Question

CASE: Boeing and Airbus Are in a Dogfight over Illegal Subsides

            Boeing and Airbus are the dominant players in the global market for large commercial jet aircraft of 100 seats or more. The two companies are locked in a rent less battle for market share. For decades, these two companies have been accusing each other of benefitting from the government subsidies. In its early years, Airbus received 100 percent of the funds it needed to develop new aircraft from the governments of four European countries where Airbus’ operations were based: Germany, France, Spain, and the United Kingdom. These funds were provided in the form of loans at below-market interest rates. For its part, Airbus claimed the Boeing has long been the recipient of R&D grants form the U.S. Department of Defense and NASA, which amount to indirect subsides. The two companies reached an agreement on phasing out subsidies back in 1992, but Boeing walked away from that deal in 2004, claiming that Airbus was still benefiting from billions in illegal development subsidies.

            In 2006, the U.S. government filed a case with the World Trade Organization (WTO) alleging that Airbus had received $25 billion in illegal subsidies, mostly in the form of launch aid for developing new aircraft. In 2010, the WTO ruled that Airbus had benefited from $18 billion in illegal government subsidies, including $15 billion in launch aid. The WTO gave the European governments until December 2011 to remove the harmful effects of the subsidies.

            In September 2016, the WTO issued another ruling criticizing the Europeans for failing to comply with its 2010 ruling and, moreover, for giving another $5 billion to Airbus in the form of noncommercial loans to help develop its latest aircraft, the A350. In this latest ruling, the WTO stated that “it is apparent that the A350 could not have been launched and brought market in the absence of launch aid.” In total, the WTO calculated that Boeing had lost 104 wide-bodied jet orders and 271 narrow-bodied jet orders as a result of Airbus launch subsidies. This latest ruling opens the door for the United States to apply retaliatory trade sanctions against noncompliant European governments.

            However, it seems unlikely that the United States will apply retaliatory sanctions anytime soon. Part of the reason is the United States itself has been countersued by the EU through the WTO for providing illegal subsidies to Boeing. In November 2016, the WTO ruled that Boeing would receive around $5.7 billion in illegal tax breaks from Washington State, where Boeing’s main production facilities are located. The state of Washington had promised to give Boeing these tax breaks between 2020 and 2040 on the condition that the company kept to production of the wings for the wide-bodied 777X aircraft in the state. According to Airbus, these tax breaks give 777X an unfair advantage against its rival aircraft, an assessment that the WTO seems to agree with.

            It remains to be seen what the final outcome will be. The WTO has yet to rule on how much damage Boeing’s tax breaks might impose upon Airbus. For its part, Boeing claims that the benefits from the subsidies to the 777X program only amount to $50 million a year, an assessment that Airbus vigorously disagrees with. The EU appealed this decision. A final ruling isn’t expected until at least 2018.

Analyze the case and answer the following questions:

QUESTION 1: According to WTO rulings, both Airbus and Boeing have been recipients of government assistance at one point or another. Discuss the nature of aircraft manufacturing and why subsidies are seemingly part of the industry practice.

QUESTION 2: In its early years, Airbus received subsidies for 100 percent of its development costs. Discuss this situation. Is there a time when subsidies should be considered acceptable? Why or why not?

QUESTION 3: Boeing is expected to benefit from some $5.7 billion in tax breaks from the state of Washington. Why is the state of Washington willing to provide these tax breaks to Boeing?

Answer 1

1. A subsidiary is a company that is part of another company, the holding company must own more than 50% and if it owns 199% this is called a “wholly-owned subsidiary”. This is mostly done to protect the assets of the primary company from each other’s liabilities. When it comes to government subsidy it is talking about a form of financial aid with the intention of stimulating the economy of that sector, in this case, many can call it “public’s investment”. The subsidy of the airline industry is done so the fundamental structure will not break when it comes head-on with risk factors such as an increase in oil prices. This is done to ensure the public well being in the form of jobs, safety, and quality service.

2. In theory, subsidies are done to boost the economy of an industry which in return benefits the public with quality service, job availability and lower price of the good or service. Essentially when the government gives subsidies is a win-win situation for both the supplier and the consumer.

3. Tax breaks help industries reduce the cost of adoption and in a sense will not see the need to raise the cost of goods. Therefore, the price of obtaining goods or services will be more accessible to the public.