Europe-US approaches the jet subsidy pact within the shadow of China

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Europe-US approaches the jet subsidy pact in the shadow of China

The United States and Europe are nearing an agreement to end a 17-year-old dispute over aircraft subsidies and tariffs, while seeking an elusive consensus on how to deal with competition from China, people familiar with the matter said Monday .

An agreement would remove the risk of a renewed trade war between the two sides, which has already spilled over into industries from agriculture to luxury goods and attacked transatlantic relations.

Talks are heading towards two separate but largely coordinated treaties – one between the United States and the European Union, the original parties – and another between Washington and London after Britain leaves the EU, People said.

US Trade Representative Katherine Tai discussed the dispute in her first face-to-face meeting with EU colleague Valdis Dombrovskis on the Monday before the US-EU summit on Tuesday. She is traveling to the UK on Wednesday.

The European Commission, which oversees the EU’s trade policy, wants to find a solution by July 11th if the suspension of the transatlantic tariffs agreed in March expires.

After years of posing on both sides, diplomats are unwilling to predict a timetable, but one noted that summits can develop a unique dynamic and another didn’t rule out the outlines of a surprise deal after this week’s diplomacy.

Others were more cautious and noted several false starts.

The US $ 11.5 billion tariffs on goods were introduced gradually from 2019 after the US and the EU both won partial victories at the World Trade Organization over claims for unfair aid to aircraft manufacturers Boeing (BA.N) and Airbus (AIR. PA).

The dispute has dragged on since 2004, when the United States withdrew from an aircraft subsidy pact in 1992 and brought the EU to the WTO. They claimed Airbus managed to offset Boeing’s share of the jet market thanks in part to subsidized government loans.

The EU counterclaimed unfair R&D support and subsidized tax incentives for Boeing.

In a potentially important breakthrough, the United States has watered down its opposition to the principle of future public credit for Airbus, but insists that it must be demonstrably market-based and notified in advance, said people familiar with the talks.

However, hurdles remain to the extent to which these conditions could effectively allow the United States to approve or block European projects, they added. The EU vehemently rejects a US veto.

The yardstick for deciding whether the interest on future loans is in line with the market is even more critical.

Under the 1992 Subsidy Pact, a third of a project could be funded by direct government support such as loans and approved indirect R&D funding up to 4% of a company’s revenues.

One way is to rethink this framework, with market rules replacing subsidy quotas and a new upper limit for indirect R&D funding.

There is “horse trade” with numbers, a source said. The negotiators also want a quick way to resolve future disputes. Neither party agreed to comment on the talks.

CHINA REVIEW

When the world’s largest corporate trade broke out in 2004, Airbus and Boeing dominated the industry and China was four years away from launching a rival C919 jet.

But the rapid rise of China’s aerospace ambitions has fueled Western concerns about a new publicly funded competitor.

In December 2020, outgoing U.S. Trade Representative Robert Lighthizer told Reuters that the United States and Europe should work together to oppose future subsidies from China to space travel.

The United States is calling for a joint review of aerospace funding in non-market economies like China, two of the people said.

Washington is reluctant to shoulder the burden of a potential subsidy threat that not only benefits Boeing but also Airbus, which Boeing now outperforms in terms of production volume.

“There is no question that the rise of China’s aircraft industry … is on everyone’s proverbial radar,” said Marjorie Chorlins, senior vice president of the US Chamber of Commerce, on Monday, noting what she called China’s “heavy subsidy”.

“It is recognized on both sides of the Atlantic that it is in our interests to unite to roll back unfair Chinese practices,” she added.

Like the United States, the EU has argued with Beijing over trade and security this year. But its 27 member states may struggle to agree on a common front on issues such as aerospace.

In Hong Kong in April, for example, Hungary blocked an EU declaration criticizing China’s new security law, sparking a dispute over the member states’ right to veto EU foreign policy.

The Chinese embassy in Washington did not initially comment on government support for its burgeoning civil aerospace industry.

NO EARLY UK DEAL

Brexit also made negotiations more difficult.

The UK and the US were on the verge of signing a broader aerospace deal in December that Brussels could have forced in their own talks with Washington.

But it collapsed amid UK concerns over jobs and distractions from the January 6 siege of Congress, multiple sources said. British and US officials declined to comment on closed talks.

Britain’s ability to negotiate trade deals independently of the EU is central to its new “global British” stance. However, its flexibility at Airbus is limited to some extent by its role as one of Airbus’ four core nations prior to joining the EU.

Airbus, which employs 14,000 people in the UK, has ensured that work could be relocated overseas when the UK turns its back on aerospace.

The UK and the US committed last week to resolve the aircraft dispute.

A European diplomat said the UK and the EU were largely in agreement in trying to reach an agreement with the United States.

“Britain and the EU are speaking separately with the US, but in parallel with making a serious push to achieve this. We no longer need it to hang over everyone. “

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