Dispute over Aviation Subsidies Needs a Sustainable Solution

The United States and the EU have each imposed retaliatory tariffs on one another because of an ongoing dispute over subsidies for the aircraft manufacturers Airbus and Boeing. Although these tariffs are WTO-compliant, they are a burden on the transatlantic relationship. It is urgently time for a negotiated solution to this conflict.

For years, the transatlantic partners have accused each other of subsidising 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 subsidising Boeing.

Stalled Legal Dispute and Threat of Further Tariffs

Since then, the WTO ruled that the respective subsidies partly violate WTO rules. 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. The EU side, however, criticised serious legal errors in the report and accordingly appealed the panel report. However, 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 lodged. The final legal clarification of the dispute over the EU countries' promotional loans to 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 thus far not exhausted the full height of retaliatory tariffs permitted by the WTO. At the beginning of March 2020, the composition of the product list, on which a duty of 25 percent is levied, was slightly changed. A few weeks later, in mid-March, the United States raised the tariffs on selected aircraft from 10 to 15 percent. On August 12, 2020, the latest adjustment to the U.S. tariff-laden product list was announced: Some products were removed from the list and new ones, particularly food products, were added. However, the tariffs were not increased.

In the Boeing case, the WTO arbitration ruling was announced on October 13, 2020. The amount of damages was set at 3.9 billion U.S. dollars. Although the EU is still trying to find a negotiated solution with the United States, it announced on November 9 – shortly after the U.S. elections – that the EU would also impose retaliatory tariffs of up to 25 percent on various products from the United States beginning mid-November 2020. EU tariffs are now imposed on U.S. aircraft, excavators, tobacco, cotton, fish, suitcases and bags, gaming machines, and chemically produced proteins, among other things.  

Back to the Negotiating Table instead of Tariff Escalation!

Tariffs cause high costs for companies and consumers on both sides of the Atlantic. Therefore, the dispute subsidies in the aviation sector must be resolved swiftly. However, the conflict cannot be solved by legal means alone. A negotiated political solution that leads to the lifting of tariffs and brings lasting peace to the dispute would be in the interest of both sides.

The EU had already submitted a proposal for political settlement to the United States in July 2019. In addition to limiting subsidies, this includes the creation of a bilateral monitoring and dispute settlement mechanism. In addition, the EU is proposing a further development of the WTO rules, as these are very weakly developed for subsidies in the aviation industry.

While Europeans and the United States have argued about subsidy rules for decades, other states are using the opportunity to promote their own aviation industry. Therefore, the United States should accept the EU’s offer and return to the negotiating table. In addition, progress is vital within the Trilateral Initiative of the United States, the EU, and Japan on the topic of industrial subsidisation.