Lawmakers claim Boeing victory in ruling

Several lawmakers declared victory after the World Trade Organization issued a long-awaited preliminary ruling in a bitter dispute between the United States and the European Union over commercial aircraft subsidies.

The WTO delivered the confidential ruling to the U.S. and European governments on Friday. Because the 1,000-page ruling is confidential, details were scant at press time. Rulings of such nature are intricate and usually lead government officials from both sides to spin the information in their favor.

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Several lawmakers, particularly those from Washington State and Kansas, seized the opportunity to tout the WTO ruling as vindication for U.S. efforts to show that Airbus has had an unfair advantage over Boeing because it received illegal subsidies from European governments.

The interim ruling is the first decision in a case that has dragged out for years, and could be used as ammunition by Boeing and its supporters in its fight for a contract to build midair refueling tankers.

The U.S. accused European Union countries of providing illegal subsidies to Airbus, which has operations in France, Germany and Spain among others.

Boeing’s congressional supporters argue that these gave Airbus, parent company EADS and partner Northrop Grumman, an unfair advantage in bidding for the tanker contract.

“The WTO’s decision also raises major questions for the U.S. Department of Defense as it prepares to solicit bids to build the next generation of aerial refueling tankers,” Sen. Patty Murray (D-Wash.) said in a statement after WTO submitted its ruling on Friday. “If DoD wants a truly fair competition, it needs to start with competitors that play by the rules. DoD needs to answer to how this violation of WTO rules will be considered in the competition for the vital aerial refueling tanker.”

Rep. Todd Tiahrt (R-Kan.), a defense appropriator and a candidate for the Senate, made the case on Friday that Boeing’s offering for the new tanker contract should have the upper hand.

“It is time to move forward with the only clear solution to the replacement of the KC-135 aerial refueling tanker, which is the [Boeing] KC-767,” Tiahrt said.  “We have been telling Pentagon leaders for five years that Europe was providing illegal subsidies, and now the WTO is confirming it. This is a clear violation of fundamental free-market principles. American workers should not be placed at a competitive disadvantage by illegal subsidies.”

Tiahrt said in his statement that he received a call from the Office of the U.S. Trade Representative about the WTO ruling, which found Airbus “guilty of receiving billions of dollars in illegal subsidies from European governments.” The USTR is expected to brief lawmakers. The committees of jurisdiction are the Senate Finance Committee and the House Ways and Means Committee. Other lawmakers can also request briefings.

Rep. Norm Dicks (D-Wash.), a senior defense appropriator, stressed that the WTO ruling should be part of the tanker competition.

"It would be inconceivable for the Defense Department to issue its “Request for Proposals” for a new Air Force refueling tanker without including a provision which recognizes the ruling issued today by the WTO panel: that these Airbus airframes have benefitted from illegal subsidies that gave them an unfair advantage in global sales," Dicks said in a statement.

Meanwhile, Sen. Maria Cantwell (D-Wash.), a member of the Senate Finance Committee, hailed the WTO ruling as “a great day for Boeing and for Washington state.”

“U.S. workers won today.  Thanks to the hard work of the USTR on this five year case, the home team won,” Cantwell said in a statement.

Boeing has major operations in Washington and Kansas.

While the U.S. case is focused on commercial market implications, lawmakers have long argued that the Pentagon should take the WTO dispute over illegal subsidies into consideration as it selects the contractor.

Air Force and Pentagon leaders, including Defense Secretary Robert Gates, stress that the WTO dispute is not part of the acquisition process, and that the Pentagon makes its selections based on which company offers the best aircraft at a good price.

EADS North America CEO Ralph Crosby said on Friday that the WTO dispute is unrelated to the tanker competition.

“Successive presidents and members of Congress of both parties have rightly determined that these issues are irrelevant to U.S. defense acquisition and have correctly refused to penalize U.S. warfighters by holding their needs hostage to an international administrative process,” Crosby said.

“The Air Force has said its number one priority is to replace the service’s Kennedy-era tankers through a competitive procurement.  With Northrop Grumman, we’re ready now to provide U.S. warfighters with the most capable, best value tanker in the world -- the KC-45,” Crosby added.

A political storm erupted last year after the Air Force picked Northrop Grumman-EADS as its contractor for the new tanker contract with a potential worth of $100 billion. Boeing successfully protested the award to the Government Accountability Office.

Gates punted a final decision on the tanker program to the next administration, but then was nominated by President Barack Obama to stay at the Pentagon. The Pentagon is expected to release a new draft request for proposals this month.

As part of the first tanker competition, Air Force officials extracted a commitment from both bidders that they would not be affected by the WTO case, even if it resulted in hefty penalties.

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EADS said it repaid all reimbursable government loans related to the A330, including principal and interest. All reimbursable launch loans are carried on EADS’s balance sheet as liabilities and are listed in the company’s annual report. Pricing on both the Airbus and Boeing planes is determined through a complicated process that includes several market-driven factors.

“The WTO matter is a political issue that should not be permitted to be used to interfere with the Defense Department’s ability to buy the best refueling tanker for our war fighters,” said Randy Belote, Northrop Grumman’s VP of strategic communications; “Our position is that it is irrelevant to the tanker program.”

For the second tanker competition, Congress required the defense secretary to conduct a formal review of the impact of subsidies on the tanker replacement program following any WTO decision. Gates does not have to conduct the review until the WTO reaches a decision and makes recommendations. The provision is contained in the 2009 defense authorization act, which is now law.

While this week’s ruling is only preliminary, it is seen as important in the biggest, most difficult and most expensive dispute in WTO history. A final decision will likely come at the end of the year, but will only take effect after an appeal process that could draw out the dispute for several more years.

At press time, it was unclear whether the WTO only ruled that subsidies on the Airbus 380 were illegal, or whether it found violations for other Airbus lines. The Airbus 380 has never been a contender for the tanker contract.

Overall, the U.S. claims that about $15 billion in launch aid given to Airbus to develop new commercial aircraft is an illegal subsidy. The U.S. also argued that Airbus received another $10 billion in research, development and infrastructure help from European governments. Overall, European government support has an economic value of $200 billion over 20 years, the U.S. argued.

The European Union has filed a counter-suit claiming Boeing received about $24 billion in subsidies and tax breaks from Washington state over the past two decades, plus non-repayable benefits from military and space contracts.

Results on the EU’s counterclaim, which is reviewed by a completely different WTO panel, are not expected until mid-2010.