In the coming weeks, massive briefs will be exchanged in the World Trade
Organization in the opening battle of the legal equivalent of a religious war.
The governments of the United States and of the European Union each claim that
the other has long given improper government support to its national champion
aircraft-maker. As with wars over ideology and abstract principle, the conflict
will result in great costs to the combatants and to innocent parties; and the
result will be inconclusive. Ancient grudges that gave rise to the battle will
be largely unrelated to the practical measures that the parties might be taking
to enhance their interests.
True, this war will not take place on a battlefield but in the civilized forum
established by the WTO to resolve disputes among its member nations. But the
fact is, the challenges posed by this case far exceed the limited capacity and
the fragile authority of the WTO disputeresolution tribunals. Struggle as they
may, the tribunals will not be able to render a decision that commands respect
and compliance from the losing party. (Indeed, both parties may be declared
losers.) The dispute will not be resolved but will continue for years, creating
disorder and confusion in the marketplace and very likely leaving everyone worse
off.
Normally it is considered a good thing when parties to a conflict can be brought
before an impartial tribunal to resolve their differences. But some conflicts
aren’t fit for adjudication. Suppose the Arab-Israeli dispute could be brought
before the World Court: would the Court be able to declare who’s right and who’s
wrong? Would the political leaders of the two nations be able to secure
compliance with the Court’s judgment? Were U.S. courts able to resolve the
slavery question? Why have the states given up on trying to determine who is “at
fault” in divorce cases? Some phenomena just can’t be sifted into legal rights
and wrongs. A court that tries to do so puts its legitimacy at risk, as the U.S.
Supreme Court has recognized by refusing to rule in cases involving “political
questions” that it considers beyond its competence.
The challenges posed by this case far exceed the limited capacity and the
fragile authority of the WTO disputeresolution tribunals
For over 20 years Boeing has asserted that its audacious European competitor
Airbus has enjoyed support from several European governments, largely in the
form of substantial loans on terms more favorable than Airbus would be able to
obtain in the financial markets. Airbus has countered that Boeing became the
world’s dominant civil aircraftmanufacturer after World War II by virtue of
massive U.S. government contracts for military planes and that its development
of new civil-aircraft models benefits from new technologies that the government
funds in contracts from the Pentagon, NASA and other agencies. (Boeing is the
second-largest U.S. government- contractor.) “How could private investors ever
be persuaded to risk huge sums to compete with the formidable Boeing, with its
U.S. governmentsupported R&D?” Airbus asked. If there was to be international
competition in the high-risk, capital intensive market for large civil aircraft,
Airbus claimed, government aid for the new entrant would be necessary. And who
could deny the desirability of competition in a $200 billion market that affects
the cost of transportation throughout the world?
The WTO’s rules give a member country a right to complain in the Dispute
Settlement Body against another country that has conferred a benefit on one of
its industries through financial contributions of any kind, when the result is
serious prejudice to the commerce of the complaining country. After years of
argument and consultations, the United States, at Boeing’s urging, sought a
ruling by the Dispute Settlement Body that Europe’s support for Airbus is not in
compliance with the WTO’s rules. The EU countered the same day with a demand for
judgment on the propriety of U.S. support for Boeing.
If we look at the complexities of the aircraft subsidies case, the intense
national commitments underlying it, and the limited authority of the WTO’s
Dispute Settlement Body, it becomes clear that an effort to declare the rights
and wrongs of government behavior affecting this industry will not resolve the
long-simmering controversy. Instead it will demonstrate that the case is beyond
the capacity of the WTO tribunals. The conflict will be broadened and
intensified, and respect for the WTO’s disputeresolution program diminished.
Here are some reasons why:
The facts are too complex for the forum. Seeking information to
support their charges, the U.S. and EU governments have exchanged thousands of
detailed questions, covering hundreds of pages. EU questions probe the contracts
Boeing had over the past three decades with NASA, the department of defense, and
the National Institute of Science and Technology, and the benefits that may have
carried over to Boeing’s civil aircraft. The demands include such esoterica as
contract documents relating to “Project 95-12-0024 (An Agent-Based Framework for
Integrated Intelligent Planning-Execution)” and “Project 98-01-0168 (Hot Metal
Gas Forming).” And, seeking evidence of government tax incentives to Boeing, the
EU seeks details on its tax payments to Snohomish County, to the City of
Everett, to Washington state, to Kansas and to the Federal Government. The EU
also submitted questions to Japan, where major Boeing aircraft components are
produced, and to 49 countries that have imported Boeing aircraft.
