EU Trade Issues: Civil Aircraft Sector
(Source: European Commission; undated background paper; posted Sept. 16, 2004)
(EDITOR’S NOTE: This background paper details the European Commission’s position on the issue of government financial support for manufacturers of large commercial aircraft, which are the subject of current EU-US talks. The US Trade Representative’s office has not published a similar document in electronic format)


The civil aircraft sector, which covers all civil aircraft, helicopters, aero-engines, parts and components, is mainly concentrated in the United States and the European Union.

In 1998, the total value of aerospace production in the US was 133 billion EUR. Europe was the second biggest producer, with a turnover of 59 billion EUR, followed by Canada and Japan. The Large Civil Aircraft sector (LCA - aircraft with more than 100 seats), which represents more than 50% of the world industry, is dominated by Airbus (EU) and Boeing (US).

EU trade relations in this sector are governed at a bilateral level by the 1992 EU/US bilateral Agreement on Trade in Large Civil Aircraft, whose main objective was to regulate the level of both direct and indirect Government support to both aircraft industries. At the multilateral level, because the US and other negotiating parties blocked adoption of a new Civil Aircraft Agreement at the end of the Uruguay Round, trade in civil aircraft remains governed by the 1979 GATT Agreement on Trade in Civil Aircraft. The large civil aircraft sector is generally subject to the WTO rules on subsidies, although more specific multilateral rules exist regarding forms of government support.

NOTE: In 1998, according to a monitoring study carried out on behalf of the Commission, it was estimated that the amount of US Government indirect support to its LCA industry reached almost $ 2 billion in 1997, i.e. around 7% of its commercial turnover (thus well above the 3% limit set by the 1992 Agreement).


1. Overview

The civil aircraft sector includes large, medium, and small-sized civil aircraft, helicopters and aero-engines, as well as parts and components. The European Commission has exclusive competence for bilateral and multilateral trade policy in this area.

The civil aircraft industry is mainly concentrated in the EU and in the United States. The Large Civil Aircraft (LCA -- aeroplanes with more than 100 seats) sector in particular, which represents more than 50% of the total turnover of the world civil aircraft industry, is dominated by US and EU manufacturers.

US and EU aircraft manufacturers compete in their domestic and third countries' markets and the EU/US rivalry takes a predominant position in the larger multilateral trade context.

At bilateral level, the EU and the US concluded in 1992 a Bilateral Agreement on Trade in Large Civil Aircraft, whose main objective was to regulate and limit the level of Government support to both aircraft industries. Public support is in fact one of the most contentious issues in the aircraft industry.

At multilateral level, trade in civil aircraft is governed by the 1979 GATT Agreement on Trade in Civil Aircraft. Only 24 countries are signatories to this agreement, but major aircraft manufacturing countries (except Brazil) are members. The main purpose of this agreement is the elimination of custom duties and other charges levied in connection with import/export of the goods covered by the agreement

2. Industry outlook

The civil aircraft sector is concentrated mainly in the United States and in Europe.

In 1998, the total value of production of the aerospace sector in the US was EURO 133 billion. In Europe the value of production was EURO 59 billion, followed by Canada and Japan.

Between 1/4 and 1/3rd of the total combined US and the EU aerospace turnover is generated through the LCA sector. In 1998, the total turnover of US LCA industry reached EURO 31 billion while in the EU it amounted to EURO 11 billion (final products: excluding turnover of US subsidiaries).

The LCA sector is today dominated by two manufacturers Airbus (EU) and Boeing (US). The third major manufacturer, Mac Donnell Douglas (US), was acquired by Boeing in 1997. Airbus market share has steadily increased since the early 70s, reaching about 1/3 of the world market in the early 90s and approaching 50% of all new orders for large civil aircraft by the end of the 1990s. However, the enlarged Boeing remains the market leader with more than 80% of all large aircraft in service today.

The aero-engine sector is the second largest in terms of turnover. In 1998, turnover in the US reached EURO 29 billion, in the EU EURO 10 billion. Major manufacturers are General Electric (US), Rolls Royce (UK), Pratt & Whitney (US). Other manufacturers include Snecma (F), MTU (D), BMW-Rolls-Royce (D), and the international consortia IAE and CFM.

3. 1992 EC/US Agreement on Trade in Large Civil Aircraft

Until the late 70s the US enjoyed almost a de facto monopoly in the LCA sector.

The Airbus consortium (created in 1969) started competing effectively in the 80s. At that stage the US became concerned about the European competition and the alleged subsidies paid by the European governments for the developments of the early models of the Airbus family. This became a major issue of contention, and the European side was equally concerned by subsidies accruing to US LCA manufacturers through NASA and defense programmes.

The EU and the US started bilateral negotiations for the limitation of government subsidies to the LCA sector in the late 1980s. Negotiations were concluded in 1992 with the signature of the EC-US Agreement on Trade in Large Civil Aircraft which focuses on the limitation of both direct and indirect government support.

On the one hand, the agreement puts a ceiling on the amount of direct government support (33% of the total development costs) for new aircraft programmes. It establishes that such support (granted in the form of repayable royalty-based loans) will be repaid at an interest rate no less than the government cost of borrowing and within no more than 17 years. Basically, this discipline applies to the form of government support in use in Europe.

On the other hand, the agreement establishes that indirect support (i.e. benefits provided for aeronautical applications of NASA or military programmes) should be limited to a 3% of the nation's LCA industry turnover. This discipline is primarily targeted to the support system in use in the US. In contrast to the European system of repayable royalty-based loans, since the repeal of the US rules on recoupment, there is no requirement for indirect support to be reimbursed.

In order to verify compliance with the above disciplines, the Agreement establishes that the parties must exchange transparency information on a yearly basis on their respective support systems, through bilateral consultations that normally take place twice a year. Such consultations are an occasion to discuss questions concerning the implementation of the agreement and any other issue of relevance to the LCA sector. It must be remarked that the exchange of transparency information has highlighted an important divergence between the US and the EU in the way to interpret the indirect support discipline. In general, the EU considers that the US notification of indirect support to its LCA industry falls short of the real benefits derived from NASA programmes and military spin-offs.

The current agreement on trade in civil aircraft was concluded in 1979 at the end of the Tokyo round. Although the aircraft negotiations for a new GATT agreement were associated to the Uruguay round, they did not succeed.

The large civil aircraft sector is generally subject to the WTO rules on subsidies, although more specific multilateral rules exist regarding forms of government support.

The EU regrets that, at the end of the Uruguay Round negotiations, the US blocked the adoption of a new Civil Aircraft Agreement supported by all other negotiating parties. Although negotiations have continued since, no progress has been made.

The 1979 agreement therefore remains in force as it was. Nevertheless, the 1979 aircraft agreement was devised to operate in a GATT context; with the introduction of the new WTO system in 1994, certain provisions of the 1979 could be put into question.

For this reason, a process of technical rectification of the aircraft agreement bringing it into conformity with the WTO, is now under way.

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