Airbus and Boeing claim they have complied with rulings against their state subsidies, but their respective opposite-number governments don’t agree © AP

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It’s Valdis Dombrovskis’s first full week after being confirmed in the EU trade commissioner job, and we have an interview running with him on and more about him in today’s Brussels Briefing. Like his predecessor “Big Phil” Hogan, he was an elected politician (prime minister of Latvia), but his style is quite different to the rumbustious Irishman’s. We’re resisting calling him “Big Valdis”, but we’ve decided on our official Trade Secrets adjectives of choice: methodical and phlegmatic. Unlike the fiery first meeting between Hogan and US trade representative Robert Lighthizer, for example, Dombrovskis’s initial chat with his American counterpart apparently involved a lot of impassively restating the EU’s case without being drawn into a row. His message in our interview sounded tough: that the EU is ready to clobber the US with tariffs after winning a World Trade Organization case against subsidies to Boeing. But today’s main piece is on why we’re not filing that in the “calamitous transatlantic trade war” box. Our Tit for tat guest is Peter Draper, executive director at the Institute for International Trade at the University of Adelaide, while our chart of the day looks at the economic divergence between east and west thanks to the pandemic.

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The airlines with long delays but fair compensation

When the US started the first WTO case against illicit EU state subsidies to Airbus in 2004, provoking the EU to launch a counter-action against Boeing, George W Bush was a first-term president, Romano Prodi head of the European Commission and, if younger readers can imagine such a thing, Angela Merkel wasn’t yet chancellor of Germany. Sixteen years of WTO litigation later, hostilities are still being exchanged.

This week, the EU is likely to get authorisation for about $4bn-worth of sanctions on imports from the US. Washington has since last year already been dinging US importers on $7.5bn-worth of goods including spirits from the EU. Pity the American drinkers of single-malt Scotch, hit by a 25 per cent tariff, forced to switch to cheaper blended whisky — or, in some desperate cases, reportedly resorting to bourbon. Brussels has drawn up its own hitlist, but will wait until after the November 3 election to impose tariffs in case they backfire politically. 

The EU wants negotiations to determine a new long-term settlement on aircraft subsidies of the kind the US renounced as inadequate in 2004. But even after the election, the dispute is unlikely to be swiftly resolved. Airbus and Boeing claim they have complied with rulings against their state subsidies, but their respective opposite-number governments disagree. The EU wants to move forward on the basis of “prospective compliance”, eliminating illegal subsidies from this moment onwards and letting bygones be bygones. The US appears to want compensation for past wrongs and believes it has more leverage from its higher award to force a better deal.

So, has the whole judicial route been a waste of time? Has its only achievement been to put a lot of trade lawyers’ children through college?

Washington has since last year been dinging US importers on $7.5bn-worth of goods including spirits from the EU © Reuters

We’d say no, and here’s why. It’s always going to be difficult to create genuine competition in a field such as large civil aircraft (LCA), with large barriers to entry from huge product development costs. There is always the risk of a subsidies arms race in prestige industries such as aircraft manufacture where companies often capture governments (when this author first went to Brussels in the mid-2000s to talk Airbus-Boeing with the commission, he was slightly taken aback to see a large scale model of the then-newfangled Airbus A380 on the relevant official’s desk).

Sixteen years of litigation hasn’t eliminated subsidies, but successive rulings have forced governments to be more careful about handouts and companies actually to do some product innovation and compete. EU governments, for example, while not properly complying with WTO judgments, have had to refine and constrain “launch aid”, the product development support they give to Airbus.

Dispute settlement has directed trade conflict down relatively manageable and legitimate channels. Unlike much of the Trump administration’s trade policy, its handling of Airbus-Boeing has been hard-nosed but not arbitrary or mindlessly destructive. It has imposed sanctions, yes, but less than the full amount authorised by the WTO rulings. The EU’s prospective award of $4bn is under 1 per cent of total imports from the US.

