbus_WTO_Litigation.html [hereinafter USTR Press Release].
 European Communities and Certain Member States - Measures Affecting Large Civil Aircraft, Request for Consultations by the United States, WT/DS316/1, Oct. 12, 2004 [hereinafter U.S. Request for Consultations].
 United States - Measures Affecting Trade in Large Civil Aircraft, Request for Consultations by the European Communities, WT/DS317/1, Oct. 12, 2004 [hereinafter EU Request for Consultations].
 EU resumes WTO case against Boeing, EUROPA, May 31, 2005, available at http://europa.eu.int/comm/trade/issues/respectrules/dispute/
 U.S. Request for Consultations, supra note 2.
 EU Request for Consultations, supra note 3.
 U.S. Request for Consultations, supra note 2.
 USTR Press Release, supra note 1.
 David Greising, Cross-Accusations of Improper Subsidies for Airbus and Boeing, Chicago Tribune, June 1, 2005, Sec. 3, at 1, 4.
 See Robert E. Hudec, GATT Dispute Settlement after the Tokyo Round: An Unfinished Business, 13 Cornell Int'l L.J. 145, 159 (1980).
 Australia - Subsidies to Producers and Exporters of Automotive Leather, WT/DS126/RW, para. 6.39 (adopted on Feb. 11, 2000). The Panel held that:
"Based on the ordinary meaning of the term "withdraw the subsidy", read in context, and in light of its object and purpose, and in order to give it effective meaning, we conclude that the recommendation to "withdraw the subsidy" provided for in Article 4.7 of the SCM Agreement is not limited to prospective action only but may encompass repayment of the prohibited subsidy" (emphasis in the original).
 Greising, supra note 9.
 See Joel P. Trachtman, Decisions of the Appellate Body of the WTO: Canada-Measures Affecting the Export of Civilian Aircraft, available at http://www.ejil.org/journal/curdevs/sr3.html.
 Canada-Measures Affecting the Export of Civilian Aircraft, AB-1999-2, WT/DS70/AB/R (99-3221), adopted by Dispute Settlement Body, 20 August 1999; Brazil-Export Financing Programme for Aircraft, AB-1999-1, WT/DS46/AB/R (99-3216), adopted by Dispute Settlement Body, 20 August 1999.
 See Edward Alden & Raphael Minder, U.S. Calls in WTO to End Airbus Subsidies, Financial Times, May 31, 2005, at 1.
 See Alan Beattie & Raphael Minder, Aerospace Subsidy Battle with Brussels Sparks Fears over Global Trade System, Financial Times, June 1, 2005, at 1.
 Marrakesh Agreement Establishing the World Trade Organization, preamble.