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저 시-비 리-동 조건 경허락 20 한민
는 아래 조건 르는 경 에 한하여 게
l 저 물 복제 포 전송 전시 공연 송할 수 습니다
l 차적 저 물 성할 수 습니다
다 과 같 조건 라야 합니다
l 하는 저 물 나 포 경 저 물에 적 허락조건 확하게 나타내어야 합니다
l 저 터 허가를 러한 조건들 적 지 않습니다
저 에 른 리는 내 에 하여 향 지 않습니다
것 허락규약(Legal Code) 해하 쉽게 약한 것 니다
Disclaimer
저 시 하는 원저 를 시하여야 합니다
비 리 하는 저 물 리 적 할 수 없습니다
동 조건 경허락 하가 저 물 개 형 또는 가공했 경에는 저 물과 동 한 허락조건하에서만 포할 수 습니다
國際學碩士學位論文
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
2012 年 8 月
서울大學校 國際大學院
國際學科 國際通商專攻
李 元 熙
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
A thesis presented
by
Wonhee Lee
to
Graduate Program in International Commerce In partial fulfillment of the requirements
For the degree of Master In the subject of International Studies
Graduate School of International Studies Seoul National University
Seoul Korea August 2012
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
指導敎授 安 德 根
論文 國際學碩士 學位論文 로 提出함
2012 年 8 月
서울大學校 國際大學院
國際學科 國際通商專攻
李 元 熙
李元熙 碩士學位論文 認准함
2012 年 8 月
委 員 長 李 永 燮 ( )
副 委 員 長 金 鍾 燮 ( )
委 員 安 德 根 ( )
THESIS ACCEPTANCE CERTIFICATE
The undersigned appointed by
The Graduate School of International Studies
Seoul National University
Have examined the thesis entitled
Legality of RampD Subsidies in the WTO
Presented by Wonhee Lee
Candidate for the degree of Master of International Studies and hereby certify
that the examined thesis is worthy of acceptance
Signature
Committee Chair Rhee Yeongseop
Signature
Committee Member Kim Chong-Sup
Signature
Committee Member Ahn Dukgeun
Date August 2012
i
Legality of RampD Subsidies in the WTO
ABSTRACT
As countries consider technology innovations important for economic growth
expenditures for research and development (RampD) of technology is increasing Under the
World Trade Organization (WTO) system RampD subsidies by governmental entities were
permitted as a lsquonon-actionable subsidyrsquo in accordance with the SCM (Subsidy and
Countervailing Measure) Agreement However the provision on the non-actionable
subsidies terminated as of January 2000 according to the Article 31 of the SCM
Agreement So far aircraft industries have been the only industry where RampD subsidies
are challenged in the WTO The paper examines the trade disputes regarding Canadarsquos
measures and the bilateral disputes between the US and the EC In these cases various
RampD subsidies on civil aircrafts are found to be inconsistent with the WTO This study
interprets the WTO decisions on various RampD subsidies disputed in the aircraft cases and
examines what types of RampD subsidies are found to be inconsistent with the WTO
Key Words RampD subsidy WTO SCM Agreement Aircraft Industry
Student Number 2009-23760
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
國際學碩士學位論文
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
2012 年 8 月
서울大學校 國際大學院
國際學科 國際通商專攻
李 元 熙
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
A thesis presented
by
Wonhee Lee
to
Graduate Program in International Commerce In partial fulfillment of the requirements
For the degree of Master In the subject of International Studies
Graduate School of International Studies Seoul National University
Seoul Korea August 2012
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
指導敎授 安 德 根
論文 國際學碩士 學位論文 로 提出함
2012 年 8 月
서울大學校 國際大學院
國際學科 國際通商專攻
李 元 熙
李元熙 碩士學位論文 認准함
2012 年 8 月
委 員 長 李 永 燮 ( )
副 委 員 長 金 鍾 燮 ( )
委 員 安 德 根 ( )
THESIS ACCEPTANCE CERTIFICATE
The undersigned appointed by
The Graduate School of International Studies
Seoul National University
Have examined the thesis entitled
Legality of RampD Subsidies in the WTO
Presented by Wonhee Lee
Candidate for the degree of Master of International Studies and hereby certify
that the examined thesis is worthy of acceptance
Signature
Committee Chair Rhee Yeongseop
Signature
Committee Member Kim Chong-Sup
Signature
Committee Member Ahn Dukgeun
Date August 2012
i
Legality of RampD Subsidies in the WTO
ABSTRACT
As countries consider technology innovations important for economic growth
expenditures for research and development (RampD) of technology is increasing Under the
World Trade Organization (WTO) system RampD subsidies by governmental entities were
permitted as a lsquonon-actionable subsidyrsquo in accordance with the SCM (Subsidy and
Countervailing Measure) Agreement However the provision on the non-actionable
subsidies terminated as of January 2000 according to the Article 31 of the SCM
Agreement So far aircraft industries have been the only industry where RampD subsidies
are challenged in the WTO The paper examines the trade disputes regarding Canadarsquos
measures and the bilateral disputes between the US and the EC In these cases various
RampD subsidies on civil aircrafts are found to be inconsistent with the WTO This study
interprets the WTO decisions on various RampD subsidies disputed in the aircraft cases and
examines what types of RampD subsidies are found to be inconsistent with the WTO
Key Words RampD subsidy WTO SCM Agreement Aircraft Industry
Student Number 2009-23760
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
A thesis presented
by
Wonhee Lee
to
Graduate Program in International Commerce In partial fulfillment of the requirements
For the degree of Master In the subject of International Studies
Graduate School of International Studies Seoul National University
Seoul Korea August 2012
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
指導敎授 安 德 根
論文 國際學碩士 學位論文 로 提出함
2012 年 8 月
서울大學校 國際大學院
國際學科 國際通商專攻
李 元 熙
李元熙 碩士學位論文 認准함
2012 年 8 月
委 員 長 李 永 燮 ( )
副 委 員 長 金 鍾 燮 ( )
委 員 安 德 根 ( )
THESIS ACCEPTANCE CERTIFICATE
The undersigned appointed by
The Graduate School of International Studies
Seoul National University
Have examined the thesis entitled
Legality of RampD Subsidies in the WTO
Presented by Wonhee Lee
Candidate for the degree of Master of International Studies and hereby certify
that the examined thesis is worthy of acceptance
Signature
Committee Chair Rhee Yeongseop
Signature
Committee Member Kim Chong-Sup
Signature
Committee Member Ahn Dukgeun
Date August 2012
i
Legality of RampD Subsidies in the WTO
ABSTRACT
As countries consider technology innovations important for economic growth
expenditures for research and development (RampD) of technology is increasing Under the
World Trade Organization (WTO) system RampD subsidies by governmental entities were
permitted as a lsquonon-actionable subsidyrsquo in accordance with the SCM (Subsidy and
Countervailing Measure) Agreement However the provision on the non-actionable
subsidies terminated as of January 2000 according to the Article 31 of the SCM
Agreement So far aircraft industries have been the only industry where RampD subsidies
are challenged in the WTO The paper examines the trade disputes regarding Canadarsquos
measures and the bilateral disputes between the US and the EC In these cases various
RampD subsidies on civil aircrafts are found to be inconsistent with the WTO This study
interprets the WTO decisions on various RampD subsidies disputed in the aircraft cases and
examines what types of RampD subsidies are found to be inconsistent with the WTO
Key Words RampD subsidy WTO SCM Agreement Aircraft Industry
Student Number 2009-23760
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
Legality of RampD Subsidies in the WTO
WTO 의 연구개발 보조금 합치성에 대한 연구
指導敎授 安 德 根
論文 國際學碩士 學位論文 로 提出함
2012 年 8 月
서울大學校 國際大學院
國際學科 國際通商專攻
李 元 熙
李元熙 碩士學位論文 認准함
2012 年 8 月
委 員 長 李 永 燮 ( )
副 委 員 長 金 鍾 燮 ( )
委 員 安 德 根 ( )
THESIS ACCEPTANCE CERTIFICATE
The undersigned appointed by
The Graduate School of International Studies
Seoul National University
Have examined the thesis entitled
