if the EU government stops its subsides to Airbus then this will cause great negative impact on company research and development program which they are doing right now in order to come with more fuel efficient aircraft . And also this will cause the job losses in the Airbus which is not good in the interest of the EU. Apart from employment and technological advancement, the company generates tax revenue for all the countries it operates in also matters in relation with EU to help Airbus. As EADS, the parent company of Airbus, already said that sales of its new super-jumbo, the A380, would have to be 20 per cent higher than initially forecast in order for the programme to break even at current exchange rates. And if we talk about on this issue furthermore, then it is clear that both parties are giving huge amounts of benefits to their respective governments.
But as American government realized that if the airbus getting the same amount of help from EU government then this cause a great amount of competition and create difficulties for Boeing. As already Airbus gain 50% of market in selling the civil aircrafts in the market by taking these factors into mind Americans signed an agreement with EU. This agreement was signed in relation with Trade of Large Civil Aircraft. The agreement restricted both concerned parties to provide financial aid to the manufacturing companies. But later on the agreement was cancelled by US.
Task Two
If we critically assess the arguments put forward by the American and the European sides then there are number of important issues needs to be consider before making any decision on the dispute between Airbus and Boeing. Because both side are against each other on the issue of illegal subsides provided by the governments in order to support their business in the aircraft Industry.
This is a complicated case, and both sides have compelling arguments as to why the other side is breaking the rules. The U.S. claims that the EU is giving Airbus illegal subsidies in the form of “launch aid,” a term describing a system of low interest loans granted by EU countries to Airbus. In addition to low interest rates, launch aid loans are favorable because they only have to be repaid once the specific aircraft are sold. The U.S. has argued that these loans give Airbus an unfair advantage in the marketplace, allowing Airbus to sell its aircraft at artificially low prices and to take risks knowing that the EU government will be there to provide financial assistance.
The rivalry between Boeing and Airbus goes back a long way, when Boeing was by far the dominant supplier of commercial airplanes. Up until 1997, Boeing was the clear market leader on the passenger airplane market. Now the situation is less certain, as Airbus has overtaken its American competitor not only in the domestic market but also in the world market, with its introduction of new models of passenger aircrafts. There are many arguments from both sides but the main argument in this case study is in 1992 EU civilian aircraft pact allows too much European government support for Airbus, helping it sell more jetliners than Boeing, which had an 80% share in the market a decade ago. Thus the U.S. government wants the E.U. to put an end to any new subsidies provided by their government.
Since 1997 Airbus has had several advantages in the production of aircrafts. Since their goods are still being subsidized, Airbus has expanded its sales from the home market to the overseas market. Thus, their quality products and subsidies together would enable them to resort to dumping (selling exports below their marginal costs of production) their products into the world market, at the cost of their main competitor –Boeing
The argument posted by John Veroneau, general counsel for the U.S. Trade Representative's office is that the 1992 civil aircraft pact has outlived its usefulness. Presently, the subsidies gravely threaten the U.S. aerospace industry. If the E.U. government fails to remove future subsidies on the aerospace giant Airbus, then the U.S. may withdraw from the 1992 civil aircraft pact or resort to retaliatory measures which may lead to trade disputes and worsen trade relationships between the U.S. and the E.U.
Also The E.U. government was justified in providing subsidies to Airbus earlier. This is because Boeing was the clear market leaders and had established a monopoly power (i.e. Boeing was the only major industry in the aerospace sector) not only in the world market, but also in the local European market. Hence, this posed as a big threat to Airbus, since they were not able to compete in the world and local market and this could have lead to the decline of the aerospace industry of Airbus. But now, since Airbus has established itself as one of the main producers in the aerospace sector, future subsidies are not desirable for free trade.
On the other side EU has a strong case at the WTO regarding Boeing relation with its Japanese business partner. The new Boeing 767 Dreamliner is built in an alliance with the heavy – industry divisions of Japanese MNEs like Mitsubishi Kawasaki and Fuji. In comparing assistance given to Boeing and Airbus, the EU further argues that the Airbus situation is less problematic since the loans must be repaid when the aircraft are sold, while the Boeing subsidies are mostly in the form of grants.
