US-EU trade spat reignites after jet subsidy talks fail

The US and EU reignited their long-festering trade war on Wednesday over commercial aircraft subsidies, with Washington and Brussels both taking complaints to the WTO after bilateral talks failed to resolve the bitter dispute.

The chief US trade negotiator said that the government would sue Europe before the trade organization over what the US regards as lavish subsidies for Airbus. The Europeans promptly retaliated by starting their own WTO lawsuit contending that the US unfairly supports Boeing's airline business through a variety of means, including military programs that subsidize its commercial operations.

The clash pits Boeing, the nation's largest exporter, against Airbus, which has recently overtaken its American rival as the world's leading supplier of commercial jets.

The US wants European countries to end direct loans to Airbus, which it charges has been the beneficiary of as much as US$40 billion in government aid through low-interest loans.

Robert Zoellick, the US trade representative, said he had no choice but to break off talks with Europe intended to extend a 1992 agreement covering government support to the commercial aircraft industry. He filed the lawsuit, he said, after learning that Airbus was planning to rely on further subsidies to develop a new aircraft to compete with Boeing's planned next-generation midsize airliner.

"The EU and Airbus appear to want to buy more time for more subsidies for more planes," Zoellick said in a statement. "This isn't fair and it violates international trading rules."

American officials have long complained that Airbus, which was started by European governments to counter Boeing's dominance of the business, does not deserve any form of government aid, particularly now that it is building a jumbo jet to challenge Boeing's 747 in the one segment of the market Boeing still has to itself.

"Since its creation 35 years ago," Zoellick said, "some Europeans have justified subsidies to Airbus as necessary to support an `infant' industry. If that rationalization were ever valid, its time has long passed."

European officials discounted this argument, saying that the talks broke down because the US wanted to limit discussion to what it considered Europe's illegal subsidies. The Europeans argued that negotiations should include what they consider equally egregious support totaling as much as US$23 billion in government-financed research and development as well as tax relief.

Europe's chief trade negotiator, Pascal Lamy, said in a statement that he would have preferred to avoid a legal dispute, but explained that since the US had started one, Europe would follow suit.

"We accept the challenge," Lamy said, "not least because it is high time to put an end to massive illegal US subsidies to Boeing, which damage Airbus."

European officials said that they feared that election-year politics were a reason that the US broke off talks.

"To argue over whose subsidies are cleaner is a nonstarter," said Arancha Gonzalez, Lamy's spokeswoman. "We both know that both sides' governments support their respective industries," she said. "The United States is closing its eyes to the reality that Boeing gets support from its own government."

Congressional Democrats applauded the administration's decision to sue the EU over Airbus subsidies, but also sought to take credit for pushing the action, hoping to prevent the Bush administration from scoring political points late om the campaign.

Boeing issued a statement supporting Washington's action, saying that it was time for Airbus to accept the notion that it was now so successful and profitable that it should abandon further direct subsidies.

"We remain determined to ensure that competition in the large commercial aircraft market is undistorted by such subsidies," said Harry Stonecipher, Boeing's CEO.

But some trade experts questioned why the US brought the case before the WTO, opening the possibility that a verdict could lead to multibillion-dollar penalties against both Europe and the US. Some argued that it would be difficult for the WTO to untangle government support from either company without threatening the industry.

"I don't see anyone wearing a white hat in this dispute," said Dan Griswold of the libertarian Cato Institute. "The governments will always be mixed up with commercial aircraft manufacturing; they have to be because of govern-ments' demand for aircraft."

The dispute's escalation into a full-scale trade war could backfire, said Claude Barfield of the rightist American Enterprise Institute.

"It is irresponsible for both sides to let this go through the World Trade Organization," Barfield said.

"These are the two big boys, the elephants of the industry. What happens if penalties are levied against either of them? We all lose."