Legality of RampD Subsidies in the WTO
Presented by Wonhee Lee
Candidate for the degree of Master of International Studies and hereby certify
that the examined thesis is worthy of acceptance
Signature
Committee Chair Rhee Yeongseop
Signature
Committee Member Kim Chong-Sup
Signature
Committee Member Ahn Dukgeun
Date August 2012
i
Legality of RampD Subsidies in the WTO
ABSTRACT
As countries consider technology innovations important for economic growth
expenditures for research and development (RampD) of technology is increasing Under the
World Trade Organization (WTO) system RampD subsidies by governmental entities were
permitted as a lsquonon-actionable subsidyrsquo in accordance with the SCM (Subsidy and
Countervailing Measure) Agreement However the provision on the non-actionable
subsidies terminated as of January 2000 according to the Article 31 of the SCM
Agreement So far aircraft industries have been the only industry where RampD subsidies
are challenged in the WTO The paper examines the trade disputes regarding Canadarsquos
measures and the bilateral disputes between the US and the EC In these cases various
RampD subsidies on civil aircrafts are found to be inconsistent with the WTO This study
interprets the WTO decisions on various RampD subsidies disputed in the aircraft cases and
examines what types of RampD subsidies are found to be inconsistent with the WTO
Key Words RampD subsidy WTO SCM Agreement Aircraft Industry
Student Number 2009-23760
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
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Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
THESIS ACCEPTANCE CERTIFICATE
The undersigned appointed by
The Graduate School of International Studies
Seoul National University
Have examined the thesis entitled
Legality of RampD Subsidies in the WTO
Presented by Wonhee Lee
Candidate for the degree of Master of International Studies and hereby certify
that the examined thesis is worthy of acceptance
Signature
Committee Chair Rhee Yeongseop
Signature
Committee Member Kim Chong-Sup
Signature
Committee Member Ahn Dukgeun
Date August 2012
i
Legality of RampD Subsidies in the WTO
ABSTRACT
As countries consider technology innovations important for economic growth
expenditures for research and development (RampD) of technology is increasing Under the
World Trade Organization (WTO) system RampD subsidies by governmental entities were
permitted as a lsquonon-actionable subsidyrsquo in accordance with the SCM (Subsidy and
Countervailing Measure) Agreement However the provision on the non-actionable
subsidies terminated as of January 2000 according to the Article 31 of the SCM
Agreement So far aircraft industries have been the only industry where RampD subsidies
are challenged in the WTO The paper examines the trade disputes regarding Canadarsquos
measures and the bilateral disputes between the US and the EC In these cases various
RampD subsidies on civil aircrafts are found to be inconsistent with the WTO This study
interprets the WTO decisions on various RampD subsidies disputed in the aircraft cases and
examines what types of RampD subsidies are found to be inconsistent with the WTO
Key Words RampD subsidy WTO SCM Agreement Aircraft Industry
Student Number 2009-23760
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
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Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
i
Legality of RampD Subsidies in the WTO
ABSTRACT
As countries consider technology innovations important for economic growth
expenditures for research and development (RampD) of technology is increasing Under the
World Trade Organization (WTO) system RampD subsidies by governmental entities were
permitted as a lsquonon-actionable subsidyrsquo in accordance with the SCM (Subsidy and
Countervailing Measure) Agreement However the provision on the non-actionable
subsidies terminated as of January 2000 according to the Article 31 of the SCM
Agreement So far aircraft industries have been the only industry where RampD subsidies
are challenged in the WTO The paper examines the trade disputes regarding Canadarsquos
measures and the bilateral disputes between the US and the EC In these cases various
RampD subsidies on civil aircrafts are found to be inconsistent with the WTO This study
interprets the WTO decisions on various RampD subsidies disputed in the aircraft cases and
examines what types of RampD subsidies are found to be inconsistent with the WTO
Key Words RampD subsidy WTO SCM Agreement Aircraft Industry
Student Number 2009-23760
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
ii
TABLE OF CONTENTS
ABSTRACT i
TABLE OF CONTENTS ii
LIST OF FIGURES iii
LIST OF TABLES iii
LIST OF ABBREVIATIONS iv
I INTRODUCTION 1
II LITERATURE REIVEW 4
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6
2 BACKGROUND OF CANADA AIRCRAFT CASE 10
3 BACKGROUND OF US V EC CASE 12
IV AGREEMNTS ON SUBSIDIES 16
1 THE GATT 1947 amp TOKYO ROUND 1979 16
2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19
31 Subsidies under the SCM agreement middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 20
32 Subsidies on Research and Development middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 25
V ANALYSIS ON THE WTO DISPUTE 27
1 CANADA-AIRCRAFT CASE 29
2 EC-AIRCRAFT CASE 32
21 EC Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 33
22 EC Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 36 3 US-AIRCRAFT CASE 37
31 US Measures Found to be Illegal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 38
32 US Measures Found to be Legal middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot 41
VI POLICY IMPLICATION amp CONCLUSION 44
REFERENCES 47
APPENDIX 50
국문초록 56
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
iii
LIST OF FIGURES
LIST OF TABLES
Figure 1 Importance of Aircraft Industry in Each Country 9
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011) 14
Figure 3 Subsidy Classification under the WTO SCM Agreement 21
Table 1 Timeline of Canada-Brazil Dispute Procedure 11
Table 2 Timeline of EC-US Dispute Procedure 15
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type 27
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3 32
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 33
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2 38
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
iv
LIST OF ABBREVIATIONS
EC European Communities
GATT General Agreement on Tariffs and Trade
DOC Department of Commerce
DOD Department of Defense
NASA National Aeronautics and Space Administration
RampD Research and development
SCM Subsidies and Countervailing Measure
TPC Technology Partnerships Canada
WTO World Trade Organization
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
1
I INTRODUCTION
As technology is an essential element of national competitiveness and
sustainable economic growth in order to bolster technology level industrialized countries
have increased their expenditures on research and development (RampD) in core
technologies such as microelectronics and information technology biotechnology and
new materials through various governmental subsidies 1 Under the World Trade
Organization (WTO) system RampD subsidies by governmental entities were permitted as
a lsquonon-actionable subsidyrsquo ndash ie allowable subsidies ndash in accordance with the Agreement
on Subsidies and Countervailing Measures (SCM Agreement) However the provision on
the non-actionable subsidies terminated as of January 2000 according to provision of
Article 31 of the SCM Agreement2 The continuation of the provision became a stalemate
