NATIONAL LAW UNIVERSITY, JODHPUR

TRADE REMEDIES
[Project towards the partial fulfillment of assessment in the subject of Trade Remedies]

SUBSIDIES IN THE LARGE CIVIL AIRCRAFT DISPUTE

Submitted to:
Ms. Roasmy Joan,
Faculty (International Trade Law Honors)
Submitted by:
Akhil Raina,
Roll No. 880,
VIII Semester,
B.Sc. LL.B. (International Trade and Investment Law Hons.)

TABLE OF CONTENTS

INTRODUCTION: A

LOOK INTO THE

CONTEXTUALISATION: THE

THE

NEXT STEP:

THE PANEL

AND

THE

LCA DISPUTE....................................3

PARTIES AND THE INDUSTRY INVOLVED................5

DISPUTE AT THE

WTO..........................................7

AB FINDINGS..........................................................9

I. DS316 PANEL PROCEEDINGS.............................................................9

II. DS316 PANEL PROCEEDINGS..........................................................10

CONCLUSION...............................................................................11

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INTRODUCTION: A LOOK INTO THE LCA DISPUTE

The year 2004 was a watershed in the history of what is now known as the Large
Civil Aircrafts1 dispute at the World Trade Organization (WTO). 2 This dispute, found in the
field of an extremely competitive industry, came to a head on October 6 of that year when the
United States unilaterally terminated a bilateral agreement between itself and the European
Union (EU) concerning aircraft subsides and initiated the dispute settlement mechanism
under the WTO.3 With both Boeing and Airbus in the process of developing a revolutionary
new type of aircraft, the United States centered their claim the fact that EU was allegedly
involved in giving launch aids to Airbus.4 In retaliation, the EU slammed a separate
complaint under the aegis of the WTO alleging that the United States indulged in the practice
of providing tax breaks and preferential government contracts to its domestic aircraft
producer.5
The LCA dispute turned out to be one of the most significant cases to ever come to the
doorstep of the WTO and this was for three major reasons. First, it squared off two natural
trading partners against each other in an ultra-high stakes trade war. This is particularly
interesting when one considers that at this point in time, both nations are engaged in the
1 Hereinafter abbreviated as LCA
2 JEFFREY D. KIENSTRA, Cleared For Landing: Airbus, Boeing, and the WTO Dispute over
Subsidies to Large Civil Aircraft, 32 NW. J. INT'L L. & BUS. 569 (2012), available at:
http://scholarlycommons.law.northwestern.edu/njilb/vol32/iss3/4 (Last visited: 16th March
2015) [hereinafter referred to as Kienstra (2012)]
3 NILS MEIER-KAIENBURG, The WTOs Toughest Case: An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the AirbusBoeing Dispute Over
Aircraft Subsidies, 71 J AIR L. & COM. (2006), at 191, 201, 205 [hereinafter referred to as
Meier-Kaienburg (2006)]
4 Request for Consultations by the United States, European Communities and Certain
Member StatesMeasures Affecting Trade in Large Civil Aircraft, WT/DS316/1 (Oct. 6,
2004)
5 Meier-Kaienburg (2006), at 207; See generally: Request for Consultations by the EuropeanCommunities,
United StatesMeasures Affecting Trade in Large Civil Aircraft, WT/DS317/1 (Oct. 6, 2004)

Page 3 of 13

creation of possibly the worlds largest and most significant trade agreement, the
Transatlantic Trade and Investment Partnership.6 The industry has been successful in
straining EU-US relationships ever since the Airbus entry into the market in 1974. 7 To this
end, EU-US collaborations regarding manufacture of a superjumbo project in the early 1990s
also failed.
Secondly, the dispute was touted to be one of the biggest and most expensive cases in
the history of the WTO dispute settlement mechanism. 8 Everyone knew that both parties had
the financial standing to afford an extremely expensive, drawn out legal battle though
everyone equally felt that it would be best if that nuclear option were to not come into play.
Finally, the dispute has the infamous distinction of being known as one of the most drawn-out
cases in the history of the DSU. Weinstein recognizes two additional significant aspects of the
current state of the dispute.9 He begins by noting that the LCA industry has immense bearing
on the parties technological development, trade balances, economic growth, employment,
national prestige and national defense. Second and from a long-term perspective, he reasons
that the dispute sheds light on a fundamental tendency in global trade negotiations and world
politics for economic globalization to reach its limits in the harsh realities of multi-polar
power politics.10
6 http://trade.ec.europa.eu/doclib/press/index.cfm?id=1282 (Last visited 29th March, 2015)
7 NINA PAVCNIK, Trade Disputes in the Commercial Aircraft Industry, (Blackwell Publishers
Ltd.)
8 Peter Mandelson, the EU Trade Commissioner, responding to the United States initiation
of the DSU quoted that Americas decision will, I fear, spark probably the biggest, most
difficult and costly legal dispute in the WTOs history. DAVID GOW, Snubbed Mandelson
Takes

