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Originally published March 31, 2011 at 9:45 AM | Page modified April 1, 2011 at 1:40 PM

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WTO ruling against Boeing unlikely to have big impact

The WTO's ruling Thursday against Boeing and Washington state is unlikely to significantly change either the company's behavior or the impact on state taxpayers anytime soon.

Seattle Times aerospace reporter

The World Trade Organization (WTO) ruled against Boeing and Washington state Thursday, finding that about $5 billion in government subsidies to the company, including a small amount of the state's ongoing business- tax reductions, were illegal under international trade agreements.

But the ruling is unlikely to significantly change either Boeing's behavior or the burden on state taxpayers anytime soon.

First, the ruling against Boeing is far less sweeping and considerably smaller in value than a corresponding WTO ruling against Airbus in 2010.

Second, the WTO takes years to handle appeals and counter-appeals, and ultimately has only weak enforcement powers.

Somewhere far down the road, a settlement between the U.S. and the European Union — possibly involving some adjustments to state law with relatively minor impact on government largesse to Boeing — seems the most likely outcome.

Underlining the weakness of WTO rulings, nine months after a final report on Airbus found that the European jet maker had received roughly $20 billion in illegal subsidies, Airbus said it still intends to seek more launch aid loans for its next airplane, the A350.

In the final report published Thursday, the WTO dispute panel concluded Boeing received about $5 billion in illegal subsidies between 1989 and 2006.

The panel ruled that $16 million in Washington state tax breaks between 2004 and 2006 were illegal. Although that's only a small part of the total benefits from the state and local governments, the ruling raises doubts about whether those tax reductions can continue as scheduled through 2024.

In a news conference U.S. Trade Representative (USTR) Ron Kirk dwelt upon the imbalance of subsidies cited in the separate Airbus and Boeing rulings.

"The WTO has vindicated the U.S. position," said Kirk . "The subsidies the Europeans have given to Airbus dwarf anything the United States has provided to Boeing."

The Boeing total does not include some Department of Defense research grants, three of which were also ruled to be illegal subsidies but were not quantified in the report. USTR attorneys estimate that these grants total about $112 million.

On the other hand, the list of illegal Boeing subsidies does include $2.2 billion in tax credits from a U.S. law that was repealed in 2006 under pressure from the WTO. Boeing hasn't benefited from that tax credit since, and considers this portion of the WTO finding already remedied.

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That leaves just about $3 billion in past subsidies Boeing still must answer for.

In a technical briefing, attorneys for the office of the USTR, who asked not to be identified individually, said they are "looking at the possibility of appeal" against those remaining findings.

Washington tax breaks

The WTO ruled that most of the roughly $78 million in benefits granted to Boeing by Washington state between 1989 and 2006 are permissible.

Concessions on utility rates and landing fees at Everett's Paine Field, as well as road, rail and port improvements, were not found to be subsidies. And though work-force training programs were classed as subsidies, they were ruled permissible because they had no adverse effect on Airbus.

All the tax breaks to Boeing from the states of Kansas and Illinois were also ruled permissible.

What was ruled illegal was $16 million in business and occupation tax reductions from both the state and the city of Everett — part of the 2003 package to entice Boeing to put the first 787 final-assembly line in Everett.

"The tax reduction is essentially a gift from the government, or a waiver of obligations due," the WTO report states, "and it is clear that the market does not give such gifts."

Those tax breaks have continued since 2006 and are supposed to run 13 more years, potentially amounting to a couple of billion dollars more.

The WTO made no ruling about those future tax breaks, confining its verdict to those through 2006.

It's clear that for now those tax breaks will stay in place, as the U.S. prepares to challenge every part of the ruling it lost. Even if, at some future date, the law has to be changed, state taxpayers likely won't be off the hook.

Washington's 2003 legislation said the state must replace the tax breaks with an economically comparable benefit acceptable to Boeing.

Gov. Chris Gregoire issued a statement saying the state is reviewing the WTO report and will be consulting with federal trade officials.

"Whatever the final result, we will continue to work to ensure that Washington maintains its competitiveness to keep and attract aerospace companies," Gregoire said.

The majority of the government aid to Boeing that the WTO ruled to be illegal came in the form of $2.6 billion in research and development (R&D) grants from NASA deemed to specifically benefit Boeing's commercial-jet division, in particular the key 787 Dreamliner jet program.

"Absent the aeronautics R&D subsidies, Boeing would not have been able to launch an aircraft incorporating all of the technologies that are incorporated on the 787," the WTO panel concluded.

That is the report's sharpest criticism of the advantages gained by Boeing.

But it doesn't approach the sweeping language of the 2010 report on Airbus subsidies, which bluntly stated that without the subsidies Airbus couldn't have achieved the leading market position it has and would have been a "much different, and we believe a much weaker, (large jet) manufacturer."

A USTR attorney said those specific NASA research programs ended years ago.

The European view

Airbus and European Union officials portrayed the WTO ruling as a "guilty" verdict that parallels the 2010 ruling against Boeing's rival.

Airbus officials said the $5 billion figure is merely a partial tally of Boeing's subsidies, denying there is any significant imbalance in the total illegal subsidies to each company.

At the same time, they minimized the impact of the 2010 ruling by reiterating the view CEO Tom Enders voiced in an internal interview sent to Airbus employees last year: that the WTO report did not rule Airbus' funding mechanism for new airplanes was illegal in principle.

"As we look at future programmes, including the A350 XWB, we just need to pay close attention to how loans are structured," Enders declared.

The part of the 2010 ruling that Airbus cites to justify this assertion that launch aid is structurally sound seems less than definitive. It says only that such loans are not necessarily granted with below-market interest rates, which is just one way in which those loans contravene normal commercial practices.

Airbus carried that argument even further Thursday.

Rainer Ohler, head of Airbus communications, insisted that while last year's WTO report leaves Airbus free to subsidize the A350, the new report outlaws the NASA and Pentagon grants to Boeing.

"Taking the cases together, the WTO has now specifically greenlighted the continued use of government loans in Europe and ordered Boeing to end its illegal cash support from US taxpayers," Ohler said.

That leaves a chasm of disagreement between the two sides.

Boeing general counsel Michael Luttig, in a statement Thursday, pointed to the more than $16 billion in cash sitting in the coffers of Airbus parent company EADS and called for Airbus to use that money to fund the A350 and to repay illegal loans on the superjumbo A380 jet.

"Illegal launch aid must end," Luttig said. "Airbus must take immediate steps to withdraw the outstanding prohibited subsidies provided to the A380, and it must finance the A350 and all other future programs on commercial terms."

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

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