THE EU CO de Policy the US has chosen, we accept the challenge, not least because it The EU and 550 Chapter 19 . The Political Economy of Interna is high time to put an end to massive illegal US subsidies to the US of p Fourth, due to the launch costs, learning curve, and economies of scope, the LCA industry has enormous barriers Boeing which damage Airbus, particularly those for Boeing's with the S claimed th to entry. Moreover, the huge development and production costs new 767." inconsiste were largely sunk and thus constitute important barriers to exit. The US claimed that Airbus had received subsidies inconsistent with the 1947 General Agreement on Tariffs and tax incent THE 1992 BILATERAL AGREEMENT BETWEEN Trade (GATT) and the 1995 WTO Agreement on Subsidies and Illinois a financial THE EU AND THE US Countervailing Measures (SCM). The BU responded by filing The rise of Airbus and the resulting duopoly led to tensions counterclaim (DS317 United States-Measures Affecting Trade the Depa between the EU and the US. These were temporarily relieved in Large Civil Aircraft) on the same day, alleging that Boeing with the conclusion of a Bilateral Agreement in 1992. The agree had received illegal indirect subsidies. It filed an updated under le Extra-T ment did not seek to eliminate subsidies in the LCA industry complaint in June 2005 (DS353 United States-Measures acts. T but instead allowed the EU and the US to continue to provide Affecting Trade in Large Civil Aircraft-Second Complaint) $19. a limited level of support to their respective aircraft industries billion (Pritchard and MacPherson, 2004). The agreement was not THE US COMPLAINT was a concluded under the auspices of the World Trade Organization than (WTO) and thus could not be the basis for a WTO dispute. The US complained about several forms of aid allegedly The Bilateral Agreement limited direct subsidies to granted by the EU and its member states for a total of more than the L 33 percent of total launch costs. Moreover the support had to $100 billion, including: (1) launch aid; (2) research funding: mor be in the form of loans. The interest rate for these loans was not (3) infrastructure-related grants; (4) corporate restructuring tech to be lower than the government's cost of borrowing, and the aid; and (5) equity infusions and European Investment Bank loans had to be repaid within 17 years. Furthermore, the Bilateral (EIB) and other loans. The US argued that these measures Agreement limited indirect government support to 3 percent of constituted specific subsidies under Articles 1 and 2 of the Cop the country's LCA industry sales. Indirect support did not need SCM Agreement and that it suffered adverse effects from to be repaid. The rules on direct support were mainly targeted the subsidies, in violation of Articles 5 and 6 of the SCM at Airbus, which benefited from such support. The rules on Agreement. The US further c rther claimed that certain launch aid indirect support, in turn, limited the US practice of providing provided for the A340 and A380 constituted illegal export support to Boeing through the National Aeronautics and Space subsidies, in breach of Article 3 of the SCM Agreement. Administration (NASA) and the Department of Defense (DOD) Specifically, the US argued that Airbus had benefited In the 1990s the US was considered to benefit more from from generous government support since its founding in 1970 the agreement than the EU (Hayward, 2005). Whereas the EU The main focus of the US complaint was the launch aid for had to abandon production subsidies and became severely the A380 and A350. Another major channel of support was the limited in the launch support it could grant, the US only had to EU's series of framework programs for research. In addition accept limits on indirect subsidies, which were difficult to verify. national, regional and local authorities in France, Germany, Spain and the United Kingdom allegedly granted support to THE DISPUTES Airbus. The EIB provided additional support. It partially funded On October 6, 2004, a few weeks after Airbus announced the airlines' investment projects, thus accelerating the renewal of launch of its A350 program and a month before the US presi passenger fleets and spurring aircraft demand. dential elections, the US withdrew from the Bilateral The WTO panel issued a ruling on the US complaint in Agreement. In conjunction with the withdrawal the US filed a June 2010. It found that Airbus received subsidies of $18 billion, complaint against the EU and four of its member states according to Boeing's calculations. Specifically, it ruled that all (Germany, France, the United Kingdom and Spain) under the