Boeing

Fight

to

WTO,

THE

GUARDIAN,

available

http://www.guardian.co.uk/business/2005/jun/01/europeanunion.theairlineindustry

at:
(Last

visited 16th March 2015)

9 M.A.WEINSTEIN (2005): Economic Brief: Airbus vs. Boeing, The Power and Interest
News Report (PINR), June 5.
10 ZGUR ALISKAN, An Analysis of the Airbus-Boeing Dispute From the Perspective of the
WTO Process, EGE ACADEMIC REVIEW, Vol. 10 Number 4, pp. 1129 1238 (October 2010)
[hereinafter referred to as Caliskan (2010)]
Page 4 of 13

Both parts of the dispute settlement mechanism have come into play. The complaints
have undergone the panel11 and appellate stages12, with both parties claiming that they have
complied with the rulings.13 Later on even these claims have, unsurprisingly, been strongly
contested resulting in further litigation in order to determine whether the parties respected the
findings of the WTO judiciary in this respect and whether the offending subsidies were
terminated.14
Not only does this prolonged nature of the dispute point out to the aforementioned
problem of it becoming a never-ending issue, it also sheds light on the difficulty that the
WTO as an institution has had to face in tacking this sensitive matter.15
After briefly looking at the histories of the two companies involved- the American
Boeing and the Airbus series from EU-this essay would go on to examine how the
competition in this sector evolved. Subsequently the analysis would move into a short
11 Panel Report, European Communities and Certain Member StatesMeasures Affecting
Trade in Large Civil Aircraft, WT/DS316/R (June 30, 2010) [hereinafter DS316 PR]; Panel
Report, United States Measures Affecting Trade in Large Civil Aircraft, WT/DS353/R (Mar.
31, 2011) [hereinafter DS353 PR].
12 Appellate Body Report, European Communities and Certain Member StatesMeasures
Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R (May 18, 2011) [hereinafter
DS316 ABR]; Appellate Body Report, United StatesMeasures Affecting Trade in Large
Civil Aircraft (Second Complaint), 1350(b)(c), WT/DS353/AB/R (Mar. 12, 2012)
[hereinafter DS353 ABR].
13 Communication from the European Union, European Communities and Certain Member StatesMeasures
Affecting Trade in Large Civil Aircraft, WT/DS316/17 (Dec. 1, 2011); Communication from the United States,
United StatesMeasures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/15 (Sept. 23,
2012).

14 Recourse to Article 21.5 of the DSU by the United States, Constitution of the Panel, Note by the Secretariat,
European Communities and Certain Member StatesMeasures Affecting Trade in Large Civil Aircraft,
WT/DS316/24 (Apr. 25, 2012); Recourse to Article 21.5 of the DSU by the European Union, Request for
Consultations, United States Measures Affecting Trade in Large Civil Aircraft (Second Complaint),
WT/DS353/16 (Sept. 25, 2012).

15 Kienstra (2012), p. 571

Page 5 of 13

examination of the WTO dispute while at the same time shedding light on the international
agreements

involved.

The

essay

would

conclude

with

possible

solutions

and

recommendations. All the while, the doctrinal and principal questions remains: does the WTO
have the competence to comprehensively deal with what it has been entrusted with?
CONTEXTUALISATION: THE PARTIES AND THE INDUSTRY INVOLVED
The scope of the civil aviation industry is not only restricted to the production of
different sizes of civil aircrafts, helicopters and aero-engines, but is also inclusive of the
manufacture of their component and parts. It is an industry dominated by the US and EU,
with Brazil, Japan, South Korea, Canada, Australia (and more recently China) being other
smaller players.16 However, the large civil aircraft sector, comprising of airlines with more
than 100 seats (and occupying 50% of the entire world production of aircrafts, is entirely
binary- dominated almost equally by Boeing and Airbus.17