due to the absence of the negotiation on its extension3
Under the WTO regime RampD subsidies have so far been challenged only in a
few cases ndash in the disputes between Canada and Brazil over subsidies to regional aircrafts
industry Brazil brought complaints against Canadarsquos RampD subsidies in the US and EC4
1 C Davidson and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand Journal of Economics 29(3) 548ndash577
2 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES April 15 1994 GATT URUGUAY ROUND AGREEMENTS (hereinafter SCM Agreement) Article 31 (Provisional Application) stipulates as follows
ldquoThe provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years beginning with the date of entry into force of the WTO Agreement Not later than 180 days before the end of this period the Committee shall review the operation of those provisions with a view to determining whether to extend their application either as presently drafted or in a modified form for a further periodrdquo (Authorrsquos emphasis)
3 Dukguen Ahn (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean Forum on International Trade and Business Law 16(2) at 365-366
4 EC (European Communities) became European Union (EU) in 1993 This study will generally use the term EC following the WTOrsquos legal expression However when appropriate the term EU will be used
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
2
dispute RampD programs by both the EC and the US were brought up5 All three disputes
involve civil aircrafts6 In these cases various RampD subsidies on civil aircrafts are found
to be inconsistent with the WTO In the Canada-Aircraft case the Panel found that the
lsquoTechnology Partnerships Canadarsquo program constituted export subsidies prohibited under
the WTO and the decision is upheld by the Appellate Body As a result Canadian
government had to revise their original government plan In the EC-Aircraft case many
of the ECrsquos Research and Technological Development (RampTD) subsidies granted to
Airbus were ruled as specific subsidies7 In the US-Aircraft case the Panel found that the
National Aeronautics and Space Administration (NASA) and Department of Defense
(DOD) have provided specific subsidies to Boeing and caused serious prejudice to the
interests of EC8
The aircraft industry has unique characteristics that it requires massive entry
costs and high RampD investments and has frequently been the target of strategic industrial
5 Ibid at 366 The relevant cases are titled as ldquoCanada-Measures Affecting the Export of Civilian Aircraftrdquo (referred to as lsquoCanada-Aircraftrsquo) ldquoEuropean Communities and Certain Member States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoEC-Aircraftrsquo) and ldquoUnited States-Measures Affecting Trade in Large Civil Aircraftrdquo (referred to as lsquoUS-Aircraftrsquo) In the Canada-Aircraft case the product at issue was small regional commercial aircrafts while in the US-Aircraft and EC-Aircraft the product at issue was large civil aircrafts USITC report notes that large civil aircrafts are traditionally defined as civil aircraft with more than 100 seats and weighing over 33000 pounds (USITC 1998) Regarding the regional jets the United States General Accounting Office notes that no uniformly accepted definition exists in its 2001 report
6 Subsidy issues on civil aircraft product were excluded from the category of ldquonon-actionable subsidiesrdquo The SCM Agreement left them to be subject to multilateral or plurilateral rules such as ldquoThe Agreement on Trade in Civil Aircraftrdquo entered into force on 1 January 1980 (Footnote 24 in article 8 Identification of Non-Actionable Subsidies in SCM Agreement) This can be one of possible reasons why civil aircraft cases have been brought as the only subsidy dispute under WTO dispute settlement body Further investigations are needed on this issue in our research
7 EC-Measures Affecting Trade in Large Civil Aircraft WTDS316R 8 US-Measures Affecting Trade in Large Civil Aircraft WTDS353R
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
3
policy9 Governments consider the industry significant in both economic and political
sense Economically the industry generates dynamically increasing returns and
contributes to domestic economy through technology spillovers to other industries
creation of high-wage jobs and exports Politically the industry is important because a
countryrsquos defense industry is technologically closely linked with the civil aircraft
industry10 These combined factors lead governments to support their aircraft industries
and research and development subsidies become one of the means to do so
The objective of this study is to examine what types of RampD subsidies are found
to be inconsistent with the WTO by interpreting its rulings on various RampD subsidy
programs disputed in the aircraft cases Examining the legality of RampD subsidies can
provide helpful policy guidance for governments in their planning industrial RampD
policies For instance several countries are planning to join or expand their market in the
civil aircraft industry by subsidizing In the process their subsidy programs can face
lawsuits by another WTO member Canada China and Russia that have regional jet
manufacturing companies are planning to enter the large civil aircraft market and Japan
is planning to enter both the regional jet and the large civil aircraft market11 And these
countries are heavily subsidizing their civil aircraft industries12 Although RampD subsidy
9 CL Benkard (2000) ldquoLearning and forgetting the dynamics of aircraft productionrdquo American Economic Review 90 (4) 1034ndash1054
10 Stephan Wittig (2011) ldquoThe WTO Panel Report on Boeing Subsidies a Critical Assessmentrdquo Intereconomics The author notes that the close link between the two industries leaves a room for new military technologies to be used for civil aircraft industry as ldquodual-use technologiesrdquo since military programs are not subject to WTO rules
11 Peder Andersen (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade
12 Ibid
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
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Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
4
matter has not yet been brought up in other sectors in future such disputes can occur in
other high-technology sectors since those sectors are also in need of government support
in their researches and development Through investigating the WTO decisions on the
RampD subsidies and examining the recent decisions on the EC-Aircraft and the US-
Aircraft cases this study would provide directions for government policies regarding
RampD subsidies in the high-technology sectors
The paper is structured as follows Section II reviews literature on aircraft
disputes and RampD subsidies For better understandings of the disputes section III
provides characteristics of the civil aircraft industry at issue and background of the
disputes over civil aircrafts In section IV the paper presents the evolution of agreement
on subsidies and closely looks at how the SCM Agreement stipulates rules on subsidies
Section V is the core of the paper and examines the WTO dispute cases on RampD
subsidies and conducts legal analysis on the findings of the Dispute Settlement Body
looking at what types of RampD subsidies are found to be inconsistent and consistent with
the WTO Section VI combines the analysis results from the previous section provides
implications and suggests possible policy directions on RampD subsidies
II LITERATURE REIVEW
