Airbus/Boeing deal explained: what is in it and what happens next

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The end of the interminable EU and US struggle over aircraft subsidies, thrashed out over meals of sea bass and lamb stew in Brussels, marks a major truce in what seemed an intractable trade conflict. 

For policymakers in Brussels, the hope is the Airbus-Boeing deal decisively turns the page on Trump-era trade tensions. For business on both sides of the Atlantic, it lifts the spectre of punitive tariffs on goods that stretch beyond aviation to Georgia cane molasses and Italian cheese. 

But the deal, sealed at Tuesday’s EU-US summit, also marks the start of a long process that requires close co-operation if both sides are to turn their fire away from each other and focus on mutual trade challenges posed by China.

What was the dispute about?

It dates back to 2004, when the number of Airbus aircraft deliveries first overtook those of its US rival. A previous understanding on subsidies collapsed, with the US administration alleging unfair state aid. The EU countered with its own complaint. The World Trade Organization opened probes into both sides. 

The main US criticism centred on so-called launch aid provided to Airbus by its EU host nations (at the time, the UK, France, Germany and Spain). The aid amounted to government financing for the development of new models, reimbursed through royalties on future sales. 

The EU retorted that Boeing benefited from US support that broke WTO rules — notably, tax breaks from Washington state where the company is based. Tit-for-tat disputes ensued, as each side accused the other (successfully) of failing to comply with WTO rulings.

In 2019, the WTO awarded the US the right to slap retaliatory tariffs worth $7.5bn on European products. The US hit list ranged from French wine to German machine tools.

The next year, the EU was authorised to put additional tariffs worth almost $4bn on US goods. Its similarly eclectic hit list ranged from spirits to ornamental fish. 

Ending the dispute only became a serious possibility with the advent of the Biden administration — and a growing mutual awareness that it was damaging companies on both sides, while aiding China’s ambitions in the commercial civil aviation market. 

In March, the two sides agreed to suspend their retaliatory tariffs for four months, creating a window for negotiations.

What is in the deal?

Its key element is a five-year suspension of punitive tariffs, and the creation of a working group tasked with reaching a final understanding on past and future subsidies.

Boeing, welcoming the deal, said it “commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and the US live up to that commitment, without requiring further WTO action”.

Line chart of Share prices rebased showing Boeing and Airbus’s stock performance

Still, to set some rules for the road, WTO benchmarks on R&D funding, tax breaks and other kinds of subsidy will be used. The deal also calls for regular ministerial level contacts — mainly between EU trade commissioner Valdis Dombrovskis and US trade representative Katherine Tai — to review progress. 

Importantly, both sides agreed to co-operate on handling “non-market economy” entrants into the civil aviation market. In a statement, US president Joe Biden explicitly linked that to countering “China’s non-market practices in this sector that give China’s companies an unfair advantage”.

What are the implications for the aviation sector? 

Welcome relief. The sector has been among the hardest hit by Covid-19, and the prospect of a trade war would have been an extra costly distraction. Deliveries of aircraft remain well below their levels before the pandemic, as cash-strapped airlines have cancelled or deferred orders.

Airbus and Boeing officials have also recently signalled they wanted a settlement. In addition to coronavirus, their longstanding duopoly faces growing Chinese competition, where state-owned aerospace manufacturer Comac is developing the C919, designed to rival the Airbus A320 and Boeing 737.

Boeing forecast last year that China will become the world’s largest aviation market, with about 25 per cent of all aviation growth worldwide already coming from the Asian country over the past decade. 

“My confidence is high that we have resolved these disputes,” Tai said on Tuesday. “We are putting away our litigation briefcases.”

Where does the deal leave EU-US trade?

It ends one long-running source of discord. Now Brussels is pushing for progress on another: Trump-era tariffs on steel and aluminium.

These have harmed EU producers and led to a separate wave of EU retaliation against US consumer goods such as Harley-Davidsons and bourbon. Biden and EU chiefs agreed on Tuesday to establish a working group on this issue.

Bar chart of EU trade balance with the US, by product group (€bn) showing The EU surplus by sector

For the EU, it is a particularly bitter row as the Trump administration justified the move by branding the EU a national security threat, alongside other traditional US allies such as Canada. But while Canada was subsequently granted a reprieve by Trump as part of an updated trade agreement, there has been no relief for the EU. 

EU officials say the bloc is now pursuing a twin-track approach of ending disputes while pressing ahead with a positive agenda. To that end, Biden and EU chiefs also agreed to set up a “trade and technology council” to co-operate on setting rules and technical standards for emerging sectors such as artificial intelligence and sensitive technologies such as semiconductors. 

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