An interesting aspect of the

interaction between these two major players in the market is the phenomenon of international
supply chains.18
The nationalistic character of aircraft manufacture, owing to its close association with
the military and strategic interest of the countries involved, has slowly eroded on account of
increased globalization. Both Airbus and Boeing have become involved in huge supply
chains where they tend to share many suppliers. This has lead to certain fascinating
consequences.
For example, it has been noted that almost half of the new Airbus production is rooted
in the US.19 This method of processing has been referred to as systems integration mode of
production and it involves the spreading out of risks and costs over a web of domestic and
foreign partners.20
16 Caliskan (2010), p. 1130
17 Id.
18 Id.
19 Economist, Boeing v Airbus: Nose to nose and Air war, June 23 (2005). In this regard,
Boeing has fared considerably better with only 2% of Boeings 727s contents being nonAmerican in the 1960.
Page 6 of 13

A full examination of this dispute must be preceded by an inquiry into the precise
nature and history of the two major companies involved in order to better appreciate the
complex relationship existing between them and the intestacies of the problems that their
interaction leads to. Born as the Pacific Aero Products Company in July 1916 in Seattle by
William E. Boeing, the Boeing Airplane came into existence the very next year and met with
early success thanks to its involvement in military production. 21 However the company really
exploded on the aviation scene in the 1950s owing to the development of the iconic 707 - a
single-aisle, four engine aircraft, and the US first jet airliner.22 Through the next decade its
growth steadily rose with the release of the 737, indisputably the best selling commercial
aircraft in history.23After its successful merger with the McDonnell Douglas Corporation in
1997, an erstwhile competitor, Boeing became the lone surviving producer of commercial
aircrafts in the US24 and currently it owns nearly hundred percent of the US civil aircraft
industry.25 However in the late 1960s, troubled with the growing dominance of the US in the
aircraft industry, collaborations were formed between European countries to give voice to a
domestic airline force.26

20 D. PRITCHARD & A. MACPHERSON, Industrial subsidies and the politics of world trade:
The case of the Boeing 707, THE INDUSTRIAL GEOGRAPHER, 1 (2): 57-73.
21

History,

The

Beginnings:

19031926,

BOEING,

http://www.boeing.com/history/narrative/n003boe.html (Last visited 28th March, 2015).

22 MARC C.S. MATHIS, Comment, Uncivil Aviation: How the Ongoing Trade Dispute
Stalemated Between Airbus Has Undermined GATT and May Continue to Usher In an Era of
International Agreement Obsolescence Under the World Trade Organization, 13 TULSA J.
COMP. & INTL L. 177, 18183 (2005) [hereinafter referred to as Mathis (2005)]
23

About

the

737

Family,

BOEING,

http://www.boeing.com/commercial/737family/background.html (Last visited 28th March,

2015).
24 STEVEN PEARLSTEIN, Europeans Relent, Back Boeing Merger, WASHINGTON POST (July
24, 1997), http://www.washingtonpost.com/wp-srv/business/longterm/boeing/boeing.htm.
25 DANIEL I. FISCHER, Comment, Super Jumbo Problem: Boeing, Airbus, and the Battle for
the Geopolitical Future, 35 VAND. J. TRANSNATIONAL L. 865, 877 (2002), p. 866
Page 7 of 13

The first step was a consortium between Aerospatiale of France and a group of
Germanys leading manufacturing firms, which became known as Deutsche Aerospace. The
joining in of British Aerospace of the United Kingdom and Construcciones Aeronauticas SA
of Spain (CASA) further intensified European efforts and lead to the ultimate creation of
Airbus Industrie GIE (Airbus GIE). In its written submissions to the WTO, the EU has
chosen to categorize Airbus GIE as a a loose association of fully independently costcentered companies.27 Between 2001 and 2004, with the entry of the European Aeronautic
Defense and Space Company (EADS), this structure underwent metamorphosis, as the four
independent partners became wholly owned subsidiaries of Airbus SAS that was eighty
percent owned by the EADS. However today, Airbus SAS is incorporated as a simplified
joint stock company, and is a division of EADS. 28 As of now it is sufficient to say that in
overcoming the considerable barriers to entry in the LCA industry 29 and developing these
aircraft, Airbus has depended on significant development financing provided by its member
nations, termed member state financing by the EC, and launch aid by the United States.30
THE NEXT STEP: THE DISPUTE AT THE WTO
We should begin by appreciating that there have historically, been four main
international legal arrangements to regulate LCA industry subsidies. These are as follows:

