When Aircraft Manufacturers Clash…

When Aircraft Manufacturers Clash…

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The current spat between Boeing – a manufacturer of aircraft in the United States, and Bombardier – an aircraft manufacturer in Canada, brings to bear a dispute in the aviation industry that has been surfacing from time to time and involves the contentious word “subsidies”.  Boeing’s complaint to the U.S. International Trade Commission against the Canadian manufacturer is based on the former’s allegation that the latter is using subsidies granted to it by the Canadian government to sell its aircraft to American carriers at prices below cost and using such subsidies to build a larger version of the C-Series plane that would directly compete with Boeing’s own flagship narrow body 737 aircraft.

In its complaint – which runs into 109-pages – Boeing claimed that Canadian subsidies, unless checked, would enable Bombardier to build a full-fleet of single-aisle planes, carrying overtones of the strategy employed some years ago by Airbus Industrie – a French aerospace company —  to the detriment of Boeing.  In response, Bombardier stated that Boeing was attempting to forge a halt to Bombardier’s innovative technology which was a misguided attempt at shutting down healthy competition in the aviation industry. Unlike the Boeing-Airbus subsidies dispute which was brought before the dispute settlement tribunal of the World Trade Organization by both the United States and Europe, Boeing’s complaint does not involve the two countries – at least not yet – and is being considered within a local jurisdiction.  However, Boeing has claimed that Bombardier’s acts are diametrically at variance with accepted norms of international trade law, which would inevitably bring to bear a discussion of the principles concerned.

This essay is neither a discussion of the merits and demerits of Boeing’s claim nor is it in defense of Bombardier’s position.  It is merely a discussion of the principles that are involved in a subsidies dispute. The fundamental principle underlying State aid is that it disrupts normal competitive forces of the market if the State subsidizes certain firms and products to the detriment of others. Unsubsidized corporate entities could run out of business trying to compete with those receiving State aid, thus losing their right to compete fairly and equally.

GATT and Havana Charter

One of the corollaries to iniquitous State aid is the loss of employment for those in an unsubsidized environment. At first impression, principles on the law of subsidies as entrenched in international economic law are seemingly composed of a patchwork of provisions emerging from various agreements and amendments. However, a deeper examination reveals that State subsidies are governed under a central theme which discourages unfair trade practices. Subsidies, which are government grants or bounties, are an integral part of international trade and entitle a government, by a selective process, to assist trading services and entities to the betterment of society. At the negotiating process when General Agreement on Tariffs and Trade (GATT) was formed, subsidies were considered less of a trade obstacle than tariffs and quantitative restrictions.

This was brought to bear in the 1948 Havana Charter of the International Trade Organization (ITO) which only contained a general ban on subsidies in its Article 26. The GATT of 1947, which replaced the ITO, did not prohibit subsidies. It merely required that members reported to other members any subsidy which directly or indirectly affected exports by increasing exports or reduced imports into its territory. This was specific to Article XVI:3 GATT 1947 which provided that if a contracting party (to the GATT) were to grant directly or indirectly any form of subsidy which operated to increase the export, the party concerned need only advise other parties of its action. However, in 1955, when GATT 1947 was reviewed, Article XVI was amended to prohibit export subsidies of non-primary products and to avoid the use of subsidies on the export of primary products. Under the World Trade Organization (WTO) system (which replaced GATT), the Uruguay Round Subsidies Agreement, in Article 3 prohibits export subsidies to non-agricultural products. Regarding internal subsidies, Article XVI:1 obligates members under the GATT 1947 system not to cause by means of any subsidy internally serious prejudice to competition.

US v. AMR Corp

The United States competition law has as its genesis the Sherman Act of 1890 followed by the Clayton Act of 1914 (which was later amended in 1936). Such established legislation has been interpreted judicially to require two criteria: pricing must be below average variable costs and there must be proof of recoupment of losses incurred during the alleged period of predatory pricing. In the 2001 case of US v. AMR Corp the court held that an air carrier, which matches prices and increases output when faced with competition from low cost carriers, is not guilty of monopolization of the market.

If the issue were to escalate into a dispute between the States concerned before the WTO, it could be brought under the Agreement on Subsidies and Countervailing Measures of the WTO (SCM) which is enforced through the WTO dispute settlement system. The Agreement deals with two subjects closely related to each other. The first is concerned with issues of multilateral disciplines regulating the provision of subsidies and the second provides rules for the use of countervailing measures to offset injury caused by subsidized imports. Of these, the first will be applicable to the dispute between the two aircraft manufacturers in the determination of whether subsidies have in fact passed between the governmental authority and manufacturer concerned. The second would apply in determining what countervailing measures must be taken by the WTO Dispute Settlement Body.

Of primary concern would be Part 1 of the Agreement which specifies that the SCM would apply exclusively to subsidies that are specifically given to an enterprise or a group of enterprises or industries. The SCM goes on to define a subsidy as a provision which is composed of three fundamental elements: it has to be a financial contribution; it has to be made by a government or any public body within the territory of a WTO member; and it has to confer a benefit on the recipient. It must be noted that according to the SCM, subsidies, as defined, must be specific. In other words, the subsidy must be specifically provided to an enterprise or industry or group of enterprises or industries, resulting in the distortion of the allocation of resources within the economy. The SCM recognizes four types of specificity: enterprise specificity, where a government identifies and provides a subsidy to a business entity; industry specificity, where a government targets a particular industrial sector; regional specificity, where a government targets business entity in a region or part of its territory; and prohibited subsidies, where a government subsidizes export goods or goods using domestic resources and inputs. Of these, clearly, the Boeing/Bombardier dispute would be considered under the enterprise specificity. The next step would be to slot the dispute into one of two categories: prohibited category, and actionable category. The prohibited category is composed of two sub categories, the first being contingent upon export performance and the second being applicable to the use of domestic over imported goods. These two categories are prohibited because they are directly calculated to adversely affect trade, impacting the interests of other members. Actionable subsidies, on the other hand, are not prohibited, but nonetheless subject to challenge either through a multilateral dispute settlement system or through the imposition of countervailing actions. If adjudicated by the Dispute Settlement Body, the Boeing/Bombardier dispute would clearly become an actionable issue under the latter category, on the basic assumption that the issue at stake is injury to a domestic industry.

The author is former Senior Legal Officer at the International Civil Aviation Organization.   Dr. Abeyratne has written numerous books on competition law, among which are Competition and Investment in Air Transport, and Aviation and International Cooperation.

By Dr. Ruwantissa Abeyratne

(slguardian.org)

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