The U.S. questions march with footnoted precision through decades of ordinances,
laws, and decrees in Germany, France, Spain, the UK and the European Union (and
the European Community, its predecessor) that have benefited Airbus through
funding, facilities, research, technology transfer or contracts. Seeking to
build a big conclusion on many small facts, it wants to know, for example,
whether the city of Bremen, Germany, extended a runway at its airport to
accommodate cargo flights carrying Airbus components and whether the Andalusian
regional government in Spain subsidized Airbus through a grant of 61.9 million
for an investment project in the municipalities of Sevilla and La Rinconada.
The three-person WTO panel deciding the dispute has a maximum of nine months to
absorb the mountain of evidence it will receive. It must decide not only what
governmental benefits Airbus and Boeing received but whether and how much those
benefits supported their large civil airliner production, as distinguished from
their other activities. It must then decide an entirely separate question:
whether the benefits caused “serious prejudice” to the commerce of the
complaining country. This question will require the panel to immerse itself in
skirmishes of competition between the two aerospace goliaths as they pursued
sales to dozens of airlines throughout the world over several decades. Did the
aid Airbus received for its model A310 enable it to take sales from Boeing’s
767? Was the Airbus benefit offset by benefits Boeing had received on its
competing model? Was the sale influenced not by price but by technology
features, or brand loyalty, or product support or geopolitics? Most experienced
trial lawyers would be quick to warn their clients that it simply may not be
possible to secure an accurate and fair decision on these vast factual questions
in the time allotted.
The three-person WTO panel deciding the dispute has a maximum of nine
months to absorb the mountain of evidence it will receive
The WTO’s rules are not sophisticated enough to provide adequate guidance
for the tribunal. The rules provide no guidance on whether technology
gained through work on government contracts and then put to commercial use
amounts to a subsidy or whether it is the sort of future competitive benefit any
company gets by learning from its past projects. Nor do the rules supply any
guidance on whether launch-aid to permit competition against a dominant
sole-supplier causes “serious prejudice” to the other government. The panel
wrestling with the claims in this case will not be free to improvise rules where
none exist in the text of the written agreement governing subsidies. All panels
are explicitly admonished by the WTO Agreement not to “add to or diminish” the
rights and obligations specified in that text. The panel will be flying blind on
significant legal questions.
History shows that governments do not comply with WTO decisions in cases
involving large economic stakes and strong national interests. It has
become common for countries losing a case in the WTO to restructure their
offending laws superficially and claim compliance. This forces the complaining
country to go back to the WTO for a ruling that the compliance is not adequate,
and then for an additional ruling authorizing it to impose trade sanctions
against the violator.
The panel wrestling with this case will not be free to improvise rules
where none exist in the written agreement governing subsidies
Some lessons can be learned from the five-year conflict between Brazil and
Canada over subsidies for production of smaller passenger airplanes – “regional”
or “commuter” jets. Each accused the other of subsidizing its manufacturer in
order to gain more export sales. WTO panels found both of them in violation and
directed them to withdraw the offending subsidies. Each country made cosmetic
changes and continued to make major export sales that benefited from subsidies.
Five years after the start of the controversy, after eight sets of briefs and
hearings, it was not clear that the subsidies had genuinely been withdrawn. In
fact, one WTO panel found Canada still in violation and authorized Brazil to add
an additional twenty percent to the normal level of retaliatory tariffs because
of Canada’s intransigence.
So intense was domestic feeling in both countries that political leaders could
not acknowledge that their country had been found wrong in the WTO. Instead,
each accused the other of bad faith. Brazil suspended meat exports from Canada
on the ground of mad cow disease, and Canada did the same, even though there was
no documented case of tainted meat going in either direction. Brazil also
threatened to ban imports of Canadian fertilizer and even to suspend all trade
agreements with Canada. Far from confining and resolving the deeply felt dispute
on airplane subsidies, the WTO proceedings had the effect of expanding it.
In the U.S.-Europe dispute over large airliners, a much larger industry is
involved, concerning companies with longer, deeper and more sophisticated ties
with their governments. If the U.S. were directed by the WTO to withdraw the
benefits it confers on Boeing through military and space contracts, how could
that be done in practice? Who would be able to police whether the hundreds of
contracts Boeing receives will help it at some time, and perhaps in some unknown
way, in its civil aircraft production? How could the U.S. government withdraw
the know-how Boeing already possesses as a result of research on new materials
or new designs for a space platform or a missile? And if the EU is directed to
withdraw its loans for new aircraft development, who can doubt that it will
devise new forms of financial assistance for its prized aircraft industry? In
short, there is no reason to think that “compliance” with WTO admonitions to
cease improper subsidies would yield anything other than halfway measures,
sophistic arguments and repeated WTO reviews. There is also a serious danger
that sparks from the WTO legal proceedings will ignite political fires in the
U.S. and Europe and impair cooperation between the two countries on their
overriding economic and security problems.