Development of high technologies such as aerospace technology biotechnology
and information technology are an engine for mid and long-term economic growth For
this reason governments endeavor to support firmsrsquo research and development for
continuous technological innovations Numerous studies have conducted economic
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
5
analysis on various aspects of RampD subsidies in high-technology industries One of the
earlier studies is on theoretically justifying government incentive of providing RampD
subsidies to industries13 Later scholars examine the effect of RampD subsidies on overall
economic growth or on firmsrsquo performance14 On the other hand Kang (2008) examines
the economic rationales behind the RampD subsidy provision in the SCM Agreement
Utilizing the game theoretical analysis he explains why countries agreed to permit
provision on RampD subsidies only for a temporally period
Although many studies review RampD in economic perspective relatively a few
analyses exists on the legal aspects of RampD subsidies15 Lee (2006) examines the
international rules on RampD subsidies under the WTO and the OECD and then suggests
specific guideline for Koreans governmentrsquos RampD policy16 Ahn (2007) examines the
RampD subsidies at issue in the Canada-Aircraft case by highlighting the legal reasoning
behind the subsidies that were found to violate the WTO agreement The study identifies
the characteristics of the prohibited RampD subsidies looking at decisions made by the
Panel and Appellate body of the WTO Examining Canadarsquos afterwards implementation
13 Spencer amp Brander (1983) They show that governments subsidize RampD activities of export industries to increase their competitiveness in the international market and mention that governments play a major role particularly in high technology and high investment export industries
14 See Grossman amp Helpman (1994) Davidson amp Segerstrom (1998) Irwin amp Klenow (1996) Wallsten (2000)
15 Unlike RampD subsidies studies on general subsidies and CVDs at issue are quite many (Crowley amp Palmeter 2009 Olienyk amp Carbaugh 2011) Disputes explicitly including RampD subsidies have rarely occurred since identifying such subsidies is difficult and politically countries may feel unease to raise an issue of other countriesrsquo government policy Further RampD subsidy was permitted until 2000 that officially no dispute exists besides the aircraft disputes
16 According to Lee (2006) under the Organization for Economic Cooperation and Development (hereinafter ldquoOECDrdquo) no agreement on governmental RampD policy yet exists but the members have been discussing on the need of such agreement that will cover existing ambiguities of the SCM Agreement regarding RampD subsidies
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
6
of the WTO decisions17 the study points out the needs for governments to conduct a
prior review on whether their RampD subsidization policies comply with the WTO rules
Building on the previous study by Ahn (2007) this study will make
contributions to the existing literature in three ways First it will update on the WTOrsquos
stance with regards to RampD subsidies including the recent rulings on Airbus v Boeing
disputes18 Second it will examine the aspects of aircraft industry and touch upon
fundamental causes of the RampD subsidy disputes that rising from the industrial
characteristics Lastly with the two retrospective findings the paper will provide an
implication on the legality of RampD subsidy under the world trading system and its future
perspective on the relevant policy decision-making
III BACKGROUND OF THE INDUSTRY AND THE DISPUTES
In understanding the RampD subsidy disputes occurred in aircraft industry this
section will provide the characteristics of the industry which makes it inevitable for
governments to provide subsidies in RampD Also by looking at the background of the
Canada v Brazil disputes and the EC v US disputes we can broaden our perspectives to
understand the elements that led to bilateral disputes
1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY
Since the aircraft industry requires massive upfront capital investments high
17 In Canadarsquos case the government had to terminate its RampD support for the civil aircraft enterprises in order to comply with the WTO ruling
18 Ahn (2007)rsquos legal analysis mainly deals with the Canada-Aircraft case as the study was written before the final rulings on Airbus v Boeing were released
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
7
RampD costs for multiple and interlinked complex technologies the organizational and
technical ability to design and manufacture and global network to provide after-sales
support the industry has a high entry barrier19 These investments have tendency to be
highly risky due to the uncertainty of aircraft certification and the number of years
required to recoup the investment20 Producing aircrafts integrates many interrelated
components and subsystems using multiple technologies a large part of the production
cost pertains to the technology embodied in its design and manufacture Thus the
expenses on RampD are a substantial portion of the total production cost of any particular
aircraft model21 Besides the RampD expenses the industry also requires costly after-sales
support services that need to be provided globally Customer support networks are
provided by OEMs suppliers and service partners and costs of providing services are
substantial Services include parts distribution repair and overhaul services rental
equipment equipment upgrades software installations logistics and routine maintenance
services with most companies providing round-the-clock support near the locations
where aircraft are based or at the intended destinations22
Because of high barrier to new entrance and high operation costs production of
19 For detailed information on the aircraft industryrsquos characteristics see the following reports by the USTIC USITC (2012) ldquoBusiness Jet Aircraft Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission USITC (1998) ldquoThe Changing Structure of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
20 USITC (2012) 21 Richard Baldwin amp Paul Kruigman (1988) 22 Regarding the importance of after-sale support USITC (2012) report quotes an industry analyst that
ongoing service and support is the most important driver of industry sales even above price and technological innovation The prior USITC report on large civil aircraft industry from 1998 also notes that operating cost is becoming the primary factor that airlines use to choose LCA and after-sales support is an ldquoextremely important competitive marketing toolrdquo for LCA manufacturers
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
8
aircrafts is limited to only a few enterprises and the market has an imperfect competition
In the large civil aircrafts industry Boeing and Airbus are the two major producers that
compete with each other in a duopoly market23 For small commercial jets it forms an
oligopoly market with six leading producers headquartered in the US Canada France
and Brazil24
Despite the costly and risky characteristics of the industry the developed
governments are sincerely desired to support their aircraft industries because of its
economic and political significance In economic sense it realizes dynamically increasing
returns through economies of scale and technology spillovers and the industry is
expecting an increasing global demand Once a new aircraft is developed and production