26 Mathis (2005), p. 185, 189

27 First Written Submission by the European Communities, European Communities
Measures Affecting Trade in Large Civil Aircraft, p. 69, WT/DS316 (Apr. 5, 2007)
[hereinafter

referred

to

as

DS316

EC

FWS],

available

at

http://trade.ec.europa.eu/doclib/docs/2007/april/tradoc_134551.pdf. (Last visited 28th March,

2015)
28 Mathis (2005), p.190
29 DS316 EC FWS, p. 27
30 Ibid, p. 32
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i.
ii.
iii.
iv.

The 1978 OECD Consensus on Export Credits31,

The 1979 Agreement on Civil Aircraft,
The 1992 EU-US Bilateral Agreement on Trade in Large Civil Aircrafts,
The 1994 WTO Agreement on Subsidies and Countervailing Measures.

As of now, the LCA industry is mainly subject to the 1994 SCM Agreement, although
more specific multilateral rules exist regarding forms of government support. 32 The legal
battle began in 1975, while US aircraft manufacturers were still dominant. The first round
concluded with the 1978 OECD Consensus on Export Credits and the 1979 GATT Agreement
on Civil Aircraft as part of the Tokyo Round. The OECD consensus set minimum terms for
officially supported export credit. The GATT agreement eliminated aircraft tariffs, but made
no attempt to abolish other public support; instead it simply preserved the rights of parties to
invoke the GATT Code on Subsidies and Countervailing Measures.33
The second round reflected mutual frustration over the extent of government support
extended to the other side. Despite gaining rights to challenge this support under the 1979
Agreement, both Airbus and Boeing avoided using trade remedies for fear of disrupting
commercial relations with their own customers and suppliers on both sides of the Atlantic. 34
Since the 1992 Agreement, Airbus has steadily increased its market share. The majority
(68%) of large commercial airliners currently in service worldwide were produced by Boeing,
while the share of new orders going to Airbus has risen significantly from just 30% in 1992.
In particular, a rapid growth in orders after 2000 saw Airbus delivering more new aircraft
than Boeing for the first time in 2003. 35 However, Most analysts consider this case to be too
complex to be solved by the WTO. In other words, the WTO system is ill suited to resolving

31 Specifically, what is known as the LCA Understanding

32 Caliskan (2010), p. 1131
33 G.C. Hufbauer (2007), Boeing vs. Airbus: Fighting the Last War, Handelsblatt, June 19,
http://www.petersoninstitute.org/ publications/opeds/oped.cfm?ResearchID=773
34 Id.
35 Caliskan (2010), p. 1132
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it. There is also a great danger of harm being done to the WTO itself. Neither the US nor the
EU can have any interest in that.36
It appears that there is no clear-cut way to negotiate a feasible and effective solution to
the disputes current situation. Although both sides have always stressed that they would
prefer a negotiated (bilateral) solution outside the WTO, currently the WTO panels are in
operation, even if their reports have not yet been circulated. At first glance, seeking a decision
from a neutral WTO panel might seem the best way to accomplish a solution, as with other
current high profile transatlantic disputes like hormones (GMOs), bananas and steel
safeguards. This essay, however, has fonotedund that the WTO process is unlikely to produce
a feasible and effective solution to this dispute, due to the unique characteristics of the LCA
industry, the historical roots of the legal battle involving complicated relationships between
the main producers and their governments, and the current structure of the WTO system.37

THE PANEL AND AB FINDINGS

I.