There are several factors that have brought this dispute at this worse stage
Airbus, after years of playing second fiddle to Boeing, has recently started to outpace its old rival. The European company sold more passenger jets than Boeing for the first time ever in 2003. The US says this demonstrates that the traditional justification for Airbus' subsidies - that it is a young company struggling to compete in a cut-throat industry - is no longer valid.
The EU retorts that Airbus' success reflects a steady decline at Boeing rather than regular injections of public money. Secondly, Airbus and Boeing are both gearing up for the launch of new super sized passenger jets - Boeing's 7E7 "Dreamliner" and Airbus' A380 super jumbo - and their success is critical to both companies' future performance.
And for other subsides such as those granted By Kansas authorities the US makes sweeping statements that Boeing is not benefited from them. Also US offers no or very limited evidentiary support of these claims.
And finally the massive overpayments in terms of R&D contracts for the department of Defense and NASA, the US seeks to argue that this constitutes payments for service not covered by the WTO disciplines on subsides that the US government is not overpaying and follow procurement procedures, and that Boeing receives good consideration in return.
Hence each side claims that a large chunk of the other's subsidies has been channeled towards developing these new-generation aircraft
Task three
The World Trade Organisation (WTO) is located in Geneva, Switzerland. It was established in January 1995 having been created by the Uruguay Round negotiations of 1986-94. Membership is around 146 countries at present with a budget of 154 million Swiss francs for 2003.Its secretariat staff is in the region of 550.
The functions of the WTO are to administer WTO agreements, a forum for trade negotiations, handling of trade disputes, monitoring national trade policies, offering technical assistance and training for developing countries and co-operating with other international organization.
The World Trade Organization has agreed to examine two high-profile disputes over alleged multi-billion dollar state subsidies given to aviation giants Airbus and Boeing. Two panels were established to investigate the merits of complaints brought by the European Union and United States.
Washington and Brussels accuse each other of violating world trade rules by handing out billions of dollars in subsidies to two of the world's largest civil aircraft makers, Europe's Airbus and the U.S. Boeing Corporation.
A member of US senate say the dispute between the United States and the European Union could be the biggest trade battle in history. But WTO spokesman Keith Rockwell steers away from this description.
"By virtue of the fact that they have brought the case here means that it will not be a battle," he said. "It will be a legal procedure conducted under rules that have been agreed to by all parties in a predictable and relatively civilized fashion. I guess from the legal point of view, it will be a legal battle. A battle is always a pejorative word. I try to steer clear of it. But it certainly will be a legal entanglement, shall we say.”
Geneva
20 July 2005
Washington was the first to go to the WTO. In October, it accused the Europeans of unfair trade practices because of the support they give to Airbus. This prompted a tit-for-tat reaction from Brussels, which accused the United States of providing Boeing with trade distorting subsidies.
The account of WTO in this dispute is still not clear in other words if we could understand Boeing's complaints, if their business had been negatively impacted by Airbus' windfall, but they haven't. The have generated business because of Airbus Failure and now coming to Airbus, If we could understand Airbus' complaints about Boeing if they had a clue about how US governmental contracts are created, and Boeing has stiff competition that would not really enable the U.S. Government to make such inflated contracts. Not that they aren't already artificially inflated. But the world trade organization is still working on this dispute and yet not come to any results because of the case complexity if some how WTO puts restriction on the subsides which the both are getting then this will effect the economies of the both the EU and USA Because of the huge Investment in their R&D and their foreign trade with another countries because these are the only two aircraft manufactures in the industry. But at the end of the day its seems like to say a negotiated settlement is possible at any time with help of WTO and may be the most likely conclusion of the matter. Because some of the subsidies in question are quite important to both Boeing and Airbus, and neither side would be pleased with a ruling that would discontinue all the benefits in dispute
References:
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EU Resumes WTO Case Against Boeing,” EU Press Release, May 31, 2005, posted at
- International Business and economic lessons: Peter Romilly 2004-2005
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International Business – 12th Edition.-Jon D.Daniels, Lee H.Radebaugh, Daniel P.Sullivan.
- EU Reopens Boeing WTO Case,” CNN.com, May 31, 2005.
- U.S. to Pursue Airbus Case,” Chicago Tribune, May 31, 2005.
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