The report concluded that “four top Air Force officials and one of Defense Secretary Donald Rumsfeld’s former top aides, Undersecretary of Defense Edward C. ‘Pete’ Aldridge, violated Pentagon and government-wide procurement rules, failed to use ‘best business practices,’ ignored a legal requirement for weapons testing and failed to ensure that the tankers would meet the military’s requirements.” It also connected Rumsfeld to the affair, citing a statement by former air force secretary James G. Roche that Rumsfeld had told him “he did not want me to budge on the tanker lease proposal.”4
Surprisingly little notice was paid to a very different Airbus argument—that a large part of Boeing’s development costs for the 787 were being underwritten by the Japanese government in the form of direct support to the companies engaged in building the wing and various other parts of that airplane. There then developed a kind of Who Struck John argument over which of the two disputing companies was engaged, or most deeply engaged, in questionable financial arrangements.
Washington complained that Airbus had been able to overtake Boeing in sales of commercial airplanes partly because of $15 billion in government loans that Airbus had received on less-than-commercial terms. The EU countered, charging that Boeing had gotten $23 billion of support since 1992 in the form of federal research grants and Japanese government backing of suppliers, along with a tax credit for exporters, a subsidy that was ruled illegal by the WTO and is known in trading circles as “extraterritorial income.” The WTO authorized the EU to retaliate by imposing up to $4 billion worth of sanctions, the biggest award in the WTO’s history.
Still, in Business Week, Stanley Holmes, who has in the past come down hard on Boeing’s mistakes and misdeeds, said, “If sales of Boeing’s 787’s flop, Boeing loses billions and faces the risk of going out of business. If A380 sales falter, Airbus doesn’t have to repay the $3 billion in loans.”5 He had a point. Airbus is not required to repay the loans it has received for an aircraft program that loses money.
The reality is that each side will find ways of helping its commercial aircraft industry. And each deploys arguments against the other’s methods that are less ambiguous than the truth. Governments have diverse but comparably effective ways of supporting companies that are surpassing earners of foreign exchange, or that have unequaled reservoirs of advanced technology, or that must be relied on to convey people and freight within and beyond national boundaries. Europe’s political culture favors munificent safety nets and industrial policies that help to sustain them. The U.S. approach to protecting the tough, capital-intensive aerospace industry is less direct, more complicated, and perhaps less effective, but not by much.
Many, if not most, of the arguments on either side of the subsidies issue were complex, more than a little contrived, and unconvincing in several cases. Boeing’s were marginally more persuasive or less unpersuasive, but it didn’t really matter. The mistake was revisiting the issue. It was made by Boeing, or more accurately by Harry Stonecipher, the company’s former chairman and CEO.
The decision to start a fight was Stonecipher’s, although his reasons were not obvious, even to most Boeing people. Many, probably most, executives felt that Boeing’s management had put the company out on a limb. But why? A part of the Boeing team calculated that interfering with Airbus’s finances could divert, or retard, its efforts to weaken the 787’s prospects by creating a competitor airplane.
Another reason was that Airbus seemed to have gotten itself out on a limb with the A380, and that the limb might topple and the big airplane with it if Airbus could be denied big infusions of money from its governments. A comment by Boeing’s chairman, Lewis Platt, connected these reasons for having a fight. “It should not be easy for them to launch the A350 program, as they’re choking on trying to finish the A380,” he said.6
A very different theory was ventured by Henri Courpron, who was then president and CEO of Airbus North America. After noting that he was speaking only for himself, not for the company, he said, “The fight is not about commerce, it’s about politics. And it isn’t about the A380 or protecting the 787. Boeing was trying to build political sympathy because it was on a losing streak and steadily losing market share to Airbus. Then came the tanker fiasco. So Boeing said to itself, ‘We can’t win, so let’s turn to the government.’ The line was: ‘We are losing because Airbus is cheating.’”7
He could have added, plausibly, that Boeing’s assault on launch aid had in effect maneuvered Washington away from investigating the company’s misbehavior on various defense-related matters and toward protecting it. By a vote of 98 to 0, the U.S. Senate passed a resolution urging the government to do exactly that.
Whatever the motives that lay behind the Boeing move, it surprised most industry people, especially veteran Stonecipher watchers. “Harry,” one of them said, “is well known to feel strongly that companies that know what they are doing do not play the trade card, and that a company that goes down that road shouldn’t be in the business.”8
THE REACTION to Boeing’s move against the 1992 agreement was mixed. Within the United States, there was considerable editorial support; Airbus was seen as exploiting an unfair advantage over its American competitor, the ex-champ. “Boeing’s frustration is kind of understandable,” wrote a prominent American aviation analyst. “If A380 development depended on commercial paper or company cash flow, the program wouldn’t have gotten past the flying bowling alley demo phase. It must really tax Boeing’s patience to watch its prize 747 legacy driven to an early grave by some bloated airborne welfare queen.”9
Elsewhere, the reaction ranged from negative to hostile. The concern was that Boeing’s pressure on subsidies and the 1992 agreement could and probably would have a serious ripple effect, depending on how far it went. Most of the aviation world’s tightly interconnected key players wanted to head off a trade war between Boeing and Airbus. The airlines, always easily rattled, had to worry about having to pay higher prices for new aircraft if government support for suppliers were to fall off thanks to a WTO ruling.
