GENEVA --- The second panel hearing in the EU's case against US subsidies to Boeing (WTO case DS353) will take place on 16-17 January 2007. The focus of the hearing is likely to be on the defences put forward by the US and on the EU arguments to tackle them.
The EU believes that most of the US defences do not withstand a thorough legal and factual analysis and scrutiny. The Panel has now also asked a number of additional questions to the US, and requested that it provide a number of documents that it has persistently refused to produce - in particular documents related to NASA and Department of Defense (DOD) subsidies in US.
The EU will make a series of strong arguments to challenge US subsidies to Boeing and to rebut US defences.
It will argue that the United States has ignored the EU's evidence on NASA and DOD subsidies. The EU has provided, among other things, evidence in the form of expert reports which show that R&D programmes transfer funds, provide goods and services, and provide valuable intellectual property rights to Boeing for free. This evidence is based on a review of literally thousands of pages of more than 100 US Government and industry authored reports which are further supported by statements by NASA, DOD or Boeing engineers directly involved in the particular Research and Development (R&D) programmes.
In addition, the US has made certain assertions and provided figures without submitting any source information or supporting evidence. For example, to counter the EU estimate that Boeing's Large Civil Aircraft division has received $10.4 billion in financial contributions from the eight specific NASA aeronautics R&D programmes challenged by the EU, the United States advanced its own substantially lower figure, but without supporting it with evidence.
Regarding NASA R&D, the EU will argue:
-- That the overall mission of NASA is irrelevant to this case: the US has vainly tried to use the broad mission of NASA as a shield against its illegal subsidies to Boeing, but the trip to the moon and other such NASA programmes cited by the US are simply irrelevant to the EU's claims and aim at distracting the panel. The EU was careful to focus its claims only on eight specific R&D programmes that directly benefit Boeing's Large Civil Aircraft division - and they have nothing to do with space exploration. In fact, they are a direct reflection of the other key aspect of NASA's mission, which the US consistently fails to mention, which is "to preserve the United States pre-eminent position in aeronautics… through research and technology development related to associated manufacturing processes" (1958 Space Act).
-- That NASA aeronautics R&D is not just basic research - and what is basic research is of immense benefit to Boeing: the EU has presented voluminous evidence as well as quotes from key NASA officials demonstrating and documenting that 1) the results of NASA's aeronautics R&D programmes are incorporated into Boeing's Large Civil Aircraft; 2) even the basic research supported by the NASA R&D programmes at issue is of immense benefit to Boeing. Specifically, it reduces the need for Boeing to spend its own resources on such basic research, while increasing Boeing's ability to incorporate promising technologies into its LCA.
-- That research results from NASA aeronautics R&D programmes are often kept hidden from public view, particularly those that are valuable: the US has asserted that all of the relevant research results are publicly available to the world aviation community. The US seeks to create the illusion that any engineer anywhere in the world could simply read the few pages of limited NASA R&D results that are made publicly available and instantaneously acquire all knowledge necessary to implement the technologies in question on a large civil aircraft. Nothing could be further from the truth. Far from all results are made publicly available; and more often than not, when they are made available it is with a delay that significantly favours Boeing, providing it with a technological advantage over its competitor; and/or the most general of information is published, while the real value of the research lies in the proprietary design databases, software codes, processes and tools, etc., which are not published, as well as the experience gained by the engineers actually conducting the research. In addition, and embarrassingly for the US, the US has represented to the Panel that certain specific reports were available, and the EU, in subsequent re-checking, confirmed again that this claim was not accurate.
Regarding US Department of Defense (DOD) R&D the EU will argue:
-- That DOD R&D has resulted in technologies used for large civil aircraft, regardless of their purported military purpose. The EU does not challenge the fact that the DOD R&D programmes may initially have had a military purpose. The critical point, which the US is continuously trying to disguise, is that those same programmes resulted in vital technologies that could be, and indeed have been, applied by Boeing to its large civil aircraft production. The DOD R&D programmes it is challenging support the development of technologies that can be applied to both military and civil aircraft. The EU provides extensive evidence to support this claim.