is cumulated average cost steeply falls as the RampD investment costs become spread over
a larger base25 The aircraft industry is also expecting a future growth with an increasing
demand for civil aircrafts26 ndash drivers for future growth in aircraft market include
replacement of aircraft in service in mature markets dynamic growth of population and
economies in emerging markets and increasing urbanization driving wealth and traffic
growth27 The industry also generates high-wage high-skill jobs and exports contribute
to the economy In political sense development of commercial aircraft industry is
23 Russia also produces yet the industry is not globally competitive (USITC 1998 amp 2001) 24 USITC (2012) The six manufacturers are Cessna (US) Hawker Beechcraft Corporation (US)
Gulfstream (US) Bombardier (Canada) Dassault (France) and Embraer (Brazil) 25 Richard Baldwin amp Paul Kruigman (1988) Industrial Policy and International Competition in Wide-
bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 1988 pp 45- 71
26 Wittig (2010) 27 Airbus Global Market Forecast 2011-2030 This report forecasts that the global airline traffic is expected to
more than double by 2028 representing a market value of $31 trillion
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
9
strategic for a nationrsquos defense security Technologies for military aircrafts and civil
aircrafts closely linked and technological innovation spillovers between commercial and
military operations28 Due to this spillover effect by providing aid to commercial aircraft
sector governmentsrsquo defense sector can also be benefited
As an evidence of aircraft industriesrsquo important role in a country Figure 1
shows that in the countries with disputes (Canada four countries in EC US) aircraft
export amount takes up a significant portion of the total export Especially in the US
and France exports of the single 6-digit HS code 880240 which includes both military
and civil large aircrafts took 30 and 40 of the total export respectively during the
past two decades
Figure 1 Importance of Aircraft Industry in Each Country
28 LD Tyson (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries Washington DC Institute for International Economics
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
10
Canada EC US
Data Source UN Comtrade (Large Aircraft Export to world divide Total Export to world) Note HS code 880240 (Airplanes and other aircraft of an unladen weight exceeding 15000 kg) includes both military and civil aircrafts For Canada HS code 880220 880230 880240 are used since regional aircrafts include weights below or above 15000 kg Because of the importance of RampD investment as business and technological
innovation are critical to success in this industry in addition to corporate investment of
RampD financial support for aeronautics RampD is provided by all governments to foster
important national goals29
2 BACKGROUND OF CANADA AIRCRAFT CASE
The dispute over the regional civil aircrafts between Canada and Brazil
originated from the rivalry between Canadian firm Bombardier and Brazilian Embraer
that are major regional aircrafts producers in the world The dispute began in 1996 with
Canadarsquos request for panel establishment to investigate the legitimacy of the Brazilian
29 USITC (2012) at xxii
0
1
2
3
4
5
6
7
1991 1996 2001 2006 20110
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
France
Spain
Germany
UK
0
1
2
3
4
5
6
7
1991 1996 2001 2006 2011
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
11
PROEX program under the WTO30 Brazil filed a complaint against Canada in the
following year regarding Canadarsquos export-contingent production subsidies and RampD
subsidies31 In 1999 the WTO ruled that Canada and Brazil both provided export
subsidies to their regional aircraft producers The WTO asked both parties to change their
export subsidy programs to comply with the SCM Agreement32 After the Panel rulings
both countries appealed the panel decision and later requested for establishment of
compliance panel twice The timeline of the dispute in Table 1 shows the long-lasted
conflict over aircraft subsidies between Canada and Brazil
Table 1 Timeline of Canada-Brazil Dispute Procedure33
Dispute Date Brazil-Aircraft Case Canada-Aircraft Case
1st Dispute
Jun 18 1996 Canada requested consultation (WTDS46)
Sep 16 1996 Canada requested panel establishment
Oct 3 1996 Canada withdrew the request
Mar 10 1997 Brazil requested consultations with the Canadian government
Jul 10 1998 Canada requested panel establishment
Brazil requested panel establishment
Jul 23 1998 DSB established a panel DSB established a panel
Apr 14 1999 Panel report (DS46) circulated Panel report (DS70) circulated
May 3 1999 Brazil appealed to the Appellate Body
Canada appealed to the Appellate Body
Aug 2 1999 AB report (DS46) circulated AB report (DS70) circulated
Aug 20 1999 DSB adopted the AB report DSB adopted the AB report
Dispute regarding
compliance
Nov 23 1999 Requested for establishment of a compliance panel (Article 215)
Requested for establishment of a panel (Article 215)
May 9 2000 Panel report circulated Panel report circulated
30 Goldstein amp McGuire (2004) at 543 The PROEX program is a government export promotion scheme that provides subsidies to foreign consumers that purchase Brazilian regional aircrafts
31 Goldstein amp McGuire (2004) at 543 32 Pavcnik (2002) at 744 Pavcnik notes that Canada has amended the scheme to comply with the WTO
ruling but the Brazilian export-financing measure still violates the WTO rules 33 Ahn (2007) at 367
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
12
May 22 2000 Notice of appeal Notice of appeal Jul 21 2000 AB report circulated AB report circulated Aug 4 2000 AB report adopted by the DSB AB report adopted by the DSB
2nd Dispute regarding
compliance
Jan 19 2001 Canada requested for a compliance panel
Jan 22 2001 Brazil requested for consultations with Canada
Mar 1 2001 Panel requested
Jul 26 2001 2nd compliance Panel report circulated
Aug 23 2001 DSB adopted the panel report
Jan 28 2002 Panel report circulated
Feb 19 2002 DSB adopted the panel report
3 BACKGROUND OF US V EC CASE
Similar to the Canada v Brazil dispute the dispute between the US and EC
over large civil aircrafts also began from the firm-level dispute between the US firm
Boeing and the EC consortium Airbus Boeing founded in 1916 dominated the global
aircraft market until Airbus was created and started expanding its market share34 Airbus
was formed in 1969 as a consortium owned initially by independent aircraft companies in
France and Germany that were joined later by Spanish and British firms35 Airbus has
been subsidized by those governments and each subsidizing country takes part in
manufacturing different aircraft parts 36 This later established company accelerated
entering into the market after its successful sale of A300 Moreover Airbus started rising
as a rival to Boeing as Airbus announced its plan to develop A320 of which size is
34 There were two other US aircraft manufacturers ndash Lockheed and McDonnell Douglas however with a rise of Airbus in the world market Lockheed was forced to shut down in the early 1980s and McDonnell Douglas was merged with Boeing in 1997 (Chanda 2011)
35 Chanda (2011) 36 Ahn (2006) at 197 Middle parts are manufactured in France front and ending parts are made in Germany
main wings are made in England and Spain manufactures tail wing and certain parts Those parts are assembled at the Airbus headquarters in France
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
13
