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Originally published September 15, 2010 at 12:29 PM | Page modified September 16, 2010 at 6:47 AM

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WTO's Boeing ruling could fuel subsidy debate, make settlement more difficult

The World Trade Organization ruled that Boeing has received illegal government subsidies, but sources said the amount is just a fraction of the Airbus subsidies previously ruled improper.

Seattle Times aerospace reporter

In a preliminary ruling Wednesday by the World Trade Organization (WTO), Boeing was found guilty of receiving illegal government subsidies. But according to people briefed on the report, the subsidies deemed impermissible appear to be just a fraction of the $24 billion the European Union had alleged — and far smaller than the aid to rival Airbus that the WTO has ruled improper.

If that interpretation is confirmed when the still-confidential ruling is made public, the outcome could be a major setback for the EU's claim that subsidies to Airbus and to Boeing are roughly in balance.

That may make a negotiated settlement of the long-running subsidy dispute even more difficult, and could further fuel the already contentious debate over which company should win the huge Air Force contract for refueling tankers.

The WTO, the Geneva-based international body responsible for policing global trade rules, said in its interim finding that Boeing has received "in excess of $5 billion in illegal subsidies," according to a trade official familiar with the report who spoke on condition of anonymity.

Included in the $5 billion finding is a reiteration by the WTO of a 2000 ruling that a U.S. Foreign Sales Corporation (FSC) tax regime that benefited Boeing is illegal. The U.S. changed that tax law, and Boeing considers this finding already remedied.

According to another person briefed on the report, who also spoke on condition of anonymity, that leaves the new illegal subsidies cited in the report at about $3 billion.

This person, who is on the U.S. side of the case, said the illegal funding includes some $2.5 billion in NASA research money and also incentives from the states of Washington and Kansas.

In the parallel complaint against Airbus, the WTO in June found that the European plane maker had received roughly $20 billion in illegal subsidies.

Sen. Patty Murray, D-Wash., speaking after a briefing by U.S. Trade Representative Ron Kirk, said Wednesday that the ruling "pales in comparison to the WTO's earlier findings that Airbus benefited from illegal subsidies."

"Not even close"

"It's not even close to the magnitude" of Airbus' violations, Murray said. She said she could not provide specifics because the WTO's ruling has not been made public.

In its suit, the European Union claimed that the illegal subsidies to Boeing included just over $10 billion in NASA-directed research contracts, an additional $3.1 billion from NASA for independent research, and $2.4 billion in Department of Defense research contracts.

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The EU also pointed to almost $4 billion in Washington state tax breaks and other incentives and a $900 million incentive package from the state of Kansas.

The $3.1 billion from NASA for independent research was not ruled illegal, according to two sources.

According to the U.S. person briefed on the ruling's details, the WTO panel ruled that about one-quarter of the NASA money, roughly $2.5 billion, was illegal and "actionable" — that is, requiring some redress.

The WTO panel ruled that a portion of the defense-research money was also illegal and actionable, although the amount was not quantified. This amount is therefore not included in the $3 billion total for illegal subsidies.

Washington, Kansas

The panel also found some Washington and Kansas incentives, including Washington's business and occupation (B&O) tax breaks, to be illegal and "actionable."

However, the Washington tax breaks produce savings to Boeing over a 20-year period of production, and the panel pegged the total illegal subsidy received so far as relatively small, according to the U.S. person briefed on the ruling.

But a source close to the European side of the case, also speaking anonymously, sharply differed on how the ruling should be interpreted.

That person said the WTO report didn't quantify the total of illegal subsidies to Boeing, so $5 billion represents only part of the full amount ruled illegal.

And he said the damages to be paid over any given illegal subsidy are a much larger amount than the subsidy itself.

"Boeing is on the hook not for $5 billion, but for $25 billion in adverse effects," he said.

Costly damages

The person close to the U.S. side of the case agreed that damages will generally far exceed the subsidy itself. But he insisted that the $5 billion in Boeing subsidies cited in the ruling is a figure directly comparable to the roughly $20 billion in loans to Airbus ruled illegal in the June WTO report.

"The $20 billion is the principal amount of subsidy that Airbus received and the $3 billion, leaving out the older FSC subsidy, is the amount found by this panel in its interim report for Boeing," he said. "That's an apples-to-apples comparison."

Boeing hailed the outcome as a big victory.

"If today's reports are accurate that some $3 billion of the EU's claims were upheld by the WTO, excluding the claims that relate to past programs long ago remedied by Congress, then the ruling amounts to a massive rejection of the EU case," Boeing said in a statement Wednesday afternoon. "The WTO findings against the U.S. are likely to require few changes in U.S. policies and practices."

The formal report against Boeing should be finalized and made public in a few months.

The consequences of the twin WTO rulings, first against Airbus and now against Boeing, are unclear. If the imbalance in the two outcomes is confirmed, it may make a negotiated settlement even more difficult.

Boeing has been keen to ensure compliance with WTO rules so that Airbus cannot take government loans to fund the A350 jet under development.

European governments have agreed in principle to provide such loans — known as "launch aid," and repayable through installments with each plane delivery only after a jet program succeeds. Despite the June ruling, Airbus insists it intends to take that money for the A350.

Boeing called on Airbus to play by the rules by "withdrawing their still-outstanding A380 prohibited launch-aid subsidy and financing the A350 on commercial terms."

The ruling may affect the competition between Airbus and Boeing to supply a new Air Force tanker.

Boeing's congressional supporters want the Pentagon to consider the impact of illegal subsidies when awarding that bitterly fought contract. A decision on the winner is expected next month.

Rep. Jay Inslee, D-Bainbridge Island, said that even if the Defense Department is not required to factor in the WTO's opinions in awarding the tanker work, the latest ruling "should send a strong message to the Pentagon" that the two companies have not been competing fairly.

As for the Washington state tax breaks, the fact that the WTO has found them illegal won't get state taxpayers off the hook.

The 2003 agreement Washington signed with Boeing, known as "Project Olympus," contains a provision designed to protect Boeing's financial interest in the event the tax breaks have to be withdrawn for any reason.

The agreement mandates that if anything changes the state's financial obligations or commitments to Boeing, the state must replace the tax breaks with an economically comparable arrangement acceptable to Boeing.

Seattle Times Washington, D.C. reporter Kyung Song contributed to this report.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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