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In 30-Year Trade War, Boeing Wins a Battle. Brace for the Counterattack.

The U.S. government, Boeing (BA) and others have long complained to the World Trade Organization (WTO) that European governments' "launch funding" loans to EADS (EADS:P) amount to illegal subsidies. EADS and Boeing have fought a seesaw battle over the commercial airline market for the past 30 years. EADS currently has the edge in number of sales.

In late March the WTO's ruling on the matter leaked to the press. It may take a few more months for the WTO to go public, but the gist of the ruling is that some of the support EADS received may be illegal. Most of the "launch aid" consisted of below-market-rate loans that didn't need to be paid back until the aircraft model was profitable. The WTO judged those loans to be subsidies. Other aid such as market rate loans, tax breaks and infrastructure support passed inspection.

While Boeing and its allies feel vindicated, EADS and the Europeans have filed a counterclaim, arguing that large defense contracts for aircraft like the KC-135, C-141 and C-17 also amount to subsidies. By helping to pay for the development and production of military aircraft that in some cases are just variants of Boeing's commercial planes, the government helps Boeing reduce prices to civilian customers and makes Boeing more competitive with EADS. No word on when that decision will be announced. EADS is certainly expecting a ruling in their favor.

As yet the WTO has not addressed the aid Boeing gets from the U.S. Government's Export-Import Bank (Exim). The bank's mission is to "support the financing of U.S. goods and services, maintaining, and creating more U.S. jobs...". Backed by Uncle Sam, the bank provides loan guarantees to companies winning contracts with foreign governments and corporations. If a buyer defaults, the U.S. taxpayer makes the company and its lenders whole.

While the Exim bank will help any company winning a contract, Boeing accounted for ninety percent of its activity, or over $8 billion in guarantees in 2009. That lets Boeing offer lower prices and bear less risk. Cushy.

Even so, that isn't necessarily a sign of illegal collusion between Boeing and the government-backed bank. After all, Boeing aircraft are the nation's biggest export after military hardware. Inevitably, Boeing dominates the Exim bank's guarantees. To prove this constitutes an illegal subsidy, EADS must file a case with the WTO, and there's no guarantee it would win. The question is complex.

Just to make things more interesting, President Obama appointed Boeing's president, Jim McNerney, to be one of the leaders of his Export Council. This is a group of business leaders charged with advising the President on trade. No doubt McNerney has a lot of advice to offer.
Photo: Flickr user temp13rec.