Update Monday: The European Union wishes to continue negotiations with the United States to resolve a dispute over subsidies to aircraft manufacturers Boeing and Airbus despite the failure to meet today's agreement deadline.

Following the angry reaction of US Deputy Secretary of State Robert Zoellick, in Brussels on Tuesday, to what he called EU Trade Commissioner Peter Mandelson's "spin" on the Airbus-Boeing subsidies dispute, Richard Mills a spokesperson for the Office of the US Trade Representative, issued a warning to the European Union on Friday that the US will refer the issue to the World Trade Organization (WTO) if the European Union approve new government loans for aircraft maker Airbus . 

"On January 11, the U.S. agreed with the EU to try to reach a comprehensive agreement to end subsidies for the production and development of large civil aircraft in the European Union and the United States," Mills said. "We set ourselves a target of 90 days to complete the negotiations, and agreed that there would be no new subsidies and no WTO dispute settlement proceedings during that time," he added and went on to say that:

"The US regrets that it has not been possible to conclude such an agreement. The United States continues to believe that such an agreement would be a useful solution to this important issue, and remains prepared to negotiate on the basis of the January 11 agreement, including the 'standstill' on subsidies.

Happier times!! Former US Trade Representative Robert Zoellick, now Deputy Secretary of State, on the left, meeting European Trade Commissioner Peter Mandelson in February.  Photo credit: European Commission

"The US is reviewing the situation to determine the best course of action to obtain the elimination of subsidies to Airbus. In the meantime, we will continue to monitor closely the actions of the EU and its Member States with regard to support for large civil aircraft. As the Senate considers Mr. Portman's nomination to be USTR, Deputy Secretary of State Robert B. Zoellick will continue to lead U.S. negotiators.

"In the event that the EU proceeds with additional subsidies for Airbus large civil aircraft, the United States will return to WTO dispute settlement."

"On January 11, the U.S. agreed with the EU to try to reach a comprehensive agreement to end subsidies for the production and development of large civil aircraft in the European Union and the United States."

France, Germany, Spain and the UK provided about $15 billion in launch aid loans for the Airbus A380 superjumbo jet  and the United States and Boeing fear that the Airbus A350 aircraft project which will compete with Boeing's 787 Dreamliner, will receive launch aid.

The European Union claims that Boeing receives a range of subsidies including NASA research and development grants, Pentagon business, tax breaks and illegal export subsidy program support.

The EU says they it has offered to reduce launch aid loans by about a third in the first stage of a two-stage deal to eliminate State subsidies, but the United States has refused to match the concessions.

Background

Robert Zoellick, the US Deputy Secretary of State and chief US trade negotiator on commercial aircraft subsidies, lost his cool on Tuesday and lashed out at European Trade Commissioner Peter Mandelson, accusing him of using “spin” in the dispute over aircraft subsidies and compared him unfavourably with his EU predecessor, Frenchman Pascal Lamy.

The undiplomatic reaction from America's No. 2 diplomat, added oil to the fire over state aid for both Airbus and Boeing.

Zoellick made the comments at the end of a visit to the European headquarters in Brussels. Mandelson is curently on a visit to the  Middle East.

Last month Zoellick suspended talks on the aircraft subsidies and the US is due to take the issue to the World Trade Organization (WTO) if agreement cannot be reached by next Monday.

It is ironic that the EU is due to impose sanctions on US imports in May due to the US' failure to implement a WTO ruling, which declared the anti-dumping law (known as the Byrd Amendment) passed by the US Congress, as illegal.

On Tuesday, Zoellick said in a comparison of the relationship that he had with Pascal Lamy: “That is not exactly the way I did business with Commissioner Lamy.”

Zoellick suggested that Mandelson had been underhand during the talks about the willingness of EU member states to end launch aid granted to Airbus.

He said: “If you don't have an authorizing environment [from EU member states], you just tell that and you don't have to spin.”

A spokesperson for Mandelson said that Brussels would not respond to “personal derogatory remarks” and he added: “This is a policy issue, not a personality issue. The US side appears to have been determined to get it into the WTO from the start.”

The US government confirmed on Friday March 18th, that talks with the European Union on launch subsidies for aircraft manufacture, had broken down.

Deputy Secretary of State Robert B. Zoellick, the former US Trade Representative who has been chairing the talks for the US, issued the following statement: 

Despite our best efforts, it’s clear that the EU is unwilling to eliminate launch aid subsidies.

Although on January 11, the EU agreed to a negotiating structure for eliminating large civil aircraft (LCA) subsidies, over the last two months, they’ve been backtracking and seeking to change the terms of that agreement.

It’s now demonstrated conclusively that they’re not prepared to follow through on that agreement. The United States is willing to hold to the standstill terms of the January 11 agreement that precluded further subsidies. But if the EU either breaks or refuses to extend the terms, we will return to litigation to eliminate LCA subsidies.

Zoellick issued the statement following a phone conversation with European Union Trade Commissioner Peter Mandelson.

According to the New York Times, Anthony Gooch, a spokesman for the European Union in Washington, said that Mr. Mandelson was "completely surprised that such a statement should be given to the press."

"There are clearly difficult issues at stake," Mr. Gooch said, but Mr. Mandelson "doesn't recognize the portrayal of the state of play as offered by the U.S. side."

"If Mr. Zoellick is announcing that the negotiations are at an end, Mr. Mandelson has not been informed of this development."

The United States is concerned that Boeing rival Airbus will receive new subsidies, or launch aid, for the A350, a midsize aircraft that Airbus is developing to compete directly with Boeing's new 787 Dreamliner airplane. In January, both the United States and the European Union were preparing to file formal complaints against each other at the World Trade Organization over government support given to Boeing and Airbus.

