U.S. case done; EU case next

The WTO decision to let the U.S. recover tariffs from $7.5 billion in goods does not
include tariffs on parts shipped to Mobile, but there’s no guarantee that won’t change.

David Tortorano
October 2019

It was the crisis that in the end - at least for now - was avoided.

Since it was first reported in early September that the World Trade Organization
ruled again in favor of the U.S. in its dispute over Airbus subsidies, the concern in
Mobile was how much would the WTO determine the U.S. could recover through
tariffs, and would components shipped to Mobile to build jetliners be on the list?

In early October the WTO said the U.S. could place tariffs on $7.5 billion worth of
goods. Shortly later, the U.S. announced the goods that would be taxed - a list that
did not include components shipped to Mobile.

“Great news,” Sen. Richard Shelby, R-Ala., said in an Oct. 3 tweet. He said the
decision was great news for the state and “all the hard-working Americans associated
with Airbus Mobile,” adding that he was pleased his discussions with the
administration helped prevent the tariffs from impacting the local plant and jobs.

Rep. Bradley Byrne, R-Ala., in an Oct. 2 press release called the decision a “massive
win for the thousands of Alabama workers connected to Airbus Mobile,” and thanked
Sen. Shelby, Gov. Kay Ivey, Mobile Mayor Sandy Stimpson and others who joined
him working on the issue.

But the threat is not over.

“As it stands now, Airbus’ Mobile, Alabama Manufacturing Facility does not appear to
be affected in the immediate term. In the longer term, however, it’s not yet fully clear.
The U.S. Trade Representative included aircraft components on an earlier list of
European goods that might be tariffed, and USTR could impose tariffs on other
goods in the future - possibly including components destined for Airbus’ Mobile
factory,” an Airbus spokesperson said. “The only real resolution to this long-running
dispute is through a settlement agreement, and we are hopeful that the U.S. and
European Union will sit down and negotiate one quickly.”

The concern is real. According to a Bloomberg report, the Trump administration has
been considering a trade weapon known as “carousel” retaliation, which would
enable the United States to regularly change which goods it targets, people familiar
with the deliberations said in September.

For the people from this region, anything that might jeopardize the Mobile aircraft
assembly campus would put a crimp on one of the major success stories. Airbus not
only operates the jetliner assembly plant, but also has an engineering center and
military aircraft repair and overhaul operation.

Old case
The U.S./Boeing and EU/Airbus have been at odds over subsidies going back many
years. The U.S. cites launch aid from various European governments as providing an
unfair advantage, while the EU points to U.S. research and development grants and
tax breaks as having the same impact.

Both sides have successfully challenged the other, and there have been repeated
appeals, dragging out the issue for well over a decade.

It was back in 2004 during the Bush administration that the U.S. first filed a complaint
in Geneva against subsidies and other advantages for the development of the A350
and A380. A parallel complaint by the EU, alleging illegal U.S. subsidies for Boeing,
was filed some eight months later.

The rulings have been dizzying.

In June 2010, at a time when Boeing was competing against Airbus for a $35 billion
contract to build U.S. Air Force tankers, the WTO ruled that aid European
governments provided to Airbus violated global trade rules. The WTO ruled that four
decades of government-backed loans to Airbus helped it gain foreign sales, harming
Boeing.

Then it was the EU’s turn. In January 2011, after an interim ruling four months earlier,
the WTO ruled that U.S. federal and local governments provided billions of dollars in
illegal subsidies for the 787 and other aircraft, giving Boeing an unfair advantage
against Airbus. At the end of March 2011, the WTO said Boeing received at least
$5.3 billion in improper subsidies. The EU claimed R&D grants from NASA and the
Defense Department, including development of carbon composites, contributed to
the technologies to build the 787.

Fast forward to September 2016. The WTO ruled that European governments failed
to comply with a WTO ruling and end billions in state subsidies to Airbus. The ruling
moved the U.S. a step closer to being able to impose tariffs against goods and
services from the EU.

Two months later the WTO determined a tax benefit granted to Boeing for production
of its long-haul 777X violates international trade rules. The tax cut in question was
provided by the state of Washington in 2013 to ensure that wings for the 777X were
made only there. The tax cut was prohibited under its rules, said the WTO.

In May 2018, the WTO issued a final ruling. The U.S. won its case challenging
subsidies that EU nations provided to Airbus to develop A350 and A380 jetliners. The
final ruling meant the United States could impose retaliatory sanctions. An appellate
panel for the WTO affirmed a 2016 ruling that the EU had failed to eliminate unfair
funding for two Airbus models. The next stage was to determine the size of the tariffs
the U.S. could impose.

In September 2019, the WTO ruled in favor of the U.S. in the dispute over Airbus
subsidies, and in October said the U.S. could move forward with plans to impose
tariffs on some $7.5 billion worth of EU goods annually, to counteract years of
European loans and illegal subsidies to Airbus.


The United States after the ruling said it would slap 10 percent tariffs on European-
made Airbus planes and 25 percent duties on French wine, Scotch and Irish
whiskies, and cheese from across the continent as punishment for illegal EU aircraft
subsidies.