The litigation has also changed domestic political debates, exactly in the way international agreements are supposed to, by helping governments face down their own companies. Commission officials became increasingly frustrated with Airbus and its allies in member states trying to water down subsidy reform. Successive WTO rulings against launch aid put more weight behind the commission’s arguments. When Airbus this year finally complied with the rulings, or claimed it had, the commission’s eminent former director-general of trade, David O’Sullivan, triumphantly wrote on Twitter: “It’s not like we haven’t been telling them to do this for many many years.”

WTO dispute settlement isn’t just a tort system where the offending party pays off the damaged one in cash and life continues unchanged. Ideally its rulings change offending behaviour to keep the global trading system as open and undistorted as possible. Of course it would have been better to have resolved this by negotiation a decade ago without punitive tariffs. But 16 years of litigation isn’t necessarily a failure: it’s a way of limiting damage and structuring future talks.

We won’t exactly say “long may it continue”, but let’s not assume it’s all been a waste of time and money. Oh, and if you want to feel a bit better about the Airbus-Boeing litigation, let’s see what happens if China starts to dominate the global LCA market in a big way and watch how harmoniously the subsidy disputes work out then.

Charted waters

Different approaches to the pandemic are leading to sharp divergences in outcomes, with China, Taiwan and other Asia-Pacific economies on course to grow in 2020, even as countries where coronavirus has become endemic suffer severe contractions, write Robin Harding, Ben Hall and Davide Ghiglione. They also highlight an important question for 2021: can East Asia, which traditionally relies on customers in Europe and North America to fuel its growth, instead become a source of demand for the rest of the global economy?

Bar chart of Change in GDP (%) showing Tackling pandemic's spread can help cushion the economy

Tit for tat

Peter Draper, executive director at the Institute for International Trade at the University of Adelaide, joins us to answer three blunt questions.

What do you think the new WTO DG should make their top priority?

It depends on the US presidential election outcome. A Biden victory looks likely, and is likely to lead to renewed US engagement with the WTO. Appellate body reform is likely to be a top priority for the new administration, so the new DG should prioritise resolution of this issue on the basis of the Walker principles. Fixing the dispute settlement system is fundamental to the organisation’s relevance, and the US will need it to contain China, and vice-versa, but that can’t be on the basis of the old business as usual. If the Trump administration returns, the WTO’s existential crisis will deepen and the real question will be whether the US withdraws from the organisation. In that case the DG’s top priority will be to manage the WTO’s decline — an outcome that no serious trade policy wonk desires. 

What’s the best path for the WTO to take on reforming industrial subsidies?

The core deal needs to be constructed among the major offenders which, in the aftermath of Covid-19 rescue packages, means the G20. G20 leaders need to establish a serious process of subsidy rollback and reform, including capital-based trade and finance officials, rather than paying lip-service to WTO reforms as they have done in the past. That process needs to be mirrored in Geneva by their trade representatives, who need to consult other relevant WTO missions with a stake in subsidies reform. Substantively, the G20 needs to task key multilateral organisations to collect robust data on subsidies they pay to their domestic firms, as without such data negotiations will take place in the dark. Getting these process issues right is crucial; even if done a deal will take years to conclude.

Do you think that plurilateral trade deals are a good compromise between multilateral and bilateral trade deals in the era of decoupling?

I am a proponent of plurilateral deals (such as on subsidies), which are the best way to achieve progress in the WTO. To avoid general stasis these deals need to accommodate the interests of willing developing countries, through differential treatment and tailored aid packages. However, key issues of interest to developing countries cannot be left off the table, for example agricultural subsidies reform, and should be included in the search for plurilateral solutions. Ultimately, the WTO can progress only through a kind of “plurilateral of plurilaterals” — an intriguing architecture I am toying with but can’t yet fully explain!

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Letter in response to this article:

Aerospace saga has far-reaching repercussions / From Sungjoon Cho, Professor of Law, IIT Chicago-Kent College of Law, Chicago, IL, US

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