EU – US Agreement on Large Civil Aircraft 1992: key facts and figures
(Source: European Commission; issued Oct. 6, 2004)
Until the late 70s the US enjoyed almost a de facto monopoly in the Large Civil Aircraft (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, as the European side was equally concerned by subsidies accruing to US LCA manufacturers through NASA and defence 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 imposes disciplines on government support on both sides of the Atlantic which are significantly stricter than the relevant WTO rules: Notably,. the Agreement regulates in detail the forms and limits of government support, prescribes transparency obligations and commits the parties to avoiding trade disputes.

Disciplines on EU and US support

-- 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 launch investments, which are 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 mainly in use in Europe.

-- the other hand, the agreement establishes that indirect support (e.g. 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 at the support system in use in the US. In contrast to the European system of repayable launch investment there is no requirement for indirect support to be reimbursed and the generous ceiling of 3% is calculated on the larger basis of the turnover of the LCA industry and applies per individual year.

European Government Support

European governments provide repayable launch investment – not grants - to Airbus at the time of program launch. European government investments support the European technology research & development sector, just as US government R&D schemes have sought to do, through NASA, FAA, Department of Defence (DoD) and export tax relief programs. However, EU governments spend three times less on aerospace R&D than the US government.

All European government loans for Airbus programs have been made entirely within the letter and the spirit of the 1992 US-EU Agreement on Trade in Large Civil Aircraft since its entry into force and this will continue to be the case for all future Airbus programs. The US have not disputed this fact.

--Of the eight Airbus aircraft launched since 1990, only three programs have been launched with government investment.

--Airbus pays royalties to governments over the entire life of the aircraft programs. Interest and principal is repaid on deliveries, even before the programs break-even and irrespective of the sale price.

U.S. Government Subsidies

U.S. government subsidies, mostly in the form of military and NASA contracts, research and development expenditure and tax subsidies have enabled the U.S. aerospace industry to maintain its global dominance for more than 50 years.

--Unlike European launch investment, none of this support has to be repaid - and in fact is not repaid

--Since 1992, Boeing has received around $ 23 billon in subsidies from the U.S. government.

--The total U.S. Government indirect support of the U.S. LCA industry in FY 2003 alone was up to $2.74 billion.
This represents around 11.9% of the FY 2003 commercial turnover of the U.S. LCA industry.

--Since 1990, Boeing has outsourced increasingly large shares of its civil aircraft programmes to other countries, e.g. Japan (more than 60% of the 7E7). The governments of these countries subsidize these shares, such that Boeing's programs also receive substantial foreign subsidies.

--Since 1990 Boeing has avoided paying around more than $1.2 billion in federal taxes through the use of off-shore Foreign Sales Corporations (FSC). This is a direct (and illegal) government subsidy prohibited by international rules.

The real issue is one of competitiveness: From 2001 to 2003, Boeing has invested only $2.8 billion of its own funds in commercial aircraft R&D and capital expenditure compared to $9.4 billion by Airbus. Lack of R&D and capital investment, has meant that Boeing has not launched any new programs since 1990.

US subsidies in the form of Defence Procurement

There are massive benefits accruing to Boeing's large civil aircraft business from military R&D programmes and overpriced DoD contracts, e.g. s ales of subsequently converted civil airplanes to the US Department of Defence at inflated prices. Recent examples include:

--Regarding the possible sale of B-767 refuelling “tanker” aircraft, a 2003 Morgan Stanley report establishes a subsidy margin of 9% or $1.6 to $2.3 billion in profits for Boeing. The report argues that the lease deal is the equivalent “at least 700 firm deliveries of Boeing 737s”, that the normal profit margin for the 767 is 6% and that the Pentagon plans to give Boeing up to 15%.

--On 14 June 2004, the US Navy awarded Boeing a contract worth potentially about $44 billion until 2030 for the production and maintenance of 108 civil B-737 and their conversion into long-range submarine hunter Multi-Mission Aircraft. It appears that airplanes will be built at Boeing's civil plants in Wichita, Kansas, and Renton, Washington.

