Dispute over Aviation Subsidies Needs Sustainable Solution

Since mid-October 2019, the United States has imposed retaliatory tariffs of 25 percent on numerous goods from the EU. The legal basis for this is a dispute settlement ruling of the World Trade Organization (WTO) on European subsidies for the aircraft manufacturer Airbus. Although the tariffs are WTO-compliant, they place a significant burden on the transatlantic relationship and lead to unnecessary costs for consumers and producers on both sides of the Atlantic. 

For years, the transatlantic partners have accused each other of subsidizing their respective aviation industries and thus violating WTO rules. For a long time, there was a gentlemen’s agreement between the United States and the EU to mutually tolerate this. In 2004, however, the United States terminated this agreement and filed a complaint with the WTO against the EU, in particular the member states France, Spain, Great Britain, and Germany. As a result, the EU also sued the United States for subsidizing Boeing.

Pending Litigation and Threat of Further Tariffs

Since then, the WTO ruled that the respective subsidies partly violate WTO rules. At the beginning of October 2019, a WTO dispute settlement panel subsequently estimated the amount of damage to the United States caused by the subsidies for Airbus at 7.5 billion U.S. dollars. The United States was also granted the right to levy retaliatory duties of this volume. In mid-October 2019, the United States imposed tariffs, with tariff rates of 25 and 10 percent remaining below the maximum possible tariff level of 100 percent. The tariffs are WTO-compliant but burden the transatlantic relationship and lead to increased costs for consumers and producers on both sides of the Atlantic.

A panel report published by the WTO in early December 2019 concluded that EU Member States had still not brought their subsidies into conformity with WTO rules. The WTO thereby confirmed that the permitted tariff volume of 7.5 billion U.S. dollars was still legally valid according to current data. The EU side, on the other hand, criticized serious legal errors in the report. The EU subsequently appealed the panel report. Since the WTO Appellate Body is no longer functional due to the blockade by the United States, it will probably take years before an appeal is heard. The final legal clarification of the dispute over the EU countries' subsidies for Airbus is therefore not possible for the time being.

The Trump administration took the panel report as an opportunity to announce an increase of U.S. tariffs. This is legally possible since Washington has so far not exhausted the full height of retaliatory tariffs permitted by the WTO. A consultation procedure on this issue ran until mid-January 2020. In mid-February 2020, the United States announced that it would raise tariffs on selected large aircraft (from ten to fifteen percent) on March 18th, 2020. Additionally, changes in the list of products levied with a 25 percent tariff were applied. This practice, also known as carousel tariffs, is highly controversial. The reason for this is that it not only hits those sectors that are directly subject to a tariff, but additionally increases insecurity for sectors which might eventually become subject to a tariff. Therefore, the amount of economic damage done is multiplied. The amended list has been in force since the 5th of March.

The amount of damage in the Boeing case has not yet been determined; the ruling is expected for June 2020. Only then will the EU, for its part, have the right to impose retaliatory tariffs on the United States.

Back to the Negotiating Table instead of Tariff Escalation!

The dispute over aviation subsidies cannot be solved in a purely legal way. The U.S. tariffs cause high costs for companies and consumers on both sides of the Atlantic. Equally harmful will be the foreseeable EU retaliatory tariffs after the conclusion of the Boeing case in mid-2020. Against this background, a negotiated political solution that leads to the lifting of duties and brings about a lasting settlement of the dispute is in the interests of both sides.

According to press reports, the EU has therefore already submitted a proposal to the United States. In addition to limiting subsidies, this includes the creation of a bilateral monitoring and dispute settlement mechanism. Furthermore, the EU is proposing a revision of the WTO rules, since these are very weak for subsidies in the aviation industry.

The Trump administration, however, seems to be waiting – at least until EU retaliatory tariffs are announced in the Boeing case as well. This also harms the U.S. economy. Instead, the United States should accept the EU offer and return to the negotiating table.