The shot that may launch history's largest trade war was fired quietly enough: In a menu card at the British Aeronautical Society's annual banquet Wednesday night, Airbus SAS announced it has applied for government support in launching its newest plane, the A350.
In the high-stakes world of international trade, those were fighting words. And the Airbus announcement about its proposed new plane--targeted at Boeing Co.'s new 787 Dreamliner--could break the uneasy cease-fire that has held between the U.S. and the European Union since face-to-face talks broke down in April.
U.S. trade officials believe Airbus has damaged Chicago-based Boeing by receiving billions of dollars in below-market loans and other benefits over the years. The U.S. brought a complaint to the World Trade Organization last fall but held off while negotiators for each side tried to reach a settlement.
U.S. Trade Representative Rob Portman has said he would prefer negotiations but would return to the WTO should Airbus receive any new government help. In response to the news of a new loan application, Portman's office issued a statement Thursday saying, in part, "If additional subsidies are committed, we have said we will resume litigation through the WTO, and that remains our position."
Behind the posturing over subsidies is the story of how Boeing and Airbus, the world's only large passenger-jet builders, use international trade rules as their weapons of choice as they duel for dominance of the $50 billion jetliner market. Boeing, in particular, wants to disrupt Airbus' push for government help on the A350, so its 787 has a clearer shot at customers.
Boeing began building its case against Airbus 18 months ago, hiring more than a dozen lawyers to Google and gumshoe their way across Europe. Searching from local courthouses to major government databases, the sleuthing jurists dug up documents showing Airbus has benefited from government loans, lucrative tax breaks and even a landfill on the River Elbe.
One prized mound of paydirt: A midnight amendment to Germany's 2005 budget showed Germany plans to help the A350 with $890 million in government funds that originated as part of the U.S. Marshall Plan.
As a rhetorical point, this was rich. Boeing could use it to claim the Europeans are using the Marshall Plan--created by the U.S. to rebuild Europe after World War II--to beat Boeing in the battle for the skies.
"When we came across that, it was one of those moments when you said, `There, we've got one,"' said Stefan Ohlhoff, a lawyer who helped lead the research effort from his home base in Berlin.
Document by document, claim by claim, Boeing argues it has built a case that Airbus has benefited from $15 billion in trade-distorting launch aid, low-cost loans that Airbus repays only after its planes make money. Boeing also developed evidence of billions of dollars more in infrastructure projects and other public support that the company contends give Airbus a competitive advantage.
A trade fight entails risks for both aircraft giants. For Airbus, launch aid will hang in the balance. And both sides know a WTO proceeding could open the thorny issue of their reliance on suppliers who themselves receive billions of dollars in subsidies.
Boeing could put its pipeline of government research funding at risk, and supports such as a $3.2 billion tax break from Washington state almost certainly will be examined. The EU claims Boeing since 1992 has fed on $23 billion in government handouts, mostly NASA and Defense Department research grants.
The EU could find that its case is tough to make. After all, Airbus has jumped from a 30 percent market share in 1992 to 50 percent of commercial aircraft deliveries today, so Airbus would be hard-pressed to prove any harm.
Whatever the risks, the bluster of free-trade rhetoric rises from a stark competitive imperative: Boeing hopes to boost prospects for the 787 by disrupting Airbus' effort to get European government help in bankrolling the A350. For Boeing, the trade fight is part of the company's struggle to reverse a slide and gain on its archrival. This year Boeing has sold 261 of the 787s, topping Airbus in sales--a comeback after falling behind Airbus in airplane deliveries for the first time in 2003.
The battle comes as Airbus is consumed with introducing its new double-decker A380, at a cost exceeding $15 billion.
"It should not be easy for them to launch the A350 program, as they're choking on trying to finish the A380," said Lewis Platt, Boeing's non-executive chairman. He said that is why Boeing wants to increase the pressure on Airbus with a trade fight over subsidies.
Since its founding three decades ago, Airbus has relied on loans from the four governments that created it: France, Germany, the United Kingdom and Spain. The program creates jobs in Europe, and the aid has helped Airbus streak to become the world's biggest airplane builder.
To win a trade case, the U.S. would have to prove that the aid to Airbus has harmed Boeing. That was impossible during the 1990s, because many of Boeing's wounds were self-inflicted: It suffered from work stoppages, production shutdowns and indecision about launching new airplanes. Then-Chief Executive Philip Condit also feared an anti-Boeing backlash that would hurt sales in Europe.
Boeing was ready to move at precisely the time that Harry Stonecipher succeeded Condit as CEO in late 2003. Brash and combative, Stonecipher set Boeing on a trajectory toward a trade war and told his lawyers to begin arming themselves with the evidence they would need.
