Boeing goes to Congress on KC-X
Update, May 13:
In case anybody wonders, the effort to force DOD to add $5bn (the amount found Airbus illegally benefited on the A330-200) to the KC-X contract price equals $28m per airplane.
11:00 AM PDT: We just received this statement from EADS North America:
“The Boeing Bill is one more attempt to avoid competing on the merits of the tanker. Unlike EADS North America, Boeing doesn’t have a tanker that meets requirements, it faces tremendous technical risk in producing one and is therefore determined to take away the warfighter’s right to choose. We believe our fighting men and women deserve the most capable system—and they deserve the right to select it.”
4:00 PM: More from the “So’s your old man” department, this one also from EADS North America:
1. All reimbursable launch investment loans for A330-200 aircraft development have been repaid – with interest. In fact, since 1992 Airbus and EADS has averaged repaying $1.40 for every dollar received in reimbursable launch investment (this figure covers more than the A330-200). Boeing has received over $16 billion in federal grants, $6 billion in state and local subsidies and over $2 billion in anti-competitive export subsidies already declared to be illegal by the WTO ($1 billion of which came after the WTO ruling) (Editor’s note: this refethis relates to a previous WTO ruling that Boeing illegally benefited from Foreign Sales Corporation [FSC] tax breaks). In fact Boeing is the only company that has been formally sanctioned by the WTO for illegal export subsidies—including illegal support for the 767. (Editor’s Note: FSC and the expectation that the 767 will also be a part of the pending WTO ruling against Boeing, due next month.) No Boeing subsidies have been repaid and all should be considered in the context of Boeing bill introduced today.
2. Boeing also receives significant subsidies from foreign governments. In fact, Boeing has moved the design and manufacturing of major components overseas to secure foreign government subsidies. To date, Boeing has taken at least $1.5 billion from Japan and more than $500 million from Italy to put manufacturing jobs in those countries.
3. A very important issue is that this bill would put the US in the position of violating the WTO agreement. It is illegal under the terms of the WTO treaty to act punitively before the WTO process is completed (it’s called “self help” in the treaty). This is clearly a case of prematurely using WTO findings to justify punitive actions. Article 23 of the Treaty forbids such action and the US could be found to be a treaty violator and subject to sanctions-all for the benefit of Boeing.
Boeing has gone to its supporters in Congress to introduce a bill to force the Pentagon to take into consideration the adverse WTO ruling in the Airbus subsidy case, according to this Reuters report.
Read the report carefully: there are several key points in it, among them:
US Sen. Patty Murray (D-Boeing/WA) has in recent times carefully inserted the word “foreign” every time she talks about an company receiving illegal subsidies. This is undoubtedly her out when Boeing is found guilty by the WTO of also receiving illegal subsidies. The Boeing decision is due next month.
Reuters writes, “Pentagon officials say they cannot consider the ruling in the competition because there is a countersuit against the United States by the European Union, and neither matter will be completely resolved before the contract is awarded.” This refers to the inevitable appeals that will be forthcoming by both sides.
Reuters also writes about another key point: “Any move by Washington to penalize one side before all appeals have run their course could be seen as an illegal tariff under the terms of membership in the world trade body, said one official closely following the issue.”
Boeing CEO Jim McNerney sent the following message to employees about the subsididy issue. Note the Boeing talking point in anticipation of an adverse ruling by the WTO:
What the ruling on Airbus subsidies means to us
The World Trade Organization (WTO) recently issued its final ruling in the U.S. Trade Representative’s complaint against European government subsidies to Airbus. While the details of the ruling remain confidential pending translation into multiple languages, members of Congress and other officials who were briefed on the results have made it clear in public comments that the final ruling — despite assertions to the contrary by Airbus supporters — is a broad and sweeping victory for the U.S. trade team and a welcome judgment for the principles of fair competition.
