BOEING Boeing and Airbus are the dominant players in the global market for large commercial jet aircraft of 100 seats or more. The two companies are locked in a relentless battle for market share. For decades, these two companies have been accusing each other of benefiting from government subsidies. In its early years, Airbus received 100 percent of the funds it needed to develop new aircraft from the governments of four European countries where Airbus's operations were based: Germany, France, Spain, and the United Kingdom. These funds were provided in the form of loans at below-market interest rates. For its part, Airbus claimed that Boeing has long been the recipient of R&D grants from the U.S. Department of Defense and NASA, which amount to indirect subsidies. For example, Boeing's first commercial jet aircraft, the 707, was a derivative of an aerial refuelling tanker, the KC-135, originally developed for the U.S. Air Force under a Pentagon contract. Airbus factory. Bloomberg/Getty Images The two companies reached an agreement on phasing out subsidies back in 1992, but Boeing walked away from that deal in 2004, claiming that Airbus was still benefiting from billions in illegal development subsidies. In 2006, the U.S. government filed a complaint with the World Trade Organization (WTO) alleging that Airbus had received $25 billion in illegal subsidies, mostly in the form of launch aid for developing new aircraft. In 2010, the WTO ruled that Airbus had benefited from $18 billion in illegal government subsidies, including $15 billion in launch aid. The WTO gave the European governments until December 2011 to remove the harmful effects of the subsidies. In September 2016, the WTO issued another ruling criticizing the Europeans for failing to comply with its 2010 ruling and, moreover, for giving another $5 billion to Airbus in the form of noncommercial loans to help develop its latest aircraft, the A350. In this latest ruling, the WTO stated that \"it is apparent that the A350 could not have been launched and brought to market in the absence of launch aid.\" In total, the WTO calculated that Boeing had lost 104 wide-bodied jet orders and 271 narrow-bodied jet orders as a result of Airbus launch subsidies. This latest ruling opens the door for the United States to apply retaliatory trade sanctions against noncompliant European governments. However, it seems unlikely that the United States will apply retaliatory sanctions any time soon. Part of Heg e the reason is that the United States itself has been countersued by the EU through the WTO for providing illegal subsidies to Boeing. In November 2016, the WTO ruled that Boeing would receive around $5.7 billion in illegal tax breaks from Washington State, where Boeing's main production facilities are located. Washington State had promised to give Boeing these tax breaks between 2020 and 2040 on the condition that the company kept the production of the wings for the wide-bodied 777X aircraft in the state. According to Airbus, these tax breaks give the 777X an unfair advantage against its rival aircraft, an assessment that the WTO seems to agree with. In 2017, the WTO issued a report largely clearing the United States of maintaining unfair support for Boeing. However, the WTO noted that the United States had failed to withdraw tax breaks offered by Washington State where most of its planes are assembled, and it continued to suggest that those tax breaks have adverse effects. Boeing claims that the benefits from the subsidies to the 777X program only amount to $50 million a year, an assessment that Airbus vigorously disagreed with. A WTO panel ruled in December 2019 that the EU has not complied with an order to end illegal subsidies for Airbus, which prompted the U.S. government to impose tariffs on nearly $7.5 billion worth of EU goods. In its ruling, a WTO compliance panel found that the EU had not taken sufficient steps to end harm to Boeing. The EU is expected to appeal, though the United States is on the cusp of preventing the WTO's appeals courtthe Appellate Bodyfrom ruling on any new appeals. Case Discussion Questions 1. Are there any circumstances under which the subsidies that Airbus received in its early years might be justified? 2. Do you think that Boeing originally benefited from subsidies? If they did, could they be justified? 3. Boeing and Airbus have allegedly been receiving subsidies for decades. How might ongoing subsidies distort the market for large commercial jet aircraft? 4. Who benefits from government subsidies to Boeing and Airbus? Who loses? 5. Under what circumstances, if any, should national governments subsidize the development of new technologies? 6. What would be the optimal outcome (in terms of economic welfare) of the ongoing trade dispute between the United States and the EU countries backing Airbus? How might such an agreement be enforced