launch aid given constituted specific subsidies, but that the US WTO's dispute settlement system. At the time Harry had failed to show that the planned launch aid for the A350 was Stonecipher, President and CEO of Boeing, declared: "It is a specific subsidy. It further found that some of the aid consti- clear that the 1992 agreement does not reflect current market tuted prohibited export subsidies. Only some of the research realities and has outlived its usefulness." US Trade funding, infrastructure-related grants, restructuring aid, loans, Representative Robert Zoellick justified the US move as ollows, "Since its creation 35 years ago, some have justified and equity infusions, however, were found to constitute specific ubsidies to Airbus as necessary to support an 'infant' industry. subsidies. The panel further concluded that the specific subsidies that rationalization were ever valid, its time has long passed. had displaced imports and exports, but it did not find evidence bus now sells more LCA than Boeing .... Terminating this that they depressed prices. The EU and its member states were cement reinforces our belief that now is the time to end ordered to withdraw the subsidies or remove the adverse effects sidies, ideally through a new agreement." EU Commissioner on the US. WTO rulings are concerned with future actions and External Trade Pascal Lamy responded, "If this is the path are thus not retroactive. The US and the EU both appealed the ruling in August 2010. In May 201 1 the WTO's Appellate Body issued its ruling, case is known as: Dispute Settlement (DS) 316 European Communities - which was somewhat more favorable to the EU, reversing s Affecting Trade in Large Civil Aircraft. the earlier ruling on close to $4 billion. The EU agreed to implement the rulingMAPLE COMPLAINT Chapter 19 . The Political Economy of International Trade Policy 551 and its member states filed a counterclaim accusing ofproviding subsidies to Boeing that were inconsistent The WTO panel issued a ruling on the EU complaint "SCM Agreement and the GATT. In particular it in March 2011. It found some of the US support for Boeing What the following measures constituted subsidies to be specific subsidies, in the amount of $5.3 billion for the Iwent with the SCM Agreement: various tax and non- 1989-2006 period. The panel also found that the FSC and rentives provided by the state governments of Kansas, ETI benefits constituted prohibited export subsidies. Some of the subsidies were ruled to have had adverse effects on EU Wind Washington, and local authorities in these states; interests, such as trade displacement, price suppression and and other support provided by NASA, the DOD, and lost sales. The US was ordered to remove the adverse effects or apartments of Commerce and Labor; and tax exemptions withdraw the subsidies. The EU and the US both appealed the ruling in April legislation on Fo on Foreign Sales Corporations (FSC) and the 2011. Territorial Income (ETI) Exclusion Act and its successor The EU put the total amount of the alleged subsidies at Preparation Questions billion between 1989 and 2006. More than half, $10.4 inn, was in the form of NASA research subsidies. The DOD 1. What is the nature of nonmarket relationships between Boeing and Airbus and their home nations? alleged to have provided dual use technology worth more 2. Why did the United States withdraw from the Bilateral $2.4 billion to Boeing at no cost. Furthermore, NASA and Agreement? OD allegedly waived intellectual property rights worth 3. What is likely to happen after the Appellate Body ruling on than $700 million and granted more than $3 billion in the EU complaint is made? Are the United States and EU likely to stop supporting Boeing and Airbus, respectively? ology subsidies. It (2011) by Christophe Crombez. All rights reserved. Reprinted by permission.Abbott further attacks, but tical Economy of International Trade Policy 549 paris it Person said she did "If we have to organize another net strike we House access to treatment is more important than Clavirenz, after negotiations over a price reduction broke down. Brazil then began importing a substitute drug from India. Brazil was also attempting to negotiate lower prices for a copy of Aluvia, stated, they have on their Web site. "80 number of other drugs. One was Abbott's Kaletra. ly whatever drugs the Preparation Questions althcare Foundation ott's offer, stating 1. Evaluate Abbott's strategy regarding Thailand's s and advocates the sided to use compulsory licensing as a bargaining blacklist against the zil had a highly successful and acclaimed Alle First had brought the adult infection rate to the level compulsory licensing. Will it be successful? offer ? mpany bowed to 2. What should Abbott have done once Thailand rejected its g price cuts on its United States. The program emphasized prevention nd lower middle- led free drugs for those infected, but the cost of 3. What should Abbott do in Brazil? right to exercise the drugs had doubled in the past 4 years. In May ent Lula da Silva authorized Health Minister Jose 4. What does Thailand's compulsory licensing do for phar- issuing these iately back off in need of this to to invoke compulsory licensing for Merck's drug maceutical companies' opportunities in rapidly growing lower- and middle-income countries? 