equivalent to Boeingrsquos best selling products B737 and B75737 As Airbus entered the
US-dominated large civil aircrafts market in the late 1970s to 1990s the political and
domestic pressure on the US government rose to limit subsidies38
The costly dispute over subsidies between Airbus Industries and Boeing has
lasted for decades The first dispute occurred in 1978 when Boeing accused Airbus of
predatory pricing and the US brought the matter to the GATT arguing that Airbus
benefited from the subsidies from the European government39 When the US turned to
the GATT regarding the ECrsquos subsidy on aircrafts the EC requested the negotiation of a
bilateral agreement concerning that the dispute would adversely affect the EC-US
relationship40 This dispute ended with a bilateral agreement between the US and EC in
199241
The second dispute which is closely examined in this paper occurred in 2004 as the
market share of Airbus exceeded that of Boeing Even after the 1992 Civil Aircraft
Agreement Airbusrsquo market share steadily grew and Airbus began to deliver more
aircrafts than Boeing in 2003 (Figure 2)42 Airbusrsquo growth became a big concern to
Boeing and the US government In fall 2004 trade representatives from the US and the
37 B737 and B757 of Boeing are narrow-body single-aisle aircrafts for short to medium-range flights 38 Michael J Levick (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21
Transportation Law Journal 433 460-61 39 Meier-Kaienburg (2006) at 197 Stephen Aris (2002) ldquoClose to the Sun How Airbus Challenged Americarsquos
Dmination of the Skiesrdquo London Aurum Press 151 40 Meier-Kaienburg (2006) at 200 41 1992 Civil Aircraft Agreement Details on this agreement will be provided in Section IV 42 In Figure 2 the number of deliveries includes all types of civil aircrafts produced by Airbus and Boeing
besides large civil aircrafts
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
14
EU began negotiations to modify the 1992 agreement yet the negotiations failed43 The
US unilaterally terminated the 1992 Civil Aircraft Agreement and requested
consultations with the EC to the WTO in October 2004 alleging that the Europeans had
violated the WTO rules by providing illegal subsidies to Airbus44 On the same day the
US requested the initiation of WTO dispute settlement proceedings against the EC the
EC counter-sued to the WTO that the US government provided subsidies to Boeing45
Beginning from 2004 this bilateral dispute under the WTO lasted for eight years until the
recent Appellate Body rulings (Table 2) Due to the scale of the dispute it took longer
than usual for Panel rulings to come out The Panel circulated its report on the European
government subsidies in June 2010 five years after the setting up of the Panel And the
Panel decisions on the US-Aircraft case came out the year after in 2011 The EC
appealed the panel decision in April 2011 Soon after the ECrsquos appeal in the same month
the US also appealed the panel rulings
Figure 2 Aircraft Deliveries Trend of Boeing and Airbus (1989 ~ 2011)
43 Carbaugh amp Olienyk (2004) at 3 44 Meier-Kaienburg (2006) at 201 Carbaugh amp Olienyk (2004) Figure 2 shows that the complaint by the
US occurred soon after aircraft deliveries of Airbus exceeded those of Boeing 45 The product at issue in the disputes is large civil aircraft which weighs over 15000 kg and is designed for
transporting 100 or more passengers andor a proportionate amount of cargo (Tariff classification heading 880240)
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
15
(Data Commercial Airplane Deliveries of Airbus and Boeing 1989-2011) httpwwwairbuscomcompanymarketorders-deliveries httpactiveboeingcomcommercialordersindexcfm
As shown above the US and the EC has had a long-lasting high-stake dispute
over their civil aircraft industries Behind this unresolved dispute huge economic
interests and political differences exist Economically Airbus and Boeing play crucial
roles in their respective domestic economies contributing much to export shares
Politically the US and European economies have different attitudes towards subsidies
that are derived from historically different ideologies on market economy ndash ldquoliberal free-
enterprise Americardquo vs state-supported Europerdquo46
Table 2 Timeline of EC-US Dispute Procedure
Date EC-Aircraft Case US-Aircraft Case
46 Meier-Kaienburg (2006) provides discussions on this historically different trade paradigm between Europe and the United States ndash European governments have frequently supported private sectors since the World War II to boost up the war-stricken economy while the US has considered subsidization as a hindrance to free market
0
150
300
450
600
750
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
of Aircraft Deliveries
Boeing AircraftDeliveries
Airbus AircraftDeliveries
In 2004 the US sued EU to
the WTO
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
16
Oct 6 2004
US requested consultations with the EC and the individual Governments of the Member States of Germany France the United Kingdom and Spain concerning measures affecting trade in large civil aircraft (DS 316)
EC counter-sued the US to the WTO on its alleged subsidies to Boeing (DS 317)47
Jun 2005 ECrsquos 2nd complaint against the US (DS353)
Jul 20 2005 The Panel was established for DS 316
Jan 20 2006 US requested for a Panel (2nd complaint-DS347)
Feb17 2006 The Panel was established (2nd complaint-DS347)48
The Panel was established for the 2nd complaint (DS353)
Jun 30 2010 EC-Aircraft1 Panel report circulated (WTDS316R)
Aug 2010 EC appealed the Panel decision (DS316)
Mar 31 2011 Panel report circulated (WTDS 353R)
Apr 2011 The US appealed the decision (DS353)
May 18 2011 EC-Aircraft AB report circulated (WTDS 316AB)
Mar 2012 US-Aircraft AB report circulated (WTDS353AB)
IV AGREEMNTS ON SUBSIDIES
1 THE GATT 1947 amp TOKYO ROUND 1979
In the early agreements under the GATT49 regime from 1947 to 1994 rules on
subsidies were not restrictive and research and development subsidies were permitted In
the original GATT created in 1947 subsidies were acknowledged to incur inefficiencies
in international trade yet the agreement placed no limits on subsidies merely mandating
47 US Aircraft1 Panel (DS317) ndash Current status panel is composed 48 EC-Aircraft 2 Panel (DS347) ndash Panel proceeding is suspended 49 General Agreement on Tariffs and Trade (hereinafter ldquoGATTrdquo)
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
17
that subsidies be reported50 Later in 1973 the Tokyo Round of the GATT tried to resolve
the question over how much of government support should be permitted Around this
time of Tokyo Round Airbus was founded and the issue on civil aircraft subsidies
became contentious51 and the civil aircraft subsidy issue was brought to the GATT
framework However the issue over subsidies was not addressed substantively because
the topic was new to the parties and subsidies were considered to have positive effects52
At the end of the Tokyo Round in 1979 as a part of the final agreement the Subsidies
Code and the Agreement on Trade in Civil Aircraft were signed53 Although the term
subsidy is not clearly defined the Subsidies Code provides a list of permissible subsidies
while prohibiting export subsidies54 Especially regarding RampD subsidy Article 11 of the
Subsidies Code allows signatories to use subsidies to ldquoencourage research and
development programs especially in the field of high-technology industriesrdquo The Civil
Aircraft Agreement regarding government support notes that the Subsidies Code apply
