Tanker fight could turn on WTO ruling

 

The World Trade Organization is expected release a long-awaited ruling this week on aircraft subsidies that could light a political fire under a multibillion dollar Air Force contract.

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

The U.S. accuses European Union countries of providing illegal subsidies to Airbus, which has operations in France, Germany and other European countries.

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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 bitter rivals have been competing for years over the tanker contract that could surpass $100 billion over two decades.

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.

The United States filed a complaint with the WTO more than four years ago, arguing that about $15 billion in launch aid given to Airbus to develop new commercial aircraft is an illegal subsidy. The U.S. also argues 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. argues.

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.

The WTO is expected to issue its preliminary ruling on the U.S. complaint around Sept. 4, which would coincide with a draft Pentagon request for proposals for the new tanker competition. Gates promises to share that draft with lawmakers.

The interim WTO ruling is not public and will be shown only to the U.S. and E.U. governments, but the U.S. Trade Representative’s office is expected to brief lawmakers. The committees of jurisdiction are the Senate Finance Committee House Ways and Means Committee. Other lawmakers can also request briefings.

If the WTO rules in favor of the U.S., it could hurt perceptions of the Northrop Grumman-EADS team in the tanker competition.

A political storm erupted last year after the Air Force picked Northrop Grumman-EADS as its contractor for the tanker. Boeing successfully protested the award to the Government Accountability Office.

Gates last year 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 two Democratic Senators from Washington, Patty Murray, a defense appropriator, and Maria Cantwell, who sits on the Finance Committee, have been among the most outspoken critics of the Pentagon not taking the WTO dispute into account. They say launch aid provided by European governments to EADS reduced the price of its tanker bid.

Sen. Pat Roberts (R-Kan.) questioned whether the Air Force was “at all concerned” with the WTO dispute and subsidies to Airbus when it granted the contract. On the House side, Reps. Norm Dicks (D-Wash) and Todd Tiahrt (R-Kan.), both defense appropriators, say subsidies to Airbus have cost American aerospace jobs.

Boeing has major operations in Washington and Kansas.

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Senate Finance Chairman Max Baucus (D-Mont.) is expected to be a strong voice on the WTO case. Last year, he expressed concern about the Air Force’s award to the Northrop-EADS team and questioned the “common sense” of awarding it when the Washington is pursuing a WTO dispute.

“I certainly am concerned and have serious questions about this deal from the perspective of international trade,” Baucus said at the time.

“Airbus is not just another company competing in open markets on the merits of its products. Rather, Airbus is the product of four decades of explicit government industrial policies to create a European aircraft industry. An industry designed not just to compete with American companies, but to defeat them with massive government funding.”

As part of the 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.

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 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.

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

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