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Welfare-Case Companies: Boeing


The airplane maker dares to complain about the competition's use of government handouts.

The aerospace and commercial airplane-manufacturing industry is a weird one -- the companies that occupy the sector make products that cost billions of dollars to research and produce, so the firms can't afford even the slightest drop in sales, but their products are usually marketed to customers that are flailing at best.

Not surprisingly, large aircraft manufacturers rely heavily on subsidies from their respective governments, even though most direct subsidies fly in the face of trade agreements that governments themselves put in place.

In a battle that seems to be never-ending, Airbus, owned by Europe's EADS, and the US-based Boeing (BA) have been accusing each other of receiving illegal government subsidies. The interesting point about this battle is that it's no big secret that these two aerospace giants rely on government funding to bring to market almost all of their products.

"Boeing and Airbus both receive substantial government support, but they are through decidedly different mechanisms and formulas. And it's a little bit like trying to balance baseball and cricket. They're kind of alike, but they're just different," Allan McArtor, head of Airbus' Washington office, told NPR in 2005.

The He-said/She-said battle began in 2004 and has made its way through rounds of World Trade Organization arguments. The first ruling in the case came back earlier this year, when the WTO said that Airbus received unfair government funding in the form of launch aid to build its commercial aircraft. That funding led to a significant shift in market share away from the competition (specifically Boeing). Boeing and the US argued (and the WTO agreed) that the money given to Airbus qualifies as an illegal subsidy because the aerospace manufacturer is only required to pay back the funds if the plane succeeds in the marketplace.

Meanwhile, Airbus and the EU argue that the tax breaks and funding from NASA and the Dept. of Defense give Boeing just as much of an advantage. A WTO report is expected to drop in September that will discuss Boeing's use of government money. At the end of May, Airbus released research claiming that the European Union has documented:
  • Approximately $16.6 billion in government research and development subsidies to Boeing between the late 1980s and 2006, compared to an alleged $3.7 billion in R&D funding given to Airbus.

  • Some $4.9 billion in state and local tax breaks granted to Boeing. (The figure didn't include newer tax breaks offered by South Carolina to Boeing.)

  • A $1.5 billion injection from the Japanese government, and close to $600 million from Italy, toward production of Boeing's 787 Dreamliner, which would result in jobs moving overseas

In mid-September, the WTO came back with an interim ruling responding to the claims made by Airbus and the EU. The trade referee's findings said that money supplied to Boeing through the Department of Defense and NASA constituted illegal taxpayer aid.

Boeing CEO James McNerney responded to the ruling with a comment that essentially said: Well, this is not a big deal. "What we have heard -- indirectly, of course -- is fairly heartening in terms of the proportionality of things that were found in the case against the U.S. when compared to the case against Europe," McNerney was quoted as saying by The Wall Street Journal.

The decisions by the WTO have the potential to dramatically affect the landscape for both large-aircraft manufacturers. The US Congress is already taking steps to pass legislation that would require the Dept. of Defense to take subsidies into account when awarding government contracts, a major concern in this dispute. As a report in the Wall Street Journal outlined, "Both companies, and the governments that back them, are currently fighting over who will win a deal to build as many as 179 US Department of Defense refueling tankers potentially worth $35 billion."

Both companies are also keeping an eye on air traffic coming from emerging markets, including China, and Montreal's Bombardier. According to the Financial Times, certain competitors are threatening to capture the market for single-aisle planes, which are popular with discount airlines.

Good thing that Boeing's chief, Mc-Nerney, is also chairman of President Obama's Export Council, and seems to have an in with Obama's National Export Initiative, says Timothy P. Carney, a columnist at the conservative newspaper, The Washington Examiner. "Last year, Ex-In dedicated 64% of loans and long-term guarantees to subsidize Boeing sales," he reports.

Government support, at least, doesn't appear to be in jeopardy.
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