America’s two major engine companies—GE and United Technologies—worried about being drawn in. They feel as if they make the key part of any airplane but do need one to hang their engines on. So they affected neutral positions vis-à-vis Boeing and Airbus. And they have another, even larger reason to be hands-off, one that points up the muddled quality of the entire dispute: the engine groups receive more financial help from governments, as well as from NASA, than do the airframe companies.
For example, France’s government owns Snecma, an engine company, and over the years has poured huge sums into engines for which Snecma is a subcontractor of GE. All the development for GE’s most successful engine, the CFM-56, came from Snecma. In effect, the French government has been subsidizing a piece of the American aircraft industry as well as its own.
“We think Harry is way off on the subsidies issue,” said a senior vice president of GE Aircraft Engines at the time. “We think he has been led astray by Rudy deLeon and that big Washington bureaucracy Boeing has in Arlington.”10 (DeLeon was then a senior vice president and a member of the Boeing executive council. He directed all federal, state, and local government operations for the company. The large Washington staff he directed is housed in a twelve-story building located in Arlington, Virginia.)
“Retaliatory measures do not help Boeing,” said one lawyer, most of whose experience has been with cases involving international law, much of that on behalf of Boeing. “WTO cases are an art form,” he continued. “They can only offer leverage. It’s not a matter of winning, but filing the case. You file in order to improve your position, not remove a problem. Lawyers who work on trade issues tell clients, ‘Avoid doing things you can’t control.’”11
A number of people with comparable experience agree and would add that (1) WTO cases are fraught with risk and have uncertain outcomes; (2) governments can help on issues such as these mainly by exercising discretion—so that in this case the U.
S. government should have used whatever leverage it had by exchanging back-channel messages with other involved governments. Moreover, a widely held opinion was that even if Boeing won the trade fight, it would be doing itself at least as much harm as good. “You can win the fight but lose the village” was a comment often heard.
The betting among the lawyers was that this dispute would not go the distance—not reach the WTO, which would be very unhappy if it did. The WTO would shrink from ruling on a large and high-profile dispute between its two strongest members.
In August 2004, President George W. Bush and Senator John Kerry, his opponent in the presidential campaign, made similar noises, but Bush drew the most attention. In mid-August he attacked European government subsidies for Airbus and revived the prospect of bringing the issue to the WTO.12
Two weeks later, with the issue gaining heft, Harry Stonecipher traveled to Brussels and London. He alternated between pleading his case in reasonable and measured terms and, in effect, going over the top. Naturally, it was the shrill language that got attention, as, for example, the put-down of Airbus’s new airplane. “I think the A380 is the dumbest thing anyone has ever done,” said Stonecipher.
The comment was noted in a well-balanced account of the visit to London by John Gapper, the widely read chief business commentator of the Financial Times. “Boeing’s complaints about Airbus have some merit,” he said, explaining that Airbus “would have been unable to develop a range of aircraft as rapidly without backing from governments that wanted to create a European rival to Boeing.”13
Gapper also noted, first, that “Airbus may well be overestimating the potential market for very large aircraft”; and second, that “most passengers would probably prefer to fly direct routes on smaller aircraft such as the 787, given the choice.” But Gapper argued that Boeing’s way of complaining “is counterproductive. Instead of damaging Airbus, it makes itself look like a sore loser, a once-powerful company that cannot cope with being overtaken by a rival it used to dominate.” He concluded by citing the financial perks that Boeing gets. “Boeing,” he said, “insists that this is wholly different, but you could have fooled me.” The article appeared under the headline “Boeing Has Not Mastered the Art of Griping.”14
Some broader, more muted considerations were outlined by Jeffrey Garten, who was undersecretary of commerce for international trade in the first Clinton administration and is now dean of the Yale School of Management. “Should a case be filed,” he wrote, “transatlantic relations will be further poisoned, just when there is a critical need for cooperation on Iraq, Iran and other explosive political issues. Cooperation between Washington and Brussels, so essential to successful global trade talks, could be undermined.
“The judicial outcome is already clear,” wrote Garten. “Both…companies have taken considerable government handouts. The court will declare both guilty, creating a political stalemate in which both sides will probably ignore the penalties the WTO wants to impose.”15
As 2004 wound down, the chief trade negotiators for the European Union and the United States—Pascal Lamy and Robert Zoellick—were both moving on to other jobs, Zoellick less immediately. They would be missed, not least because it had always been clear that the best outcome would be an agreement worked out in confidential talks between them, as opposed to an angry, litigious process, one that was likely to be the ugliest, most destructive of WTO battles and last several years.
The issue had been greatly inflated. Of course, subsidies do matter, but less than this disorderly quarrel seemed to suggest. What matters most is getting the product right and selling it. The divergent fortunes of Airbus and Boeing since the 1980s had far less to do with government support than with how the two companies competed in an unforgiving business. Boeing thinks, doubtless correctly, that government support precludes a failure of Airbus. But Boeing should have focused less on failure than on building the new products that would have responded most effectively to trends in the marketplace.