5. How should the pharmaceutical industry deal with tion Abbott's compulsory licensing? Abbott's continues Any. All rights reserved. Reprinted with permission. Case was prepare Reprinted with permis professor David P. Baron. Copyright 2008 by the Board of Trustees of the Leland Stanford sums ed a cyber ncluding The Airbus and Boeing Trade Disputes "We use such as MARKET FOR LARGE CIVIL AIRCRAFT ll from market for Large Civil Aircraft (LCA), aircraft that can space and security markets. Today its commercial aircraft divi- ts Web more than 100 passengers and weigh over 30,000 pounds, sion accounts for little more than half of its revenues. Airbus, s used y two producers: Boeing and Airbus. These by contrast, remains focused on the production of LCA. The Web n the linde large wide-body aircraft with two passenger aisles: the LCA market was projected to continue to grow rapidly. the "Is A330, A340, A350 and A380; and the Boeing 747, 767, The characteristics of the LCA market explain the emergence and persistence of the current duopoly. First, the inal and 787. Both c Both companies also produce large narrow-body launch costs of an aircraft program are very high, usually up to 50 percent of the total costs (Knorr et al., 2010). There are thus nch graft: the Airbus A318, A319, A320 and A321 (the A320 ing daily); and the Boeing 737 and 757. These aircraft can strong economies of scale. An aircraft program is the complete pically carry no more than 200 passengers, and tend to have a sequence of actions from the design to the last sale of a particular arimum flight range of less than 4,000 miles, whereas large airplane model. Launch costs include the costs of development, ride-body aircraft can usually carry more passengers and fly construction and overhead related to the start-up of a new aircraft program. Launch costs may in some cases exceed the value of inher. The market for large narrow-body aircraft is more the company, as was the case for Boeing in the 1970s when it mmpetitive than the market for large wide-body aircraft and is developed the 757 and 767. The uncertainty about the success orbe the main focus of the trade disputes. 82 of a new model makes the launch of an aircraft a risky business. Over the years, competition between Airbus and Boeing The high-risk nature of the LCA industry is at the heart of the as become more intense. For decades Boeing was the dominant disputes between the European Union and the United States. im in the LCA market. Airbus first equaled Boeing, as far Second, the LCA market is characterized by a steep sthe numbers of orders are concerned, in 1994. Since 1999 learning curve due to the technological complexity of the heir numbers have been similar. As far as aircraft deliveries production processes (Pavenik, 2002). Labor costs related to the production of an airplane decline by 30-40 percent as the reconcerned, Airbus took the lead in 2003 and has retained it accumulated output doubles (Benkard, 2000). ever since. Third, there are important economies of scope. Research Both companies have similar product offerings but have achievements and innovative technologies can be transferred pursued somewhat different strategies in other respects. During easily from one model of aircraft to another (Heymann, 2007 e 1990s Boeing increasingly diversified into the defense, To reap the benefits of the economies of scope, aircraft manufac turers often develop and produce variations of existing airpla models, and establish product families rather than design ne models. Both Boeing, with its many variations of the Boei Street Journal, July 24, 2007. 737, and Airbus, with the A320 family, have pursued this rou Street Journal, July 5, 2007. market for large narrow-body aircraft includes such other producers as Moreover, airlines prefer to buy products from the same fam (manufacturers of the Tupolev aircraft), Bombardier and Embraer. since doing so lowers their maintenance and training costs. nese company Comac is scheduled to deliver its first large narrow-body n 2012