Boeing strongly supported the U.S. government taking this case to the world’s ruling body on trade issues. We have always believed that without many different forms of European government support, Airbus would not have developed a full family of commercial airplanes as quickly as it did, nor would it so rapidly have gained more than half of the global market. According to news accounts of the final ruling, the illegal subsidies powering Airbus’ rise caused economic harm (“adverse effects” in trade terms) that cost the U.S. billions in lost export sales. The practical impact of those lost sales was the destruction of tens of thousands of high-quality U.S. aerospace jobs.
The fact is that European governments paid 100 percent of the development costs for early Airbus products. Today, Airbus still receives from its four sponsor governments one-third of the upfront funding — known as launch aid — needed to start new airplane programs. This is despite European governments and Airbus having agreed in the early 1990s to progressively reduce government support and to begin funding new products like most companies do — either through profits or commercial loans with market-based interest rates and repayment terms.
To date, launch aid has always come in the form of low or no-interest loans, with Airbus making no repayments during the many years it takes to develop a new airplane. Repayments are instead tied to airplane sales. That means loans are fully repaid only if the airplane is a commercial success. Industry experts predict that the A380′s $4 billion in launch aid will never be repaid due to slow sales. But even if the money is repaid, the non-commercial nature of the launch aid loans qualifies them as subsidies that violate trade rules.
While ending launch aid has always been our primary objective, the U.S. complaint documented many forms of government aid to Airbus that media reports indicate the WTO found in violation of trade rules. They include:
- $15 billion of launch aid funding, including more than $5 billion for the A330/A340 and more than $4 billion for the A380
- $2 billion for infrastructure (land and buildings)
- Well over $1 billion in research-and-development grants
U.S. officials estimated these illegal subsidies saved Airbus approximately $200 billion compared to the interest and other costs they would have incurred by borrowing those funds on commercial terms. (That’s nearly six years of revenue from Boeing Commercial Airplanes!)
These subsidies provide Airbus a substantial competitive advantage. They lower the company’s risk because it can walk away from the government debt associated with a failed program. That safety net enables Airbus to take chances it would not otherwise take, shortens product development cycles, and protects the company from the consequences of poor decisions. Government supports also lower the company’s cost of capital — a distinct and unique advantage in a capital-intensive industry like ours.
Perhaps most important, government subsidies give Airbus a price advantage by lowering overall program costs — and the company’s aggressive pricing over the years helped fuel its market-share gains.
We believe this subsidized-price advantage tilts the U.S. Air Force’s refueling tanker competition in favor of Airbus’ parent, EADS. That’s why we have argued that Airbus subsidies should be accounted for in evaluating any proposals for A330-based tankers. After all, we now know from reports covering the ruling that the A330/A340 family benefitted from $5 billion in illegal launch aid. And Airbus plans to take billions more to develop the A330′s replacement, the A350. Despite our repeated requests and the U.S. government’s reported major win on the trade case, the Air Force does not intend to account for Airbus subsidies in the tanker competition.
So, where do we go from here?
European trade officials undoubtedly will appeal the recent ruling. However, the appeals process has a set timeline that will conclude before this year is out. It’s incumbent upon WTO members themselves to comply with the organization’s rulings in order to preserve the integrity of the global trading system. Should Airbus and its sponsor governments choose not to comply with the ruling following the appeals process, the United States will have the option of implementing proportional trade sanctions.
While these steps in the process continue, we will stay intensely focused on providing low-cost, innovative solutions for our airline and government customers. And we will continue to support members of Congress and the U.S. Trade Representative as they press the case for a level playing field in both commercial and military markets.
One final note: In response to the U.S. case, European officials filed a counter complaint that alleges Boeing has also received illegal subsidies over the years. The suit claims, for instance, that NASA and Defense Department R&D spending are illegal subsidies to Boeing. U.S. trade officials have mounted a vigorous defense, pointing out, for instance, that NASA R&D spending is not product-specific (an important test under trade rules), and that NASA-funded research has been shared with Airbus and others to benefit the entire industry. In addition, every alleged subsidy Boeing has received — government contracts for R&D, state and local tax breaks and infrastructure support — are all items Airbus also has received (and on a greater scale) in addition to its billions in illegal launch aid. The panel hearing the European complaint has indicated it hopes to issue a confidential interim decision to the parties this summer.