US subsidies in the form of R&D expenditure

Boeing's large civil aircraft business benefits significantly from NASA and DoD R&D programmes. In 2003 alone, Boeing received US$ 2.74 bn in subsidies, including around US$ 2 bn from the US Department of Defence and more than US$ 600 million from NASA.

The largest part of funds spent by the Government in R&D for a specifically aeronautical product constitutes a reduction in R&D expenses for the main potential user of the technology, i.e. Boeing. This is the case even if the R&D is eventually not successful.

Subsidies to the planned Boeing 7E7: over $ 5 billion

Planned subsidies for Boeing's 7E7 programme from Washington State ($3.2bn), Kansas ($0.5bn), Oklahoma ($0.35bn). Washington State 7E7 subsidies alone are about as high as European launch investment for A380. The only difference is that A380 launch investment is paid back and is compatible with the 1992, while Washington support is not. In addition, Washington 7E7 production subsidies are illegal under the 1992 Agreement. To this must be added the planned 7E7 subsidies of around US$1.6 billion from Japan.

EU-US links in the aeronautics sector

Numerous European companies participate in US programmes and vice versa, e.g.

--Airbus spent in US ca. US$ 50 billion since 1990, 15 million per day, procures USD 5.6 billion -per year.

--Airbus supports 120 000 jobs in US aerospace industry.

--Boeing continues to move jobs abroad via outsourcing to foreign subcontractors.
--Boeing is indirectly benefiting from European launch investment through its European partners.

Key Facts and Figures

--US $ 23 billion in subsidies from the US Government to Boeing since 1992.

--US $ 1 billion in illegal FSC/ETI subsidies to Boeing between 2000-2003 and continues to receive around US $200 million per year

--US $ 2.7 billion subsidies to Boeing in 2002 alone : this represented 8.6 % of Boeing's turnover in 2002, i.e. almost three times the 3% limit of the 1992 Agreement. The situation in 2003 is similar.

U.S. Files WTO Case Against EU Over Unfair Airbus Subsidies: Background
(Source: Office of the United States Trade Representative; issued Oct. 6, 2004)
--The WTO Case Against Airbus

The U.S. case alleges that launch aid and other government support to Airbus qualifies as a subsidy under the Agreement on Subsidies and Countervailing Measures (SCM) and that such subsidies are "actionable" because they cause adverse effects or are "prohibited" because they are export-contingent, or both.

The 1992 Agreement does not preclude the United States or the European Commission from bringing a WTO case. The terms and obligations under the 1992 bilateral Agreement are separate and distinct from the terms and obligations of the 1994 SCM Agreement. Compliance with one is not a defense against claims of non-compliance with the other.

The first step in the WTO process is to file a Request for Consultations. The United States is taking this step today. This begins a period of no less than 60 days for the parties to consult in an effort to resolve the matter. If after 60 days the parties are unable to do so, the United States would be authorized to request that a WTO panel be established to make findings on this matter.

--Termination of the 1992 Agreement

Consistent with the United States’ view that now is the time to end new subsidies and its decision to file a WTO case, the United States today is also exercising its right, as provided by the 1992 agreement’s terms, to terminate that agreement.

--Subsidies to Airbus

Airbus S.A.S. ("Airbus") was established in 1970 as a European consortium of French, German, and later, Spanish and U.K. companies. In 2001, Airbus formally became a single integrated company. The European Aeronautic Defence and Space Company ("EADS") and BAE SYSTEMS of the U.K. transferred all of their Airbus-related assets to the newly incorporated company and became 80 percent and 20 percent, respectively, owners of the company. The operating results of Airbus are fully consolidated in the EADS balance sheet.

Over its 35 year history, Airbus has benefited from massive amounts of EU member state and EU subsidies that have enabled the company to create a full product line of aircraft and gain a 50 percent share of large commercial aircraft ("LCA") sales and a 60 percent share of the global order book. Every major Airbus aircraft model was financed, in whole or in part, with EU government subsidies taking the form of "launch aid" – financing with no or low rates of interest, and repayment tied to sales of the aircraft. If the sales of a particular model are less than expected, Airbus does not have to repay the remainder of the financing. EU governments have forgiven Airbus debt; provided equity infusions; provided dedicated infrastructure support; and provided substantial amounts of research and development funds for civil aircraft projects.