In 2003, Airbus became the world’s biggest commercial aircraft manufacture. Last year was also another landmark one for Airbus, when it once more maintained its position as Number One, both in terms of orders and deliveries. With 320 aircraft delivered, Airbus exceeded expectations at the beginning of the year when it had indicated that the 2004 deliveries would be “at best” as high as in 2003, when it delivered 305 aircraft. The 320 deliveries also make up some 53 per cent of all deliveries of aircraft above 100 seats, and led to a turnover of slightly over €20 billion.

The European Union and the United States agreed in January on the terms for launching negotiations on subsidies affecting the civil aircraft sector, arising from the complaint by the US to the World Trade Organisation relating to public subsidies provided to Airbus SAS.

The A380 Family starts from a baseline three-deck passenger aircraft with a capacity of 555 passengers in three classes over a range of up to 8,000 nm./14,800 km. Larger and longer range members of the family are anticipated in the basic design concept. The A380, which will seat 555 passengers in a typical three-class interior layout, will enter airline service in 2006.

The objective of the negotiations, which were to last three months, was to eliminate different types of subsidies and to establish fair market-based competition between Boeing and Airbus.

The Boeing 7E7-8 Dreamliner and 7E7-9 airplanes will carry 217-257 passengers and are due to enter service in 2008.

With this agreement the EU and US confirmed their willingness to resolve the dispute which has arisen between them over trade in large civil aircraft, and to devote time and resources to doing so by negotiation rather than pursuing the dispute through WTO panels.

The negotiations were intended to cover the different types of support affecting the sector in a balanced manner, elaborating upon the scope of subisidies as defined by the WTO.

The EU and the US also agreed to seek early extension of the agreement between them to third countries, notably those involved in significant risk-sharing production for either Airbus or Boeing.

Peter Mandelson said in January: "I am glad that Bob Zoellick and I have been able to agree a way forward. I hope our negotiations in the next three months will lead to an agreement ending subsidies to development and production of large civil aircraft. When disputes arise in transatlantic trade relations we should try to solve them by dialogue and co-operation. Todays agreement creates a positive atmosphere for more work to strengthen the economic partnership between the EU and the US, which is vital for both of us. Airbus can justifiably be proud of the excellent range of aircraft it is producing, and is clearly capable of competing in the global market place."

The agreement marked the beginning of a process and not its conclusion. Much work remains to be done. The Commission had said that it intended to work closely with Member States and Airbus, as well as with the United States Trade Representative, to achieve a final result that enhances Europe’s competitiveness in this important sector.

Background

• In terms of revenue, production and orders for aircraft, Airbus and Boeing have occupied similar positions in recent years. Both companies have been making major efforts to develop new aircraft models. In 2000, Airbus successfully launched the A380, a 555-seat aircraft, the roll-out of which will take place on 18 January 2005. In 2004, Boeing launched a new aircraft, the 787 “Dreamliner”, a significant portion of which will be produced outside the US, and which will be launched in 2008. Airbus has also initiated work on an aircraft that will operate in the same market segment as the 787, the A350, which will be launched 18 months later.
• Government support to Boeing and Airbus, which are the only two major large civil aircraft producers in the world, (commonly defined as producers making aircraft for 100 passengers or more), has been a bone of contention between the EU and US for a number of years. The EC and the US concluded in 1992 a bilateral Agreement on Trade in Large Civil Aircraft, which included disciplines and ceilings on the respectives types and volumes of support granted by either side. The US abrogated the 1992 Agreement unilaterally on 6 October and launched the WTO dispute settlement process against alleged European subsidies to Airbus. The Commission launched its own WTO case against subsidies given to Boeing on the same day.
• Intensive consultations have taken place between Ambassador Zoellick and Commissioner Mandelson since the second half of November. These discussions have led to the agreement on the objectives and parameters of the negotiations which will now commence.

Questions and Answers produced by European Commission (US position below)

Have the parties foregone their rights to go to dispute settlement in the WTO/withdrawn the pending cases?

No. However, during the negotiations the parties have agreed not to request establishment of WTO panels relating to the pending disputes.

Why does the text refer to risk-sharing partners?

The aeronautics industry today is characterised by an increase of international risk-sharing arrangements. Large civil aircraft manufacturers share risks and revenues with industrial partners. These partners often benefit from government support. This should be reflected in a future agreement. Otherwise the agreement would leave open a significant loophole.

What kind of subsidies do the EU and US expect to cover?

This is a difficult issue which will be at the heart of the negotiations themselves. The way we want to achieve progress on this issue is to establish a list of different kind of subsidies affecting either of the two companies and to then to reach agreement on which form of subsidy should be prohibited, actionable or permitted.

What about third countries?

Both parties recognise the ever increasing degree of international workshare, as well as the intention of new players to enter the large civil aircraft market (aircraft in excess of 100 seats). This is the reason why the EU and the US will work together to broaden the agreement in a second stage to include as parties other countries with civil aircraft industries, or countries with risk sharing roles relevant to the objective of the agreement.

Does the deal have implications for the launch of the A350?

No. The question of support to new aircraft programmes and of different kinds will of course come up during the negotiations. But nobody expects their outcome to affect the decision to launch the A350. It has also been agreed that during the negotiations, within the time frame currently foreseen for the negotiations, neither of the two parties will make new government support commitments for LCA development or production.

Why the short negotiation period?

The negotiations will have to cover difficult issues, but some headway has already made over the past months and it is in both parties’ interest to solve this issue as soon as possible.

What happens if negotiations are not concluded in three months time?

Parties will have to decide whether or not to extend the period of negotiations, and if so, on what terms.

What have parties agreed regarding subsidies during the period of negotiations?

It has been agreed that neither side will commit new government support for the development or production of civil aircraft.

Download US factsheet on aircraft subsidies (in pdf format)