The size and scope of the tariffs were reduced considerably from a $25 billion list
floated by Washington earlier this year that included helicopters, major aircraft
components, seafood, luxury goods and other big-ticket categories that were
excluded from Wednesday’s announcement. The inclusion of aircraft components
would have hit Airbus’ Mobile, Ala., operation, which assembles A320 and A220
jetliners.

But the clash is not over: The WTO will rule in the coming months on the EU’s own
request to levy tariffs on the U.S. over aid to Boeing.

While on the surface the October ruling is a win for an American company over a
foreign competitor, it’s far more complicated given the global nature of the aerospace
industry. Both Airbus and Boeing have operations, employees and suppliers
worldwide that are impacted in the dispute.

World footprint
While one of the giants is headquartered in Europe and the other in the United
States, both are multinationals.

Boeing, the oldest of the two and headquartered in Chicago, builds its planes in
Washington State, and North Charleston, S.C.

Boeing has a reach that includes customers in about 150 countries and 145,000
employees and operations in more than 65 countries. It has manufacturing, service
and technology partnerships with companies and governments worldwide and
contracts with 20,000-plus suppliers and partners.

Boeing has regional executives in offices worldwide, including Africa, Australia,
China, Europe, India, Israel, Japan, Latin America, Middle East, North Africa and
Turkey, Republic of Korea, Russia/CIS, Saudi Arabia, and Southeast Asia. Its
commercial jetliners are the Next-Generation 737, 737 Max, 747-8, 767, 777, 777X,
and 787.

The company has gone through a tough stretch in recent years. Its 737 Max remains
grounded after two crashes that killed a combined 346 people. The 737 Max problem
was caused by a faulty sensor that erroneously reported the aircraft was stalling,
triggering an automated system that caused repeated nosedives.

Boeing's KC-46 tanker has also had rough going. The Air Force says it will be three
or four more years before it can perform its mission. It’s  withholding $28 million from
every tanker it receives until the problems are fixed. This September the airplanes
delivered were crippled because their other role, carrying cargo and passengers,
was suspended because of an unsafe cargo locking mechanism.

In a press release Sept. 30, Boeing Chairman, President and CEO Dennis
Muilenburg announced several immediate actions to strengthen the company's
commitment to product and services safety. The actions follow recent
recommendations from the Boeing Board of Directors that were the result of a five-
month independent review of the company's policies and processes for the design
and development of its airplanes by a specially appointed committee.

But Boeing has also received bad press from other moves. After complaining about
the CSeries jets that were purchased from Bombardier by Delta Air Lines, a 300
percent tariff was placed on the planes even though Boeing had no plane of that
size. It never happened, but it did result in an arrangement that hurt Boeing.

Bombardier and Airbus reached an agreement where Airbus took a majority share of
the CSeries, renamed it the A220 and opted to build them in Mobile. The plane has
been highly praised for its efficiency, seating arrangements and oversized windows.
Boeing has since been working to get a competing plane, built by Embraer, in its
lineup.

Airbus traces its origins to 1970, when European aerospace companies and
governments realized they could not compete with the huge aerospace companies
and production capacity of the United States. They formed a consortium of aircraft
makers, named Airbus Industrie GIE. In 2000 it became the European Aeronautic
Defense Company, and in 2017 the parent and subsidiary companies were merged
and took the name Airbus SE.

Like Boeing, it has operations worldwide. With 130 nationalities represented by
Airbus, it has activities in Europe (France, Germany, Spain, United Kingdom, Finland,
Romania, Russia, Turkey), the Americas (Brazil, Canada, Chile, Mexico, and the
United States), Africa and the Middle East, and Asia (Asian-Pacific region, Brunei,
China, Japan, India, Malaysia, Pacific region, Philippines, Singapore, South Korea,
Thailand, and Vietnam).

Airbus commercial aircraft are the A220, A320, A330, A350 and A380.

But Airbus has not had smooth sailing on all fronts. The most recent problem for the
company has been the A380 superjumbo jet, a massive plane that is even larger
than the Boeing 747.

It’s being phased out with production scheduled to end in 2021 because airlines
could not operate it profitably.

Although it is considered a beautiful plane and a high-tech marvel, it’s a plane some
say never should have been built. Even Airbus competitor Boeing, at a time when the
two companies were considering a joint project to build a massive plane, warned
against it because the market was not there.

Airbus' U.S. footprint
The footprint in the U.S., which started with a single sales office and staff of fewer
than a dozen people in 1978, is growing. According to Airbus, it is “approaching
4,000 Airbus team members in the U.S., with around 900 of them in our helicopter
business.”

Airbus has a nationwide network of 38 locations in 16 states (see page 4), including
production facilities in Mobile and Columbus, Miss.

The United States is the largest single supplier county to Airbus, which has spent
more than $187 billion in the U.S. since 1990. Airbus spending in the U.S. supports
more than 275,000 American jobs. It has about 450 U.S. suppliers in around 40
states, and is the largest export customer of the U.S. aerospace industry.

Mobile is on its way to becoming the world’s fourth largest producer of passenger
jets. The most popular Airbus jetliner, the A320 series, is built in Mobile as well as
Toulouse, France; Hamburg, Germany; and Tianjin, China.

