In the biggest case ever to come before the World Trade Organisation, the EU and US traded charges on 22 March 2007, claiming that rival plane makers Airbus and Boeing had received billions in illegal subsidies over the past decades.
The European Commission presented its first written accusations against the aerospace and defence giant Boeing to the WTO on 22 March 2007.
European trade experts spent the past two days defending the Union against similar US accusations in the first hearing of the case before a WTO trade dispute panel.
In the worst-case scenario, the EU and the US would both win, paving the way for a ferocious round of two-way sanctions that could seriously dent transatlantic trade.
In the filing of its case against the US on 22 March, the European Commission said that the "lavish subsidies" given to Boeing have allowed the US group "to engage in aggressive pricing of its aircraft which has caused lost sales, lost market share and price suppression to Airbus on a number of select markets".
The EU says that US federal, state and local subsidies benefiting Boeing, amounting to $23.7 billion over the past two decades and up to 2024, are inconsistent with WTO rules.
Among others, the EU accuses the US of providing vast amounts of hidden support to Boeing through military contracts and federal research programmes, worth around $16.6bn during the past 20 years.
It also says that Boeing's commercial aircraft division has benefited from "significant federal tax breaks" and points to a $4bn package of tax breaks and exemptions, credits and infrastructure loans from the state of Washington.
In the hearing on 20-21 March, US officials claimed that the benefits of the $15bn of launch aid awarded to Airbus over the past 30 years by France, Germany, the UK and Spain, amounts to "well over $100bn", based on calculations of the additional cost that Airbus would have incurred if it had obtained financing "at commercial interest rates".
They said that long-term loans granted by European governments at below-market rates have "enabled Airbus to pursue an aggressive strategy to increase its market share" and to "launch a series of large civil aircraft models at a scale and a pace that would have been impossible without subsidies".
"Subsidies have enabled Airbus to develop a full family of airliners targeted at its US competitors," the US team said.
"It is not tolerable that one producer should have ready access to billions of dollars in up-front, risk-free financing" to develop aircraft, they said, adding that the zero-interest repayments, conditional on the commercial success of Airbus models, have cost thousands of American jobs and cut into Boeing's earnings.
Meanwhile, Gretchen Hamel, a spokeswoman for the US Trade Representative's office, said that the United States was still prepared, and would prefer, to negotiate a solution to financing airliners.
The European Union rejected the claims and said that Washington had failed to show how Airbus-financing had led to lost sales for Boeing or lowered prices.
In its defence at the hearing, the EU said that the US case against Airbus "ignores relevant international agreements and is supported by very limited and often incorrect facts".
Governments' lending policies are "not determined by purely commercial considerations", the EU argues, because they do not need to maximise profits and can "pursue public policy goals."
The EU said that its governments' lending policies were purely aimed at helping to develop new planes, in support of "public policy goals". It argued that the money was legal because it was repaid as Airbus sold aircraft, although it acknowledged that, in the case of severe production setbacks, the loan terms could benefit the company.
The EU and the US have been locked in a dispute over state aid to large commercial aircraft builders, Airbus and Boeing, since Washington and Brussels filed complaints against each other in 2004.
According to international trade rules, government support for manufacturing is illegal if it can be proved that it harms the companies or industries of another WTO member state.
Transatlantic tensions had been held at bay by a 1992 bilateral agreement setting limits on aircraft subsidies. But, in October 2004, US authorities announced they were abandoning the pact and filing a formal complaint to the World Trade Organisation (WTO) over Airbus's failure to comply with its terms.
The bilateral deal allowed the EU to subsidise up to 33% of development costs for new aircraft, in order to help the younger Airbus compete with the more mature Boeing. However, it prohibited support for the actual production of aircraft.
The US accused the EU of handing out production subsidies and claimed that, in any case, all aid to Airbus should be eliminated as the company had overtaken Boeing in terms of global-market share.
The EU immediately retaliated by filing its own complaint against the US, pointing to "massive" indirect subsidies to Boeing, worth around $20 billion, in the form of military contracts, R&D and tax exemptions.
Procedures in the WTO were slow to get started as US and EU negotiators struggled – but failed – to reach a deal replacing the 1992 Accord on aircraft subsidies.
The US decided to follow through with its complaint in November 2006 (EurActiv 16/11/06), in what some saw as a deliberate blow to its rival as it struggled to deal with a series of management upheavals and delivery delays, which finally led to the announcement, in February 2007, of major restructuring plans threatening 10,000 jobs across Europe (EurActiv 02/03/07).
