In a final decision released Tuesday in Geneva, the World Trade Organization (WTO) ruled that Airbus has failed to fix the harm done to Boeing from the illegal government subsidies used to launch its A380 and A350 jets.
Following this final appeal of an almost 14-year-long case, the U.S. Trade Representative (USTR) immediately proclaimed it would seek authority to impose billions of dollars in punitive tariffs on European goods.
At a moment of already heightened trade tension between the U.S. and the European Union (EU), the Airbus ruling threatens to rip open up a new tear in the frayed transatlantic alliance. President Donald Trump is already at loggerheads with EU leaders over proposed U.S. tariffs on European steel and aluminum imports.
Though a negotiated settlement over the Airbus subsidies remains possible, there's also a risk of an open trade war.
Boeing chairman and chief executive Dennis Muilenburg declared victory Tuesday.
"Today's final ruling sends a clear message: disregard for the rules and illegal subsidies are not tolerated," Muilenburg said.
A lawyer close to the case on the U.S. side discussed the details of the ruling in advance on condition of anonymity and provided an analysis of the outcome favorable to Boeing.
He said the ruling "is truly the final decision in the litigation," and the threat of tariffs could force European governments to rein in their financial support for Airbus.
"The difference now is that there are actual economic consequences," he said. "That usually focuses the mind."
The implication is that the U.S. will use the decision and the threat of tariffs in any settlement negotiations.
However, a person close to the case on the European side who also provided details of the ruling in advance on condition of anonymity - and provided a counter-analysis favorable to Airbus - dismissed the idea that the long-running case is nearly over.
He predicted the legal maneuvering "will continue for years to come" and in the end bring no significant change.
"This is the latest part of the saga. It's for sure not the last one," he said.
A parallel WTO case against Boeing focused on the subsidies it receives from Washington state is lagging nine months behind the Airbus case.
Airbus chief executive Tom Enders in a statement said that "today's report is really only half the story... The other half coming out later this year will rule strongly on Boeing's subsidies and we'll see then where the balance lies."
Enders added that "the current geopolitical climate for trade is worrying, and industry players should not fuel it with unproductive disputes that undermine fair competition world-wide."
A dollar figure for retaliatory tariffs
One part of Monday's appellate panel decision was favorable for Airbus, in that it reversed a 2016 ruling that required the European jetmaker to fix the harm from subsidies for its popular single-aisle A320 jet family and the medium-size widebody A330. The passage of time was ruled to have left those older subsidies moot.
That left it on the hook only for the loans that launched the A380 superjumbo jet and the newest A350 jet.
The European expert declared that "a very thin victory for Boeing."
However, the U.S. can now initiate action.
The U.S. lawyer said that in prior submissions to the WTO, the U.S. estimated the harm to Boeing from those two jet programs at "between $7 billion and $10 billion annually," so it s expected to ask for authority to impose tariffs in that range.
Getting that authorization entails a discussion with the WTO, during which the EU will be allowed to challenge the U.S. proposed damages. At the end of the process, as in the penalty phase of a trial, the WTO will weigh Boeing's lost sales and lost market share against the EU counter arguments and decide on the monetary amount.
Boeing said Tuesday this process should be fast enough to allow the U.S. to impose tariffs "as early as 2019."
The European expert suggested it will take much longer - "at least 18 months" - implying that the the final decision in the case against Boeing would figure in any settlement.
If tariffs are imposed, they are unlikely to be applied to airplanes. The U.S. can choose whatever products it believes will put the biggest economic squeeze on the European countries. That could be agricultural goods, autos or anything else that will hurt jobs in Europe.
Negotiating a way out
Clearly, the months it takes to quantify the allowed U.S. retaliation will also be a period of intense political negotiations between the U.S. and the EU.
"The leverage of retaliation will drive the negotiation," the U.S. lawyer said.
For its part, the EU side will offer to adjust its financing for airplane development so as to comply with WTO rules.
The Airbus press release Tuesday suggested that bringing the A350 and A380 launch aid loan programs into line with WTO requirements would require only "minor action" and "tweaks" to the terms of the loans.
What changes are under consideration was left unsaid.
Airbus would certainly like them to be minimal. One possibility may be to modify the interest terms on the government loans.
Airbus General Counsel John Harrison said Tuesday the jetmaker "will do what is necessary to correct any errors," without being specific.
The U.S. lawyer said that the advantage in this negotiation lies heavily with the American side.
He said that now the WTO has finished ruling on the legal aspects, and has decided Airbus did not comply with the trade rules, it will fall to the U.S. to accept or reject any EU offer of compensation.
In assessing any further Airbus moves toward compliance, "whether they have done what's needed is for the U.S. to decide," the lawyer said.
Trade war or settlement?
Two extraneous issues will have an impact on how this Airbus case plays out.
One is the impact of the parallel case against Boeing.
The WTO ruled last year that the Washington state business tax rate reduction - worth about $800 million to Boeing since 2004 through 2016 - is an illegal subsidy and that Boeing has failed to fix it.
The U.S. appealed that ruling, with a decision due in about nine months. If it loses, Boeing will be in the same position Airbus is in now.
However the two sides differ wildly in interpreting the scope of the penalty Boeing might face if it does lose.
Boeing argues that the level of subsidy Airbus has received with launch aid loans dwarfs Boeing's savings from the state tax breaks.
In contrast, Airbus argues that every 787 Dreamliner sale was illegally subsidized and will warrant a penalty. So in a press release Tuesday, Airbus said that any potential U.S. sanctions are "likely to be minor" compared to what could come of the European case against Boeing.
A senior Airbus executive and trade lawyer in January warned that if the U.S. imposes tariffs, the EU "will retaliate with megatons to the U.S.'s kilotons."
Logic might dictate that a final settlement of this aerospace industry dispute between the U.S. and the EU would have to await resolution of both cases.
But perhaps not, because the second issue is the current political climate under Trump.
He has moved aggressively on trade issues with little regard for rules and precedent and without recourse to international institutions.
The administration justified the proposed aluminum and steel tariffs as a matter of national security without any attempt to bring a case to the WTO.
The Commerce Department aggressively pursued Boeing's case against Canadian jetmaker Bombardier over its CSeries jet, before that case went down in flames earlier this year.
Airbus CEO Enders in January accused Boeing of "ruthlessly surfing on this 'America-First' wave."
Yet the Airbus case long predates Trump and has played out over years strictly according to the slow-moving international rules.
That it's coming to a head at this moment of a U.S. hard line on global trade policy lends an unpredictable edge to any settlement negotiations and elevates the risk of a trade war.
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