-- That ITAR export controls do not prevent Boeing from using military technology toward its large civil aircraft. First, such controls do not prevent using the technology, knowledge and experience resulting from military R&D programmes to design and produce large civil aircraft (rather than "incorporated" into the planes themselves). In addition, the evidence shows that in many instances Boeing finds a way to use military technology for its large civil aircraft regardless of ITAR controls, including by "working around it".
Regarding the US argument that NASA and DOD R&D programmes constitute purchases of services by the US Government, the EU counters the US defences by clearly showing that the US argument is completely artificial, and intends to mask the fact that NASA and DOD simply transfer funds and provide goods and services to Boeing. These transfers enable Boeing to perform R&D that improves Boeing's own technologies, production processes and,
ultimately, its large civil aircraft. In particular in the case of NASA, the EU demonstrates:
-- That the tremendous latitude given to Boeing as a contractor in the programmes challenged by the EU is allows Boeing to perform the R&D in a way that benefits Boeing and its products directly;
-- That in return for funding R&D performed by Boeing, NASA obtains limited research results and license rights that it never intends to use and indeed has no conceivable use for;
-- That NASA is not in the business of manufacturing large civil aircraft or its parts, and therefore has no intended or demonstrated use for the limited research results and license rights it obtains through its contracts with Boeing.
-- That with regard to the US DOD, no "services" are purchased, but funds are transferred. In fact, DOD pays twice: It first directly funds the R&D, and then subsequently procures the aircraft under separate budgets, something a commercial customer would never do (it would pay only one purchase price). What is more, some DOD contracts explicitly state that they are "not for the acquisition of property or services for the direct benefit or use of the government". Accepting the US interpretation regarding "purchase of services" would create a gaping hole in the Subsidies Agreement (ASCM agreement). It would allow governments to artificially boost the competitiveness of select industries by setting up an agency that would channel funds through contracts labelled as "purchases of services" but that in reality provide funds to a company or industry to finance R&D performed by that company or industry, for its own benefit, and in exchange for research results that the agency never intends to use or for which it has no use. Indeed, the mere requirement to provide reports on the use of grants could be considered a "service" under the US theory - removing virtually every grant from disciplines of the WTO Subsidies Agreement (since this is what granting authorities all over the world do) - including R&D grants under the EC Framework Programmes, which the US has eagerly challenged in their own case.
Regarding subsidies from Washington State, after having put up a less than vigorous defence, and failed to answer key questions from both the EU and the Panel during the first hearing, the US continues to have a very weak defence in its later submissions, and completely fails to address evidence that the Washington subsidy package was clearly designed for the exclusive benefit of Boeing. In addition, the US could not rebut the EC claim that these subsidies are prohibited export subsidies: they are contingent on a commitment by Boeing to produce such a high number of large civil aircraft units that this production cannot be absorbed by the US domestic market alone but needs to be exported.
For other subsidies, such as those granted by Kansas authorities, the US makes sweeping statements and fails to provide the necessary evidence to rebut the EU's arguments.
The US readily acknowledges that FSC and successor schemes were prohibited export subsidies and that Boeing was a main beneficiary. The US, however, continues to claim that Boeing will not avail itself of any benefits post-2006 despite an internal IRS memorandum, which would allow for such benefits to be claimed by companies like Boeing. The US has failed provide any documentation that Boeing will actually forego these WTO-incompatible benefits.
The EU's claim that this array of subsidies worth $ 23.7 billion causes "serious prejudice" to its interests remains unaffected by the current overall high demand for large civil aircraft. The EU has provided detailed evidence that these subsidies are causing specific adverse price and technology effects for particular large civil aircraft markets in which Boeing and Airbus compete.