Since 1985, the United States has been involved in several major rounds of negotiations with the Airbus partner governments and the Commission with the objective of achieving greater disciplines over the subsidies provided to Airbus. In 1989 and 1991 the United States brought two cases at the GATT challenging Airbus subsidies. The first case challenged a German program that offset adverse exchange rate fluctuations on sales of Airbus aircraft, and the second, broader case challenged overall subsidies to the Airbus consortium. The first case ended in a victory for the United States after a GATT panel determined that the exchange rate scheme constituted a prohibited export subsidy. The EC blocked adoption of the panel report, which was permitted before the creation of the WTO, but Germany subsequently withdrew the scheme.

The United States withdrew the second case in July 1992 after the two sides negotiated a bilateral agreement limiting government support for large civil aircraft programs. The agreement included a prohibition of future production support and a limitation on the share of government support for the development of new aircraft programs to 33 percent of the project’s total development costs.

After 12 years, the United States believes the 1992 agreement has outlived its usefulness and needs to be terminated. Expected to lead to a progressive reduction of subsidies, the 1992 agreement has instead become an excuse for EU governments to continue subsidizing Airbus. The $3.2 billion in launch aid that the EU governments have committed for the new Airbus A380 is the largest amount of funds committed for a single project. The EU has provided further loans and infrastructure that has pushed the total amount of A380 subsidies to approximately $6.5 billion. Airbus is now contemplating the launch of another competitor (A350) to the recently-launched Boeing 7E7, and has indicated its intentions to request subsidies for that aircraft as well.

In addition, Airbus’ market share has increased markedly over the agreement’s lifetime. Its share of the market had already increased from 16 percent in 1988 to 30 percent in 1990, prior to the agreement’s signing; it reached 50 percent in 1999. In the meantime, McDonnell Douglas’ market share dropped precipitously, culminating with the firm’s purchase by Boeing in 1997. Airbus’s success in gaining additional market share is exemplified by the goals it has set for itself over its lifetime: In 1975, Airbus aimed to gain a 30 percent share of the world aerospace market. By 1994, it had declared that nothing less than 50 percent would do. It has exceeded that goal.

In 1997, the EC conditioned approval of the merger of Boeing and McDonnell Douglas on a commitment by Boeing to license to Airbus any "government-funded patent" that could be used in the manufacture or sale of large civil aircraft. Airbus has no similar commitment to share the fruits of government-funded technology with Boeing. The United States has sought to include a mutual commitment of this kind in a new bilateral agreement.

In 1999, a WTO panel reviewing a complaint by Brazil found that Canadian aircraft financing with launch aid-type terms was a prohibited export subsidy. Another panel, reviewing a case brought by Canada, found that Brazil’s interest rate subsidies to its aircraft manufacturer were also an export subsidy.

--Efforts to Negotiate a New Bilateral Agreement

The last major USG effort to address subsidies to Airbus was in 1999 – 2000, when the United States sought to head off subsidized financing for the A380. The considerations at that time included a possible WTO case. For its own business reasons, however, Boeing did not support such a course. As a consequence, the Clinton Administration did not pursue a WTO case at that time.

Matters changed significantly this year as talk surfaced of new subsidies for a new Airbus plane. Subsequently, USTR Zoellick had several conversations with EU Trade Commissioner Lamy in late Spring and early summer regarding this matter. USTR and EC trade officials met in July and more recently in September with the goal of securing a commitment to end new subsidies.

In August, President Bush instructed USTR Zoellick to pursue all options to end the subsidization of Airbus, including the filing of a WTO case, if need be. USTR has sought to end the subsidies through the negotiation of a new bilateral agreement. The EC has been unwilling to agree on the goal of ending all new subsidies, much less on how to achieve this goal.

USTR Zoellick met with Commissioner Lamy on September 30 to discuss this matter. The EC remains opposed to the goal of ending new subsidies for large civil aircraft.

While the United States remains committed to resolving this matter through the negotiation of a new bilateral agreement, we have concluded that filing a WTO case at this time is necessary to ensure that, one way or another, the playing field is leveled. The WTO offers an agreed multilateral forum for resolving trade disputes according to agreed rules.


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