World Trade Organization announces decision in DS 353 dispute by European communities on U.S. large civil aircraft

GENEVA, Switzerland, 12 March 2012. The World Trade Organization (WTO) Appellate Body in Geneva, Switzerland, has released its decision in DS 353. The dispute, titled “United States – Large Civil Aircraft (second complaint),” was filed by the European Communities, more commonly referred to as the European Union (EU) against the U.S., with Australia, Brazil, Canada, China, Japan, and the Republic of Korea as third parties.

According to WTO documents, on 27 June 2005, “the European Communities requested consultations with the United States concerning prohibited and actionable subsidies provided to U.S. producers of large civil aircraft.”

The WTO’s findings are as follows:

1. In this dispute, the European Communities claimed that the following ten categories of measures constituted subsidies to Boeing's large civil aircraft division that were inconsistent with the SCM Agreement:
   
   1. State of Washington and municipalities therein — various tax and non-tax incentives provided by the State of Washington and the City of Everett, notably in connection with the location of the 787 assembly facility in Everett
      
   2. State of Kansas and municipalities therein — property and sales tax breaks provided by the City of Wichita and interest payments by the State of Kansas on Kansas State Development Bonds
      
   3. State of Illinois and municipalities therein — tax and non-tax incentives provided by the State of Illinois, the City of Chicago and Cook County in connection with the relocation of Boeing's headquarters
      
   4. National Aeronautics and Space Administration (NASA) — payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under eight NASA aeronautics R&D programmes
      
   5. Department of Defense (DOD) — payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under 23 DOD Research, Development, Testing and Evaluation programmes
      
   6. Department of Commerce (DOC) — payments and access to government facilities, equipment and employees provided to joint ventures/consortia in which Boeing participated under the Advanced Technology Program
      
   7. NASA/DOD — “Waivers”/“transfers” of intellectual property rights under NASA and DOD R&D contracts and agreements entered into with Boeing
      
   8. NASA/DOD independent R&D and bid and proposal reimbursements
      
   9. Department of Labor 787 worker training grants
      
   10. Tax breaks exemptions under legislation relating to Foreign Sales Corporations (“FSC”) and the Extraterritorial Income Exclusion Act (“ETI”) and successor acts
       
2. The European Communities estimated that the total amount of the alleged subsidies was $19.1 billion between 1989 and 2006. More than half of this amount was accounted for by the value of the alleged NASA R&D subsidies, which, according to the European Communities, was $10.4 billion in this period.
   
3. The European Communities claimed: (a) that the United States acted inconsistently with certain provisions of Articles 5 and 6 of the SCM Agreement because the effect of the alleged subsidies was to cause adverse effects to its interests in the form of serious prejudice; (b) that the United States acted inconsistently with Article 3 of the SCM Agreement because the FSC/ETI and successor act subsidies and taxation measures enacted pursuant to Washington State Legislature House Bill 2294 (“HB 2294”) constituted prohibited export subsidies; and (c) that the United States had violated agreed obligations concerning support to the large civil aircraft sector are set forth a bilateral 1992 Agreement between the United States and the European Communities on trade in large civil aircraft, thereby constituting serious prejudice to the European Communities' interests.
   
4. The Panel upheld the European Communities' claims that: (a) someof the measures maintained by the States of Washington, Kansas, Illinois and municipalities therein, the NASA aeronautics R&D measures, some of the DOD aeronautics R&D measures, and the FSC/ETI and successor act subsidies, constituted specific subsidies. The Panel estimated the total amount of these subsidies between 1989 and 2006 to have been at least $5.3 billion; (b) the FSC/ETI and successor act subsidies constituted prohibited export subsidies; (c) some of the specific subsidies (i.e. the NASA and DOD aeronautics R&D subsidies, the FSC/ETI and successor act subsidies and the Washington State and municipal B&O tax subsidies) caused adverse effects to the European Communities' interests in the form of serious prejudice, finding that the effect of these subsidies was displacement and impedance (or threat thereof) of Airbus large civil aircraft from third country markets, significant price suppression and significant lost sales.
   
5. The Panel rejectedthe European Communities' claims that: (a) the other challenged measures constituted specific subsidies and/or that they caused serious prejudice; (b) the Washington State taxation measures enacted under HB 2294 were prohibited export subsidies.
   
6. The Panel exercised judicial economy in respect of the European Communities' claims that: (a) the specific subsidies caused adverse effects in the form of a threat of significant price suppression; (b) the United States had acted inconsistently with the bilateral 1992 Agreement between the United States and the European Communities on trade in large civil aircraft, thereby constituting serious prejudice to the European Communities' interests.
   
7. With respect to its finding that FSC/ETI and successor act subsidies constitute prohibited export subsidies, the Panel did not consider it necessary or appropriate to make any additional recommendation because of the pre-existing DSB rulings and recommendations regarding those measures. With respect to its finding that certain subsidies caused adverse effects to the interests of the European Communities, the Panel recommended, as provided for in Article 7.8 of the SCM Agreement, that the United States take appropriate steps to remove the adverse effects or withdraw the subsidy.
   
8. The panel report addresses many important issues relating to the interpretation of Articles 1 and 2 (definition of subsidy and specificity), Article 3.1(a) (prohibited export subsidies) and Articles 5 and 6 (adverse effects) of the SCM Agreement. For example, as noted above, the Panel found that R&D funding received by Boeing under certain NASA aeronautics R&D programmes, and some of the R&D funding received by Boeing pursuant to DOD R&D programmes, constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement. A fundamental question addressed by the Panel in this regard was whether or not the R&D transactions at issue were excluded from the scope of Article 1 of the SCM Agreement as “purchases of services”.