Why the Airbus-Boeing Case Could Wreck the WTO, and How To Stop It

April 4 issue - On March 19, U.S. Deputy Secretary of State Robert Zoellick and European Union Trade Commissioner Peter Mandelson had a heated one-hour telephone call. The subject: the trade dispute pitting Boeing against Airbus. Afterward both sides accused one another of bad faith. Within days tempers had cooled, but it was still clear that this is becoming the nastiest transatlantic trade dispute in years, one that could jar not only the global trading system, but political cooperation among the major industrial nations as well.

The spat has outgrown the World Trade Organization, which did not yet exist when the United States and EU first addressed the charges of unfair trade practices in the aerospace industry back in 1992. Since then, both Airbus and Boeing have outsourced work to Asia and Latin America, transforming themselves into international, rather than continental, manufacturing networks. This case is now global, rather than transatlantic, raising the stakes. When Airbus surpassed Boeing in global sales and market share two years ago, it became Europe's most important 'national champion,' and has been cited as a model for other state-sponsored champions from biotech to energy. Though American leaders don't speak of government-backed 'champions,' they are no less firmly behind Boeing. That's why this dispute requires an extraordinary solution, one outside the normal bounds of the WTO.

Before I outline my proposal, let me lay out the forces that make extraordinary measures necessary. The 1992 agreement was deeply flawed; rather than eliminating subsidies, it attempted to define which subsidies are permissible, and the debate over what this means has been escalating ever since. According to U.S. estimates (also hotly disputed), Airbus has used $15 billion in subsidies to build its global aircraft market share from 30 percent to near 60 percent. Washington's case is that Airbus has long since outgrown an infant industry's need for aid.

Brussels counters that Boeing is subsidized, too, only in different ways, by government defense contracts and research grants, as well as $3 billion in tax breaks from Washington state. The EU also identifies subsidies of more than $1 billion received by Boeing's Japanese subcontractors