But Analysts Say No Real Consequences Expected From The The Ruling

The World Trade Organization on Monday ruled that Boeing had received an illegal subsidy from the state of Washington in the form of a tax break that came with the stipulation that the assembly of the wing and final assembly of the airplane must be done in Washington State.

The WTO said that requirement constitutes an illegal subsidy because it favors the use of domestic over imported goods, and it must be withdrawn "without delay".

Airbus called the ruling a "death blow" to Boeing, without bothering to acknowledge that the WTO had ruled against the European planemaker in the other six complaints lodged with the body over the 777X program. And privately, even European attorneys admit that the ruling is not likely to slow the 777X program even a little bit.

The Seattle Times reports that it is instructive to note that the WTO had initially ruled against Airbus over the A380 program using the same "prohibited subsidy" language, and Boeing made a great deal of public relations hay over the ruling. But it was overturned on appeal a year later. Now Boeing faces a similar situation, and many analysts believe that the outcome will be the same.

The reactions from the two planemakers were predictable. Airbus called the ruling a "knockout blow" to the U.S. company. “The United States and Boeing picked this fight at the WTO, and today’s ruling is yet another blow for that strategy,” said Tom Enders, Chief Executive Officer, Airbus Group, in a news release. “Those prohibited subsidies must be withdrawn immediately following today’s historic ruling, meaning that Boeing must give up these massive tax subsidies.”

"The United States has no other option than to direct that Washington State repeal the legislation or amend it in a way that makes it WTO-compliant," said John Harrison, General Counsel, Airbus Group. "That would obviously take away any incentive to keep producing the 777X in Washington State and it will certainly not benefit Boeing’s balance sheet.”

Boeing, however had a different interpretation of the ruling. In a news release, Boeing said that the EU challenged seven different state tax incentives, and rejected entirely the EU's challenge to six of the seven incentives and rejected most of the challenge to the seventh. The WTO held only and narrowly that a reduction in Washington state's Business and Occupancy (B&O) tax rate for future 777X revenues is inconsistent with the WTO agreements. The WTO threw out all of the EU's other challenges to various incentive programs and left untouched even the B&O tax rate as it applies to revenue from the other Boeing models produced in Washington state--the 737, 747, 767, 777 (current model) and 787.

In total, the EU claimed that Boeing had received $8.7 billion in subsidies. This claim was rejected by the WTO, which found future incentives totaling no more than $50 million a year to be impermissible. The WTO found that to date Boeing has received no benefit from the 777X rate incentive, and will not until 2020, because the first airplane will not be delivered until then.

"Today's decision is a complete victory for the United States, Washington State and Boeing," said J. Michael Luttig, Boeing's general counsel. "The WTO found in September that Airbus has received $22 billion in illegal subsidies from the EU and that without these subsidies neither Airbus itself nor any of its airplanes would even exist today. By contrast, in rejecting virtually every claim made by the EU in this case, the WTO found today that Boeing has not received a penny of impermissible subsidies."

"The WTO has repeatedly found that Airbus is entirely a creature of government, and they must now bring themselves into compliance with the international laws or risk massive sanctions," said Luttig.

In light of this decision and the massive liability that the WTO has found against the EU and Airbus, Luttig said the company expects the EU and Airbus to appeal today's decision. "After any appeal," Luttig said, "we fully expect Boeing to preserve every aspect of the Washington state incentives, including the 777X revenue tax rate."

(Images from file)

FMI: WTO report, www.boeing.com, www.airbus.com