to trade in civil aircraft and acknowledges the ldquowidespread governmental supportrdquo in this
area55
50 Daniel I Fisher (2002) ldquolsquoSuper Jumborsquo Problem Boeing Airbus and the Battle for the Geopolitical Future 35 Vanderbilt Journal of Transnational Law 865 at 871 General Agreement on Tariffs and Trade (GATT) 1947 Article XVI
51 Daniel Fisher (2002) at 871 52 Meier-Kaienburg (2006) at 198 53 Subsidies Code refers to the Agreement on Interpretation and Application of Articles VI XVI and XXIII of
the General Agreement on Tariffs and Trade The final agreement of the Tokyo Round included three nontariff areas 6 codes 4 framework agreements for developing countries and 3 economic sector agreements Subsidies Code was one of the six codes and civil aircraft agreement was one of the economic sector agreements (Buterbaugh amp Fulton 2008 at 33) Civil aviation was the only industry given a separate agreement at the conclusion of the Tokyo Round of the GATT in 1979 (Daniel Fisher 2002 at 872)
54 Subsidies Code Article 8 amp 11 55 The Agreement on Trade in Civil Aircraft Article 6
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
18
2 1992 CIVIL AIRCRAFT AGREEMENT
While RampD subsidies were fully permitted at the Tokyo Round the bilateral
agreement between the US and the EC regarding trade in large civil aircrafts began to
place restraints on them The two parties signed the bilateral agreement in July 1992 to
strengthen subsidy-related provisions of the 1979 Agreement on Trade in Civil Aircraft56
The 1992 Civil Aircraft Agreement contains 13 articles that regulate various forms of
government subsidies ndash direct subsidies indirect subsidies and loans Regarding direct
subsidies the agreement prohibits the use of direct subsidies for production57 and places
limits on the direct subsidies for development of a new aircraft58 Article 4 limits the
amount of direct development subsidies to be at maximum 33 of the total development
costs and governments are only allowed to fund projects that are likely to repay the loan
within 17 years The agreement also regulates indirect subsidies for production and
development of an aircraft The agreement allows the producers to receive indirect
support amounting to a maximum of 3 of industry-wide annual commercial sales or 4
of annual commercial sales of a firm in each country59 The provision stipulates that
benefits from indirect support are deemed to exist when cost reductions to a firm occur
56 USITC (1998) at 3-32 The full name of the agreement is Agreement between the Government of the United States of America and the European Economic Community Concerning the Application of the GATT Agreement on Trade in Civil Aircraft (hereinafter the ldquo1992 Civil Aircraft Agreementrdquo) See Appendix for a copy of the 1992 Civil Aircraft Agreement After the bilateral agreement the GATT Subcommittee on Trade in Civil Aircraft began multilateral negotiations in October 1992 Although both the US and the EC wanted more signatories to engage in the 1992 Agreement the bilateral agreement was not brought into the WTO due to a lack of support among non-signatories and continuous disagreement between the US and the EC (USITC 1998 at 3-32 E-4) Irwin and Pavcnik (2004) present an interesting result of a study that aircraft prices increased by about 37 after the 1992 US-EU agreement that limited subsidies
57 1992 Civil Aircraft Agreement Article 3 58 Ibid Article 4 59 Ibid Article 52 (a) amp (b)
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
19
from government-sponsored research and development60 While the provision on indirect
subsidy curtails benefits received by Boeing from government-sponsored projects in the
military and space programs the provision on direct subsidy places restraints on
European governmentrsquos funding of the launch cost of a new aircraft61 Lastly with
regards to loans the agreement restricts the governmentrsquos ability to help the domestic
aircraft producer offer financing to airlines62
3 THE URUGUAY ROUND amp THE SCM AGREEMENT
Prior to the launch of the Uruguay Round the US proposed including the issue
on trade in high-technology products in the negotiation agenda considering that
government subsidy policies in high-technology industries significantly influence the
trade flows63 However the EC considered the proposal as an initiative to control RampD
subsidies and objected to its inclusion believing that the US utilizes them more
surreptitiously through defense spending64 This different stance between the US and
the EC continued even during the Uruguay Round when negotiating on permitting certain
subsidies The US opposed establishing the provision on permitted (non-actionable)
subsidy while the EC suggested including a wider range of government aid in the non-
actionable subsidy category65 Through the Uruguay Round the Agreement on Subsidies
and Countervailing Measures (ldquoSCM Agreementrdquo) was established Rules stipulated in
60 Ibid Airticle 53 61 Pavcnik (2002) at 742 62 1992 Civil Aircraft Agreement Article 6 Pavcnik (2002) at 741 63 Patrick Low (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century
Fund Press at 203 64 Ibid 65 Ahn (2007) at 361
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
20
the SCM Agreement became a guideline for current subsidy disputes under the WTO
regime The following sub-section will provide interpretations of the SCM Agreement
and details on RampD subsidies
31 Subsidies under the SCM agreement
Unlike the previous agreements regarding government support the SCM
agreement defines the term subsidy and further it classifies subsidies For better
understanding of the agreement Figure 3 illustrates the classification of subsidy and the
procedure of determining a subsidy according to the SCM Agreement provisions To
prove that a government program is a subsidy that is inconsistent with the WTO it first
has to meet the definition of a subsidy and ldquospecificrdquo
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
21
Figure 3 Subsidy Classification under the WTO SCM Agreement
In order to be defined as a subsidy a government measure should contain two
basic elements (a) a financial contribution by a government or any public body within
the territory of a member country (b) which confers a benefit66 The forms of ldquofinancial
contribution by a governmentrdquo include (i) direct or potential direct transfers of funds (eg
grants loans equity infusion loan guarantees) (ii) foregone government revenue that is
otherwise due (iii) the provision of goods and services or (iv) any form of income or
price support67 However not all financial contributions by a government are subsidies
66 SCM Agreement Article 11 67 SCM Agreement Article 11(a)
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
22
and a benefit should be conferred from the financial contributions to a recipient In order
to demonstrate a conferred benefit a government needs to prove that ldquothe recipient
obtained an advantage which it could not obtain in the market placerdquo68 For instance if a
government provides goods and services at market prices no benefit is conferred and thus
no subsidy exists69 On the other hand ie if a government provides loans to a company
at more favorable terms than those available in the market it is considered as granting
benefit to the recipient70
If a program is defined as a ldquosubsidyrdquo it then has to be proven ldquospecificrdquo in
order to be subject to possible constraints under the WTO71 Subsidies are ldquospecificrdquo
when they are limited to ldquocertain enterprises or industriesrdquo72 On the other hand if a