Stonecipher tabbed Robert Novick, a partner with powerhouse Washington law firm Wilmer Cutler Pickering Hale and Dorr and former general counsel of the U.S. Trade Representative during the Clinton administration. Novick launched an effort to unearth original government documents and corporate records that would stand up in a WTO legal proceeding.
Quest for evidence
He recruited more than a dozen lawyers and private investigators to scour Europe for any evidence they could find. The team also interviewed retired European trade officials, seeking intelligence into the inner workings of the Airbus funding system.
Early on, a junior associate in Berlin turned up one big find: A report from the City of Hamburg about a landfill along the River Elbe. In the document, a law firm retained by Hamburg concluded that the $850 million public works project would qualify as a subsidy because it was built solely for Airbus' benefit.
The transcript of a debate in Britain's House of Lords showed that Airbus received $797 million in loans on the A330 airplane through 1997 but had made no repayments in the decade since the first loan. This looked like proof that Airbus did not repay loans even on its most successful airplanes.
The Internet sped the searchers' work. In one instance, the European Commission posted a note on the WTO's Web site stating that aid provided by Spain for the Airbus A330 and A340 airplanes qualified as subsidies.
For Ohlhoff, the Wilmer Cutler lawyer who helped orchestrate the search, the hunt mixed days of drudgery with moments of excitement.
"It's excruciating sometimes, because you sit at the computer for five hours and nothing comes up," Ohlhoff said. "Then, all of a sudden, one comes up. Your heart beat goes up, and you can't believe your eyes, because you can't believe someone would put that in writing."
Discovering that Airbus was receiving Marshall Plan money was one such instance. Sixty years after World War II, the Marshall Plan money is still around because Germany has charged interest on loans to successful companies. The searchers found Germany has loaned the money--officially called the European Recovery Plan--several times to benefit Airbus. Germany also invests it in engine manufacturing, technical research and other projects in the nation's aerospace industry.
As the evidence piled up, a top Boeing trade lawyer, Theodore Austell, took the four three-ringed binders full of documents and began laying out his case last fall in a war room at Boeing's Arlington, Va., lobbying office.
Discussing the evidence a few steps outside the room, Austell in January likened the search for Airbus' funding with the search for a river's source.
"Sometimes it goes on the surface, then it disappears. It's hard to explain how it slips beneath the earth. Then it shows up somewhere else," Austell said.
By March 2004 Stonecipher was ready to take the complaint to then-U.S. Trade Representative Robert Zoellick.
At first Zoellick responded with skepticism as Stonecipher and Platt laid out their case in Zoellick's office across 17th Street from the White House. After all, Condit twice before had brought subsidy claims to the trade representative's office, only to back away.
Stonecipher insisted that Boeing was serious this time.
"Airbus is no longer a little foundling" that needs government aid, participants recall Stonecipher saying.
Zoellick told Stonecipher he disliked the timing. The Europeans would accuse him of playing politics by raising the dispute during President Bush's re-election campaign, the participants recall.
Still, the Boeing case would be a chance to show the office was good at prosecuting trade infractions, not just negotiating trade deals. The Boeing executives and Zoellick began sketching out a plan of battle.
They would have to abandon a 1992 agreement between the U.S. and Europe that allowed loans from European governments to cover up to 33 percent of Airbus' cost of launching new planes. The U.S. also would have to keep suppliers out of the trade dispute, since Boeing is relying heavily on subsidized Japanese suppliers to build the 787.
Later that spring, Zoellick warned his European counterpart, Pascal Lamy, that a fight was looming. Stonecipher last summer traveled to Europe and met with his counterpart at Airbus, Noel Forgeard, to warn of the coming battle.
By the time Stonecipher went public, Airbus was ready. It launched a counterattack on alleged trade abuses by Boeing. Airbus asserted that Boeing has relied on $23 billion in research by NASA and the Defense Department.
Airbus also criticized a $3.2 billion tax break to Boeing from Washington state, which may break WTO rules because it repays Boeing based on the number of airplanes that are produced. The company distributed academic research claiming that Boeing's Japan suppliers would receive $1.6 billion in subsides for their 787 work.
Relationship with NASA
Airbus' claims of U.S. research subsidies will not be easy for Boeing to shake. A visit to NASA's research center in Langley, Va., illuminates how Boeing directs and carries out NASA research and also benefits from the findings.
The relationship dates to the very dawn of aviation. A famous Langley photograph shows Orville Wright, Howard Hughes, William Boeing and other aviation pioneers visiting the site as advisers to NASA's predecessor organization.
In more modern times, Boeing has used Langley virtually as a proprietary research laboratory. At Boeing's urging, Langley scientists have researched lightweight composite materials, high-speed aircraft, wing design and other subjects.