DS316 PANEL PROCEEDINGS

In the DS316 Panel Report, released on June 30, 2010, the panel found a substantial amount
of subsidies to Airbus.38 The panel held that each of the challenged launch aid measures was a
specific subsidy under the SCM Agreement. 39 The Panel further held that fourteen of the
seventeen challenged provisions of infrastructure and infrastructure-related grants were
specific subsidies, including the provision of manufacturing sites in Hamburg and Toulouse, a
runway extension at the Bremen Airport in Germany, and grants from Germany and Spain for
manufacturing and assembly facilities.40 In addition, the Panel held in favor of the United
States in regard to each of the French equity infusions, the majority of the challenged
36 Id.
37 Id.
38 DS316 PR,
39 Id, 8.1(a)(i)
40 Id, 8.1(b)
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research and technological development funding, and the German governments transfer of
its ownership in Deutsche Airbus to the Daimler Group.41
It did not find, however, that any of the challenged loans by the EIB, though subsidies, were
specific subsidies.42 Of each of these measures that the Panel found to be specific subsidies,
the Panel found only the launch aid provisions by three of the four Airbus nations to the A380
to be in the category of prohibited subsidies as export subsidies.43 The remaining launches aid
subsidies were not held to be contingent on either law or fact upon anticipated export
performance, so they were not held to be prohibited subsidies. 44 These remaining launch aid
subsidies and the rest of the specific subsidies therefore required a showing of adverse effects
to be actionable. In this regard, the Panel found that the subsidies had caused adverse effects
of serious prejudice to the United States interests under Article 6.3 of the SCM Agreement
by displacing imports and exports and causing significant lost sales.45
The Panel also rejected several of the United States challenges of launch aid subsidies for
the development of the A350. The panel did not find that any of the nations had committed to
launch aid for the A350 as of July 2005. 46 In addition, the Panel rejected the claim that the
history of launch aid provisions to Airbus aircraft constituted an unwritten launch aid
program.47 These findings are important because they mean that if the United States wishes to
challenge launch aid for the A350, it will have to initiate new proceedings, taking additional
time and possibly giving Airbus a competitive advantage in the meantime, instead of
immediately applying countervailing measures as it could have if the measures were
determined to be part of this proceeding.

41 Id, 8.1(c), (d) & (e)

42 Id, 8.3(b)
43 Id, 8.1(a)(ii)
44 Id, 8.3(a)
45 Id, 8.2, 8.4
46 Id, 8.4
47 Id, 8.3(a)(iv)
Page 11 of 13

The panel concluded by recommending that the subsidizing Member granting each subsidy
found to be prohibited withdraw it without delay, and that the Member granting each
subsidy found to have resulted in such adverse effects take appropriate steps to remove the
adverse effects or . . . withdraw the subsidy. However, it declined to make any suggestions
concerning steps that might be taken to implement those recommendations. 48 Though the
parties sharply disagreed in the press over the extent to which the report favored each partys
positions, the total amount of illegitimate subsidies adds up to $18 billion by the United
States calculationsmore than any WTO panel has found in any previous dispute.49
II.

DS316 PANEL PROCEEDINGS

The AB panel upheld the Panels conclusion that the launch aid measures were specific
subsidies, but reversed its conclusion that launch aid for the A380 constituted an export
subsidy, and limited the findings of serious prejudice based on displacement. 50 The AB also
reversed Panel conclusions as to some of the infrastructure and research and development
measures,51 but upheld findings that certain capital investments and research and
development programs were specific subsidies.52 In addition, the AB rejected the United
States arguments that certain launch aid measures were prohibited export subsidies and held
that allegations of a de facto launch aid program were outside the terms of reference of the
Panel.53 The AB concluded by recommending that the EC bring its measures, as found by the
Panel and modified by the AB, into conformity with its obligations under the SCM
Agreement.

48 Id, 8.8
49 Oral Statement of the United States at the First Oral Hearing, European Communities and
Certain Member StatesMeasures Affecting Trade in Large Civil Aircraft, 2, AB- 20101/DS316 (Nov. 11, 2010), available at http://www.ustr.gov/webfm_send/2392.
50 Id, 1414(e), (f), (j), (m), (n)
51 Id, 1414(g), (s).
52 Id, 1414(f), (h).
53 Id, 1415.
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CONCLUSION
Since the creation of Airbus over four decades ago, the United States and the EC have
disputed over subsidies in the civil aircraft industry. This dispute was the subject of
negotiations between the parties over much of that time without achieving any agreement that
suitably addressed the concerns of the parties before reaching a head and finally devolving to
the current all-out litigation in the WTO. After eight years, the WTO process is finally
nearing an end and the parties will be able to return to the negotiating table to again attempt
to produce an agreement.
The history of the dispute suggests that the current struggle will result in a patchwork
agreement to address the parties more immediate interests in their new aircraft. However, the
parties should resist the temptation to reach such a limited agreement and should instead take
advantage of the information and leverage that the exhausting WTO process has provided
them to make an agreement addressing the civil aircraft industry as a whole and eliminating
subsidies to the maximum extent possible.

Page 13 of 13