Mobile’s connection with Airbus goes back to 2005, when Mobile Regional Airport got
a military aircraft service center. Then in June 2005, European Aerospace Defense
System (EADS, now Airbus) said it would build an Airbus engineering center at
Brookley Field. In October EADS and its partner, Northrop Grumman, picked Mobile
as the site where KC-30 tankers would be built, if they won the Air Force contract.
Mobile won out over 70 sites in 32 states.

While the EADS/Northrop bid was initially chosen, Boeing protested and won the new
competition. But Mobile, which continued to nurture the ties to Airbus, was chosen as
the site to build the A320 series of jetliners. It delivered its first plane in 2016.

Since it first began building A320 series jetliners in Mobile, the Airbus campus
experience can be described with one word: growth. It is increasing the number of
A320s built, adding more workers and is now building A220 passenger jets and hiring
more workers for the second assembly line.

But the WTO decision in the 15-year battle between Boeing and Airbus over illegal
subsidies had - and still has - the potential to impact the campus and throw a monkey
wrench into one of aviation’s most striking success stories.

Washington’s list of EU exports that could be subjected to tariffs was large. The U.S.
planned to chose products from the list and then tax them at different rates in order
to claw back from an amount set by the WTO.

The list includes EU aircraft parts — a move that EU officials said was designed
explicitly to disrupt the company's supply and manufacturing chain by depriving the
company of the parts it needs for the final assembly of its A320 model in Mobile. EU
officials warned the U.S. that such a move would end up destroying U.S. jobs.

While the parts were not on the list released after the WTO decision, they could still
get on any revised list.

Boeing and Airbus won’t gain anything by “going at each other’s jugular,” according
to the Airbus top salesman. Speaking to CNBC’s Charlotte Reed after the WTO
ruling, Airbus’s Chief Commercial Officer (CCO), Christian Scherer, said the legal
action was unlikely to benefit either company.

“I don’t think that the aerospace communities or eco-systems on either side of the
Atlantic have anything to gain (by) going at each other’s jugular,” he said at the
launch of the firm’s annual commercial outlook.

“In general, aviation is a global industry, no aircraft is coming from one single country
or zone. It’s a lose-lose for the whole industry if we move to tariffs,” said Kristi Tucker,
a spokeswoman for Airbus in Mobile.

“Such a tit-for-tat fight poses huge risks to the entire aviation industry on both sides
of the Atlantic: Airbus has brought past subsidies in compliance with WTO rules. The
counter WTO ruling against the U.S. and Boeing will eventually follow, likely allowing
the EU to impose even greater tariffs on U.S. goods. Boeing will be hit much harder
as their subsidies continue to create huge market harm – estimated by the EU to be
approximately $12 billion per year. In short, a negotiated solution is the only real way
of resolving this complex dispute.”

Where it will all end up is unclear.

-------------


Airbus in the United States

Mobile, Ala.
 Airbus U.S. Manufacturing Facility
 Airbus Engineering Center
 Airbus Defense and Space Military Aircraft
Wichita, Kan.
 Design and Engineering Center
Miami, Fla.
 Airbus Training Center
 Latin American/Caribbean marketing
Denver, Colo.
 Airbus training facility
Herndon, Va.
 Airbus Americas Inc. headquarters
Ashburn, Va.
 Satair (formerly the Airbus Spares Center
 Metron Aviation
Washington, D.C.
 Airbus Americas’ Safety /Technical  Affairs and Government Relations departments
 Airbus Experience Center
Grand Prairie, Texas
Airbus Helicopters
Columbus, Miss.
 Airbus Helicopters
Plano, Texas
 Airbus DS-GS
Merritt Island, Exploration Park, Fla.
 OneWeb Satellites (joint venture between OneWeb and Airbus)
Atlanta, Ga.
 Airbus Aerial
 Satair
Silicon Valley, Calif.
 A Cubed

Airbus Helicopters Service Centers
Mesa, Ariz.
 Precision Heli-Support
Woodland, Calif.
 Advanced Helicopter Services
Stockton, Calif.
 Big Valley Aviation
San Diego, Calif.
 Corporate Helicopters
Redding, Calif.
 Redding Air Service
Van Nuys, Calif.
 Rotorcraft Support
Loveland, Colo.
 Trans Aero
West Palm Beach, Fla.
 Rotortech Services
Peachtree City, Ga.
 Precision Aviation Services
Meridian, Idaho
 Nampa Valley Helicopters
Georgetown, Ky.
 Thoroughbred Aviation Maintenance
Broussard, La.
 Arrow Aviation
Portsmouth, N.H.
 New Hampshire Helicopters
Marshville, N.C.
 U.S. Helicopter
Croydon, Pa.
 Sterling Helicopter
Belle Vernon, Pa.
 Uniflight West Penn
Grand Prairie, Texas
 Uniflight
Woods Cross, Utah
 Helicopter Services of Utah
Auburn, Wash.
 Cascade Helicopter Services
Janesville, Wisc.
 Helicopter Specialties

- Ted Kordecki, research associate
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