Northrop Grumman sent us the following rebuttal to my tanker brief of November 9, in which I explained why Boeing believes the recent World Trade Organization finding on commercial-transport subsidies is relevant to the Air Force’s tanker competition. The rebuttal was written by Joel Johnson, an expert on trade policy and defense cooperation who has served at the State Department, the Treasury Department, and on the staff of the Senate Foreign Relations Committee. Johnson is currently a consultant to several organizations, including Northrop Grumman.
As noted in Loren Thompson’s article, the WTO finding is preliminary and confidential, and the WTO panel evaluating the case by the EU against alleged US subsidies to Boeing has not yet completed its work.
Both cases were extremely complex, including a variety of allegations of various types of subsidies. It should be noted that there are no “illegal” subsides under WTO rules. There are “prohibited” subsidies, meaning subsidies that are directly export dependent (and are the type Boeing received for three decades – see below); “actionable” which means if a party proves it was “adversely” affected by such a subsidy then the subsidy must be terminated, and “allowable”. It is likely that the WTO will find all three kinds of subsidies in the Airbus, and probably Boeing cases.
The WTO findings are intended to provide the parties a ruling on subsidies, and encouragement to change policies and/or negotiate a settlement. The panels will not determine a level of injury or what allowable sanctions might be. Under WTO rules, “preemptive” sanctions are not allowable. The entire process of findings, appeals, and possible negotiated agreement or removal of subsidies must be allowed to run its course. The US would violate the spirit, if not the letter (military procurement is generally excluded from trade rules, although the purchase of civil aircraft for military purposes might not be) if it imposed sanctions before the WTO process were completed.
There are two, albeit related, issues involved in determining the impact of subsidies. Did the subsidy allow a product to be launched earlier than if only commercial financing were available, and did the subsidy allow pricing of the product that was different than had commercial financing been the only option? We do not know how the WTO panel ruled on various Airbus aircraft.
It should be noted that for thirty-two years the United States tax code had provisions reducing US taxes on profits related to exports. Boeing was the single largest beneficiary of this program. Every Boeing commercial aircraft exported during this period (1971-2003) was priced accordingly, relative to its competitor. The WTO ruled that three versions of the program were prohibited under the subsidies code (the Domestic International Sales Corporations or DISCs; then the Foreign Sales Corporations or FSCs, and finally the Exterritorial Income Exclusion or ETI). Should the USAF consider these thirty years of tax benefits to Boeing determined to be subsidies by the WTO?
During this entire period, in spite of three WTO rulings, the EU never discriminated against Boeing military or civil products. Even when it imposed WTO-approved sanctions against $4 billion of U.S. exports to Europe, the EU still did not sanction aerospace products, as it did not want to penalize European consumers or its military.
The bottom line is that in the case of the subsidies to Boeing, the Europeans followed the WTO rules, and allowed their consumers and military to choose the aerospace products that best meet their needs. The US should do likewise.
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