Now that the US and EU have frozen their war on state aid for large civil aircraft, the question is: how will aircraft funding change after the trade dispute? In the ‘Understanding on a cooperative framework for Large Civil Aircraft’, the United States and European Union have formulated guidelines for future regulations on funding.
After months of preparations since March, the understanding was signed in Brussels on Tuesday during the summit with US President Joe Biden. It was presented by Executive Vice-President Valdis Dombrovskis of the European Commission and US Trade Representative Katherine Tai. Both parties hailed the understanding, which gives them five years to solve the issue once and for all.
Both sides will establish a working group on large civil aircraft that will be led by trade ministers. The working group will produce the framework and conditions for the future financing of large aircraft. The golden rule will be that funding is only allowed if it meets market terms.
Likewise, any research & development (R&D) funding must be open and transparent, the lack of it being the essence of the dispute The use of the funding must be accountable. And any aid must be permitted by law. Also, R&D funding must not be combined with specific support to OEMs like tax breaks that would harm the other side.
Both sides will now continue discussions to formalize the intentions so that the development of future large aircraft will be done in the most transparent way. The application of countermeasures (see: background) that brought the dispute to a climax in 2019 will be suspended for five years. The understanding will come too late for Boeing’s muted new mid-market aircraft, but the airframer and the US government would better adhere to the principles of the understanding to prevent a new row.
Pointing the finger at China
The understanding also includes the specific intention by the US and EU to collaborate on addressing “non-market practices of third parties that may harm their respective large civil aircraft industries.” The agreement says that “the two sides will share information about such subsidies, and identify points where joint work is needed to clarify the extent of state support, with the goal of establishing the basis for joint or parallel action in the future.”
While there is no direct reference, both parties point their fingers at China. With unrestricted state aid from the Chinese government as well as that from Russia, the two countries are developing the CRAIC CR929. This aircraft should become a direct rival to the duopoly of Boeing and Airbus in the wide-body market when it enters the market, which is scheduled for the second half of the decade.
The CRAIC CR929 targets the duopoly of Airbus and Boeing on the wide-body market.
The understanding also refers indirectly to the current strained trade relations between the US and China. For political rather than technical reasons, the Chinese authorities keep the Boeing MAX grounded or block airlines from buying US aircraft. On this, the annex on the agreement says: “Some economies also do not permit their airlines to make purchases in line with commercial considerations. The two sides will develop information and consider joint action to ensure purchases reflect those that private, marketoriented operators would undertake.”
Manufacturers welcome settlement
Both aircraft manufacturers have welcomed the understanding. “Anything that levels the playing field in this highly competitive industry and avoids this lose-lose proposition of tariffs across the Atlantic or any borders for that matter is good”, Airbus Chief Commercial Officer Christian Scherer said on Tuesday during a media conference. “Don’t take that as a very obvious statement from Airbus, but ask our customers, ask the market. Anything that substantiates a long-term convergence between the two sides of the Atlantic is really good news.”
In a media statement, Boeing said: “Boeing welcomes the agreement by Airbus and the European Union that all future government support for the development or production of commercial aircraft must be provided on market terms. The understanding reached today commits the EU to address launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action. Boeing will fully support the U.S. Government’s efforts to ensure that the principles in this understanding are respected.”
The dispute began in 2004 when the US filed a case with the World Trade Organization (WTO) against the EU on the alleged $19.4 billion in state aid to Airbus, notably the A380 and the A350, which Boeing claims has cost it $200 billion in aircraft sales.
The EU responded with a counterclaim in 2005 that targeted subsidies for Boeing and its 777 and 787 programs, including those through defense budget and from Washington State. Despite initial rulings, the dispute lingered on for years. The Appellate Body of WTO ruled in May 2018 that the EU had not fully complied with previous rulings on state aid to Airbus. This allowed the US government to impose $7.5 billion in tariffs. The Trump Administration duly did so in October 2019 and imposed a fifteen percent duty on EU-build aircraft.
After the WTO has ruled in March 2019 that the US had continued illegal state aid to Boeing, the EU imposed tariffs worth $4.0 billion on US exports to Europe in November 2020. This included a fifteen percent tariff on Boeing aircraft exported to Europe.
In July 2020, Airbus said it had amended its contracts with France and Spain in order to comply with the WTO ruling. Under the Biden Administration, the US and EU agreed in March 2021 to suspend all tariffs until July and start working on resolving the issue.