Much of that technology made its way into the 787, a highly efficient plane made mostly from carbon-fiber composites.
Often, NASA pays Boeing researchers to conduct experiments. The results in some cases are treated as proprietary to Boeing.
"The technical output is protected for some years," said Joseph Chambers, a retired NASA research manager, who wrote a book detailing Langley's contribution to commercial aviation. "NASA worked out legally the way to work with partners."
NASA sometimes seems to take instructions from Boeing. The company and its eventual merger partner, McDonnell Douglas, were primary recipients of $440 million NASA spent during the 1990s researching a supersonic aircraft. At one point, NASA researchers say, NASA paid more than 300 researchers from the companies to work on the project.
NASA ultimately killed the program in 1999, but only after Boeing's Condit told NASA administrator Dan Goldin that the company could see no commercial market for a faster-than-sound airplane, say current and former NASA researchers. Goldin did not respond to requests for comment.
"Can of stink"
Still, the argument on research is as complex as the rest of the trade fight. The European Union has allocated nearly $1 billion to a new aeronautics research budget, and Boeing's subsidy sleuths believe they can prove much of the research is done for Airbus' benefit.
One project carries a name that seems almost to make the point: Technology Application to the Near Term Business Goals and Objectives of the Aerospace Industry. As described on the EU's Web site, the project and related efforts seem aimed squarely at Boeing's 787.
The point and counterpoint of research funding illustrates why Airbus views the trade dispute as a mistake. With so much on the line--supplier relationships, research, tax breaks, infrastructure costs--neither side will benefit, Airbus maintains.
"If you're going to open the can of stink on one side of the industry, it exposes the rest of the industry," said AllanMcArtor, chairman of Airbus North America. "That's not good for anybody."
The Europeans at points have hinted they might be willing to halt launch aid, but only after the A350 gets some.
"It's a tactic to slip one more airplane under the door," said Boeing's Platt, who took up the cause after Stonecipher was fired in March for conducting an affair with an employee. "We reject that."
For a while, Airbus had avoided a request for aid for the A350, knowing it would risk triggering a U.S. trade case. But John Veroneau, lead negotiator at the U.S. trade representative's office until he left for private practice in February, sees a simple explanation: Airbus could handle the early development costs on its own.
Now that Airbus is going public with requests for aid, the U.S. must make its decision.
"There is no question in my mind that the USTR and the White House are serious about bringing this case," Veroneau said.
As players on both sides of the Atlantic digested the note on the menu card Thursday, it brought them to agreement on at least one point: The launch of a trade case could come very soon.
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The case against Airbus
The U.S. is on the verge of filing a trade complaint against Airbus and the four European countries that have provided numerous and generous subsidies to it. Boeing says that these subsidies give Airbus an unfair advantage in the commercial airplane market. Subsidies have come in various forms, from seed money for different types of aircraft to enormous grants for production facilities.
Launch aid by plane
A300/A310Note: Dollar amounts reflect payments in each country's own currency, indexed to 2003, and converted at rates applicable in the year of disbursement.
Germany $1.55 billion
France $2.05 billion
Spain $233 million
Total $3.83 billion
Germany $702 million
U.K $567 million
France $672 million
Spain $87 million
Total $2.03 billion
Germany $2.01 billion
U.K $1.04 billion
France $1.45 billion
Spain $270 million
Total $4.77 billion
France $58 million
Total $58 million
A340-500 / A340-600
U.K. $215 million
France $337 million
Spain $75 million
Total $627 million
Germany $1.07 billion
U.K $867 million
France $1.37 billion
Spain $426 million
Total $3.73 billion
Overview of infrastructure subsidies for the Airbus A380
GERMANY: $857 million
$850 million: Spent by the City of Hamburg to fill a part of the River Elbe to accommodate the expansion of a production facility.
More than $7 million: Provided as a grant by the Land of Lower Saxony for the expansion of its facilities in the City of Nordenham.
U.K.: $408 million
$376 million: Provided to fund the Broughton site.
$32 million: Given as a land grant from the National Assembly for Wales.
FRANCE: $298 million
$206 million: A public investment for an assembly site in Toulouse.
$82.6 million: Provided for road construction between Langon (port on the Garonne River) and a production site in Toulouse.
$9.7 million: Provided for construction in ports and along the Garonne River to accommodate transportation of A380 fuselages.
SPAIN: $143 million
$143 million: Investments made in Puerto de Santa Maria, Illescas, Puerto Real and La Rinconada plants.
Note: Euros and British pounds were converted into dollars at average 2003 exchange rates. Maps are not to scale.
Sources: European governments' documents, ESRI, Boeing Co.