Boeing took an extended recess from its core business. The 777 was the last airplane it had built. Lamy called Boeing’s loss of market share a “self-inflicted decline,”16 a sentiment echoed by most of the aviation industry, including numerous Boeing people.
FOR A BRIEF TIME, reason was allowed to prevail. In early January, Zoellick and Peter Mandelson, Lamy’s British successor, reached a provisional agreement designed to freeze all new subsidies and litigation for three months. Mandelson said then, “If pursued the whole distance, this gladiatorial clash would have succeeded in giving a Pyrrhic victory to both sides. The poison spread by this conflict would have spilled into other aspects of the trans-Atlantic relationship.”17
Within three days of the moratorium, however, the companies were putting down markers. Airbus applied to the four member governments for roughly $1.3 billion to help finance the development of the A350. Airbus officials talked of continuing to expect “repayable” launch aid to be available, albeit at a lower level, even after the two sides had completed talks on what both described as massive and illegal subsidies. An Airbus official added: “We are preparing everything in good faith on the basis we would get launch aid.” A spokesman for Zoellick objected strongly, saying, “The objective on which we agreed is to secure a comprehensive agreement to end subsidies, and I repeat, end.”18
Noel Forgeard, then Airbus’s CEO, said that his company’s application for launch aid would be allowed to “quietly sleep” while the talks between U.S. and EU negotiators proceeded. The United States warned that unless an agreement was reached within three months, or was well in hand by then, Washington would be ready to litigate.
The hard issue turned on whether the contesting parties could agree on some rules of the road for financing their new airplanes: Airbus’s A350 and Boeing’s 787. Would or could Airbus acquiesce in the various devices by which Boeing was financing development of the 787 unless Boeing withdrew its objections to launch aid for the A350?
The truce was not likely to head off the clash, and it didn’t. Zoellick and Mandelson are alike in various ways, including some that matter. Each is highly intelligent, highly skilled, and impelled by a powerful ego. Lamy, Mandelson’s predecessor, was equally intelligent, equally skilled, and more experienced in these matters than Mandelson. Also, his ego wasn’t a problem. As rival negotiators, he and Zoellick were fine. However, Mandelson and Zoellick were an accident waiting to happen.
It did happen in late March, about eight weeks after the truce was reached. With the deadline agreed under the truce little more than a month away and the parties still far apart, each negotiator was becoming vexed and running out of patience with the other. They spoke on the telephone, and after some harsh words were exchanged, the call ended abruptly.
Then they worsened matters by going public. On the first of April, an op-ed piece by Mandelson appeared in the Washington Post in which he compared the American approach to supporting Boeing very unfavorably to Europe’s method of supporting Airbus.19
Five days later, an angry response came from Zoellick. In what the Financial Times described as an “unusually personal attack,” Zoellick accused his opposite number of using “spin” in the dispute “and compar[ed] him unfavorably with his predecessor, Pascal Lamy.” The fallout of all this, the article said, “could also damage trans-Atlantic cooperation on other trade issues.”20 It then appeared that the truce was a dead letter and that the dispute could be en route to the WTO, where each party stood a reasonable chance of being ruled against. There also appeared a possibility that Washington and Brussels might go to war over the Airbus-Boeing dispute and other trade issues. It should have been clear from the first that personally uninvolved negotiators operating in a back channel should have managed the affair. Instead, it had been personalized, with only the lawyers likely to prosper.
In May, the office of the U.S. Trade Representative filed a complaint with the WTO about European subsidies to Airbus, and the European Union then filed a countercomplaint a
bout federal and state subsidies to Boeing. But by then negotiators and lawyers alike had to compete with major distractions. The war in Iraq and an increasingly vulnerable domestic program were consuming the attention of President Bush’s administration. The rejection of a newly minted constitution for the European Union, notably by France and the Netherlands, produced a political crisis that deeply affected all of its members. It also pointed up the absence of leadership and focus in major European countries, and the anemic performance of their economies.
The largely self-induced problems in the United States and the European Union could cause each side to turn inward and further complicate shared problems. On the subsidies issue, they both misplayed their hands, especially the Europeans, because they had the most to lose but also the most to gain. Airbus in particular had the most to lose, because it has relied heavily on the launch aid, a highly visible crutch but one increasingly hard to defend. Airbus also had the most to gain, provided that those who were pulling the strings were willing to allow a change in direction.
Instead of announcing that member governments of Airbus would be asked to provide $1.3 billion for the A350, the Europeans should have stated a willingness to give up launch aid for the new airplane provided Boeing agreed to take a comparable step. The quid pro quo, if agreed to, could have required Boeing to forgo arrangements with the three Japanese heavies, the companies that would be building 35 percent of the 787, including the wing, unless they, too, commercialized their roles (gave up government subsidies) and, in effect, allowed a standard for so-called launch aid to be created. Any such standard would appear to be compatible with the best interests of the various parties.
Boeing Versus Airbus Page 7