The subsidies controversy has little relation to the current realities of
the large civil aircraft industry. For some years this controversy was
about Boeing, a U.S. manufacturer that enjoyed no direct government support but
had military contracts, competing against Airbus, a European manufacturer that
had no military contracts but received direct government loans. In recent years
those conditions have changed dramatically, and the changes continue:
- Is Boeing still a U.S. manufacturer when it has outsourced to Japan the entire
wing assembly of its new 787 and will procure well over half of the components
from abroad?
- On the other side, is Airbus still a European manufacturer when nearly half of
its new A380 will be produced in the United States? When the wings for its A320
will be produced in China?
- Should the WTO worry about Boeing suffering from the direct supports Airbus
receives when Boeing has apparently received $3.2 billion from Washington state,
along with tax abatements in Kansas and Illinois, and its Japanese wing supplier
is receiving massive funds from the Japanese government to offer the low price
Boeing demands?
- And should the WTO worry about Boeing’s benefits from government contracting
when Airbus’ parent, EADS, has adopted the Boeing model and become a major
aerospace and military contractor for European governments?
The purpose of the WTO’s rules is to enable businesses to compete in global
markets free of government interventions that favor one competitor over another.
And the Dispute Settlement Body is intended to provide expeditious
interpretation of the rules so businesses, and those who invest in them, will
face fewer risks from government actions that distort the marketplace. The WTO
is a great success. But it is important to face the reality that its rules and
institutions, drawn up to cover virtually all commercial activity, will not work
effectively in regulating government behavior in the large civil aircraft
industry. The industry is too concentrated, too large, too complex and too
deeply interwoven with overriding government policies to be governed by the
rules that serve the general marketplace.
WTO rules and institutions will not work effectively in regulating
government behavior in the large civil aircraft industry
Trade negotiators and scholars have long recognized the fragile and limited
nature of the WTO dispute resolution system and have worried that the “wrong
case” could discredit it. The WTO dispute rules warn that “before bringing a
case, a Member [government] shall exercise its judgment as to whether action
under these procedures would be fruitful.” The large civil aircraft case is
crying out for such an exercise of judgment.
Looking to the Law for an answer is distracting the players from the
practical challenges they face
Boeing and Airbus enjoy a comfortable duopoly in a major global industry. Both
had record sales last year: Airbus sold more planes than Boeing while Boeing had
greater dollar revenues than Airbus. Each is a winner. But as they share the
benefits of a thriving market, they also face some common challenges. Both face
the continuing task of bringing together dramatic new technologies and large
amounts of capital to make new generations of large civil aircraft. Both have
probably gone farther than most businesses prefer in making themselves dependent
on national governments. And government-support measures that once seemed
sensible now seem anachronistic as the companies have become truly global
enterprises.
All these challenges are parts of the largest one: in their competitive rush to
beat each other by sourcing offshore to lower costs and secure customers, how
can they avoid fostering new competitors? Does Boeing want its wing manufacturer
in Japan to become an independent aircraft-maker (perhaps with government
assistance)? Does Airbus expect that those producing its A320 in China will be
blind to the vision of becoming an autonomous player in this market? Are U.S.
and European economic and security interests served by the transfers of critical
technology (often government-funded technology) needed in order to turn foreign
companies into suppliers of major components?
The companies and the governments that advocate for them in the WTO all have a
common interest in keeping their industry healthy.What better time could there
be for working to secure that goal than the present juncture when both companies
are thriving and both governments are paying attention to their welfare? That
goal will not be achieved by quixotically asking trade-law experts in the WTO to
decide the rights and wrongs of decades-old practices. In fact, looking to the
law for an answer is merely distracting all the players from the urgent
practical challenges they face in a technologically dynamic, globalizing
industry.
Under WTO subsidy rules, the companies and the governments are all sinners, but
the WTO’s judges will not be able to redeem them with some almighty hand.
Instead, if the companies themselves work at it, they may find they can create a
great future for their industry.
Robert Herzstein is a Washington lawyer and former Under Secretary of
Commerce for International Trade. In the early 1990s he advised Airbus on
efforts to reach a U.S.- Europe agreement regulating aircraft subsidies
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