Ten months ago, in a case brought by the United States in 2004, the World Trade Organization issued a preliminary ruling siding with the Boeing Co.’s complaint that European Union subsidies to Airbus put Boeing at a competitive disadvantage in the commercial aircraft market.
The WTO moves at a magisterial pace, so it wasn’t until last week that it finalized its ruling. It said that EU nations had given Airbus $20 billion in cheap upfront loans that enabled the company to begin designing and producing six different aircraft.
These government loans, called “launch aid” in WTO jargon, put Boeing aircraft at a competitive disadvantage and helped Airbus overtake Boeing as the world’s largest commercial aircraft producer, the WTO ruled.
The launch-aid loans were made at below-market rates and didn’t have to be repaid until Airbus delivered the planes. Meanwhile, Boeing was borrowing on commercial markets and carrying all of the development and production costs itself.
In practical terms, the ruling means that Boeing may be able to sell more aircraft. And, should nations such as China and Brazil enter the large commercial aircraft business down the road, the WTO decision sets the competitive ground rules.
In the short term, the decision finally could help bring the long-running soap opera called “The Tanker War” to an end. For more than 10 years, the Air Force has been trying to replace its Eisenhower-era fleet of air-to-air refueling tankers. The $40 billion contract calls for 179 “KC-45” tankers to be built at a fixed price, with delivery to begin in 2015.
That’s a huge piece of business that could employ tens of thousands of workers for more than a decade. The question for the Pentagon has been whether the tanker should be built on the airframe of a Boeing 767 or the airframe of an Airbus A-330.
Back in 2002, Boeing got the deal, only to have it canceled after Sen. John McCain, R-Ariz., smelled a rat. Subsequent corruption investigations sent a Pentagon procurement officer and Boeing’s chief financial officer to prison.
The tanker contract was rebid. In March 2008, it was awarded to a consortium between the European Aeronautic Defence and Space Company — the parent company of Airbus — and Northrop Grumman of California. EADS/Northrop, to forestall congressional objection to shipping jobs overseas, promised to open a plant in Alabama.
Boeing appealed the Air Force decision, complaining that the bid specifications unfairly favored the EADS/Airbus entry. Secretary of Defense Robert M. Gates agreed and ordered the contract re-bid. In March, Northrop dropped out of the race, but EADS stayed in.
The deadline for submitting the next “final” bid is Friday.
Now the question is whether, in assessing the bids, the Air Force should take the WTO decision into consideration. The “launch aid” enables EADS to shave the price on the A-330 airframes. The House has agreed that the WTO decision should be a factor. The Senate — despite pleas from senators from Boeing states, including Washington and Missouri — so far has refused to go along.
Even before the WTO decision, we thought Boeing had the better entry. Boeing has far more experience building tankers, particularly the refueling booms, and the 767 can operate on shorter runways in many more potential theaters of war.
Competition is a wonderful thing, but if free trade isn’t fair trade, why bother?
