After a 17 year war over jet subsidies, US and EU eye a truce

A deal to end or pause world’s largest corporate trade war will help dozens of industries caught in tit-for-tat tariffs.

The dispute between the US and EU dates back to 2004 over subsidies to Boeing and Airbus [File: Edgar Su/Reuters]

The United States and Europe are speeding efforts to reach a pact to end a 17-year-old dispute over aircraft subsidies but may settle for a prolonged truce in recent tariff wars, people familiar with the matter said.

A deal to either end or pause the world’s largest corporate trade dispute would grant relief to dozens of other industries affected by tit-for-tat tariffs that were suspended in March. They face a renewed trade war within weeks if there is no progress.

US Trade Representative Katherine Tai discussed the dispute in her first face-to-face meeting with EU counterpart Valdis Dombrovskis on Monday before Tuesday’s US-EU summit. She travels to the United Kingdom on Wednesday.

The European Commission, which oversees EU trade policy, and the US are eager to find a solution by July 11 when the current suspension of transatlantic tariffs comes to an end.

The two sides have been targeting a pair of treaties – one between the US and European Union, the original parties, and another between Washington and London following the UK’s exit from the EU – on new ground rules for aerospace.

Barring a detailed accord, they could opt for a standstill agreement pushing back the resumption of tariffs by years, but no final decision has been reached, one of the people said.

Reset relations

US President Joe Biden has promised to reset relations with European partners after four tumultuous years under former President Donald Trump.

Trade experts said a deal to freeze the conflict over jet subsides, some of which have been rescinded or wound down, would give both sides more time to focus on broader agendas such as concerns about China’s state-driven economic model.

The tariffs on $11.5bn of goods were progressively imposed from 2019 after the US and EU both won partial victories at the World Trade Organization (WTO) for claims of unfair aid for planemakers Boeing and Airbus.

The dispute has dragged on since 2004 when the US withdrew from a 1992 aircraft subsidy pact and took the EU to the WTO, claiming Airbus had managed to equal Boeing’s share of the jet market thanks in part to subsidised government loans.

The EU counter-sued over what it termed unfair R&D support and subsidised tax incentives for Boeing.

In a potentially key breakthrough, the US has watered down opposition to the principle of future public loans for Airbus but insisted they must be demonstrably market-based and notified in advance, people familiar with the talks said.

But hurdles remain regarding the extent to which that could effectively allow Washington to approve or block European projects, they added. The EU has vehemently opposed any US veto.

Even more critical is the benchmark to be used when deciding whether the interest on any future loans is market-compatible.

Under the 1992 subsidy pact, one-third of a project could be financed by direct government support such as loans and cleared indirect R&D support up to 4 percent of a company’s revenue.

One option is to revisit that framework with market rules replacing subsidy quotas and a new cap on indirect R&D support.

None of the parties agreed to comment on the talks.

China ‘on radar’

Robert Lighthizer, former US trade representative, had suggested US and EU join forces against China on aircraft subsidies [File: Elijah Nouvelage/Bloomberg]

In December 2020, outgoing US Trade Representative Robert Lighthizer told Reuters the US and Europe should cooperate in opposing future aerospace subsidies used by China.

The US has floated a joint review of aerospace funding in non-market economies like China, two of the people said.

“There’s no question that the rise of China’s aircraft industry is … on everybody’s proverbial radar,” US Chamber of Commerce Senior Vice President Marjorie Chorlins said on Monday, noting what she described as China’s “heavy subsidisation”.

Like the US, the EU has sparred with Beijing on trade and security this year. But its 27 nations could struggle to agree upon a common front on topics like aerospace.

In April, for example, Hungary blocked an EU statement criticising China’s new Hong Kong security law, sparking a row about the right of member states to veto EU foreign policy.

The Chinese embassy in Washington had no immediate comment.

Brexit complications

Brexit has also complicated negotiations.

The UK and US came close to striking an aerospace agreement in December that could have forced the hand of Brussels in its own talks with Washington.

But it collapsed amid British concerns about jobs and was eventually overtaken by political distractions surrounding unrest in Washington in January, several sources said. A British official said a balanced deal had been out of reach at the time.

The UK’s ability to negotiate trade deals independently of the EU is central to its new “global Britain” stance. But its flexibility on Airbus is cramped by its role as one of four core nations involved in the planemaker, pre-dating its EU accession.

Airbus, which has 14,000 staff in the UK, has made it plain that work could shift abroad if the UK turns its back on aerospace.

Source: Reuters