WTO Ruling Vs. the Tanker
Put Focus on Acquiring Best Platform, Not Trade Dispute
By JOEL JOHNSON
Published: 23 November 2009
The World Trade Organization (WTO) has issued a preliminary (and theoretically confidential) finding that European "launch aid" loans to Airbus are inconsistent with the WTO rules on government subsidies. A similar ruling on a European Union allegation that Boeing is a recipient of subsidies from federal and local governments is expected soon.
Both cases will be subject to appeals by the losing party, a final report will be prepared, and offending parties will have an opportunity to change their policies or negotiate a deal. Finally, if aggrieved parties are not satisfied, they will be allowed to retaliate against the offending party. This whole process will likely take several more years (the original U.S. complaint was filed in 2004).
While the U.S. Air Force draft request for proposal states the WTO case will not figure in the competition, some in Congress argue that the Northrop Grumman offering for the next tanker should be penalized or eliminated because its airframe is based on the Airbus A330. That would be a mistake for at least three reasons:
■ U.S. Global Reach. The primary acquisition responsibility for the Pentagon and the Congress is to provide the best equipment to the U.S. military. That includes tankers, which are the lynchpin for the U.S.' ability to project military power or accomplish humanitarian missions anywhere in the world.
There are only two manufacturers in the Western world of widebody aircraft that can be modified as tankers - Airbus and Boeing. The Airbus-based tanker has won all five of the most recent head-to-head tanker competitions (Australia, United Kingdom, United States, United Arab Emirates and Saudi Arabia).
The U.S. Air Force decision was set aside for reasons related to the acquisition process, not to technical merit. Surely the Air Force should be offered the same choices as other air forces in the world.
■ Industrial Base. Some argue that awarding the tanker to the Northrop Grumman team would eliminate American jobs and undercut the U.S. industrial base. A persuasive counterargument can be made. Northrop Grumman's tanker would produce 48,000 American jobs. Boeing claims a comparable number (although only Northrop Grumman has provided information as to how their numbers were calculated).
But a win for Boeing would simply prolong a production line of the 767 in Seattle. The 767 is obsolete and unattractive to commercial airlines, which is why Boeing decided to spend more than $10 billion to develop a replacement - the 787.
A win by Northrop Grumman would result in the establishment of an assembly line for both the tanker and freighter version of the A330, a modern aircraft with a backlog of over 400 orders, and would establish a new center of aerospace excellence in the Southeast. It should also be noted that in 2009, Airbus and Boeing will each produce over 400 aircraft. The Air Force intends to purchase about 15 tankers a year. Thus neither company will be greatly affected regardless of the tanker outcome.
Of course, if, as several members of Congress have proposed, the Air Force decided to undertake a "split buy" of approximately 15 aircraft each from both companies, nearly 100,000 jobs would be created and the industrial base further strengthened.
■ Trade Policy. No country has argued more strongly for an open and rules-based trading system than the United States. The backbone of that system is the WTO and the rules it enforces.
The trade cases involving Boeing and Airbus still have several steps before either party should be contemplating retaliation ("pre-emptive" retaliation is expressly prohibited by WTO rules). It is noteworthy that the previous largest subsidy case decided by the WTO involved a U.S. tax benefit to exporters that was deemed a "prohibited" subsidy. The single largest beneficiary was Boeing.
During the 14 years the WTO case dragged on, the European Union and its members never took pre-emptive action against the United States. When the EU was finally granted authority to retaliate against the United States, it never sanctioned military or aerospace products, but rather penalized U.S. exports for which Europe was an important market, but for which Europeans had other choices. Pressure from those affected industries finally convinced the U.S. government to terminate the program.
Question: Should the USAF take into consideration that every plane Boeing exported for 32 years benefited from a tax break the WTO deemed to be a prohibited subsidy?
In sum, the best policy for the administration and Congress is to let the WTO case run its course, and to assure that the tanker competition produces the best technical solution for the American war fighter. There will be ample time to resolve the respective American and European complaints on the way each supports its civil aircraft industry. But the U.S. Air Force needs the best possible tanker as soon as possible. It should be allowed to get it. ■
Joel Johnson, former vice president, international, for the Aerospace Industries Association of America, is an independent consultant to corporations (including Northrop Grumman) and government agencies on trade and defense cooperation.
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