subsidy is available on the basis of ldquoobjective criteria or conditionsrdquo then it is not
specific73 Even if the subsidies appear to be not specific on legal documents it can still
be specific if it is de facto specific meaning the subsidy is in fact specific being used by
certain enterprises74 Also a subsidy that is limited to certain enterprises in a particular
68 Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press at 346
69 Sykes (2005) The Economics of WTO Rules on Subsidies and Countervailing Measures 70 Further details on determining the existence of a benefit and calculating the benefit amount is stated in
Article 14 of the Agreement 71 Sykes (2005) According to Sykes (2005) the concept of specificity originated from the US law 72 SCM Agreement Article 21 73 Sykes (2005) SCM Agreement Article 21(b) stipulates ldquoWhere the granting authority or the legislation pursuant to which the granting authority operates
establishes objective criteria or conditions governing the eligibility for and the amount of a subsidy specificity shall not exist provided that the eligibility is automatic that such criteria and conditions are strictly adhered tordquo (Authorrsquos emphasis included)
74 SCM Agreement Article 21(c) stipulates ldquoIfhellip there are reasons to believe that the subsidy may in fact be specific other factors may be considered
Such factors are use of a subsidy program by a limited number of certain enterpriseshelliprdquo (Authorrsquos emphasis included)
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
23
region within the jurisdiction of the administering authority is defined to be specific75
The SCM Agreement governs subsidies by classifying them under the traffic
light system ndash red light yellow light and green light subsidies The ldquored lightrdquo
subsidies are prohibited subsidies The two types of the prohibited subsidies are export
subsidies and import substitution subsidies Export subsidies are subsidies that are
ldquocontingent in law or in fact upon export performancerdquo and import substitution
subsidies are the ones that are ldquocontingent hellip upon the use of domestic over imported
goodsrdquo76 These subsidies are deemed to be specific regardless of their details77 When
subsidies are found to be prohibited the remedy is repayment or removal of the scheme78
The ldquoyellow lightrdquo subsidies are actionable subsidies that are not prohibited altogether yet
can be challenged when they are specific and cause ldquoadverse effectsrdquo79 The SCM
Agreements lists three types of causing adverse effects to another member (a) injury to a
domestic industry (b) nullification or impairment of the benefits of a tariff concession or
(c) serious prejudice to the interests of another member80 The ldquogreen lightrdquo subsidies
also known as ldquonon-actionablerdquo subsidies were permitted and offered ldquocountries a
method for structuring subsidies to avoid attack under countervailing duty laws 81
Governments could provide subsidies that fall under the categories above without fear of
75 SCM Agreement Article 22 76 SCM Agreement Article 31 Annex I of the SCM Agreement lists prohibited export subsidies 77 SCM Agreement Articles 3 amp 23 78 Meier-Kaienburg (2006) 203 79 SCM Agreement Article 5 80 SCM Agreement Article 5 81 Paul C Rosenthal amp Robert TC Vermylen (2000) ldquoThe WTO Antidumping and Subsidies Agreements
Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
24
challenge or countervailing measures82 This provision was temporarily in effect for five
years83 and expired in January 200084 The types of subsidies that were provisionally
permitted were RampD subsidies regional development subsidies and subsidies for
complying with environmental requirements 85 However the provisions of non-
actionable subsidies do not apply to civil aircraft since civil aircraft is subject to the
multilateral agreement on civil aircrafts86 The Agreement will apply to this product As
the provision is no longer in effect RampD subsidies for other products besides civil
aircraft can be subject to challenge under the WTO
In the Canada-Aircraft case the RampD program at issue falls in the category of
ldquoprohibitedrdquo subsidies On the other hand in the Airbus-Boeing dispute allegedly illegal
RampD subsidies are ldquoactionablerdquo subsidies under the SCM Agreement When member
countries file complaints the WTO evaluates what constitutes a subsidy and identifies
which subsidies are illegal under the WTO rules87 The legality of subsidies is largely
assessed by looking at whether subsidies impose illegal conditions or distort trade by
causing adverse effects on free trade88
Although SCM Agreement is one of the precisely written rules among WTO
agreements some ambiguities still exist Whether the benefit was conferred depends on
82 Sykes (2005) at 97 83 SCM Agreement Article 31 According to SCM Agreement Article 31 the provision could be extended
after the WTO members review it 84 Sykes (2005) at 97 This provision has not been renewed 85 SCM Agreement Article 82 86 SCM Agreement Article 82(a) note 24 stipulates as follows ldquoSince it is anticipated that civil aircraft will be subject to specific multilateral rules the provisions of this
subparagraph do not apply to that productrdquo 87 Meier-Kaienburg (2006) 204 88 Ibid
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
25
Despite the detailed guidelines in considering market prices no clear answer yet exists to
the question of which market should be used to benchmark89 Regarding the term
ldquospecificityrdquo the Agreement does not define the range of number of enterprises that
would be considered as ldquocertain enterprisesrdquo
32 Subsidies on Research and Development
While RampD subsidies are simply mentioned in the previous agreements the
SCM Agreement 82(a) defines different types of RampD subsidies and provides regulations
accordingly The provision does not place any restriction on supporting independently
conducted ldquofundamental researchrdquo activity that is not linked to commercial objectives yet
it regulates the assistance for research conducted by firms or by higher education or
research institutions that are contracted with firms90 The areas of research activities
where government support is regulated under this provision are ldquoindustrial researchrdquo and
ldquopre-competitive development activity The Agreement limits that the amount of RampD
subsidies should not exceed 75 of the industrial research costs or 50 of the pre-
competitive development activity costs91 Here the industrial research means planned
search or investigation for discovering new knowledge with the objective that such
knowledge may be useful in developing or improving products processes or services92
The pre-competitive development activity indicates translating industrial research
findings into a plan or design for new or improved products processes or services and
89 Dukgeun Ahn (2007) at 43 90 SCM Agreement 82(a) note 26 91 SCM Agreement Article 82(a) If the government RampD program covers both industrial research and pre-
competitive development activity costs then the total costs are not supposed to exceed 625 which is the average of the allowable levels of the two categories (ibid note 30)
92 Ibid note 28
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
26
includes creating a first prototype which is not capable of commercial use93 The pre-
competitive development activity further includes the conceptual formulation or design of
products and initial demonstration yet these same projects cannot be used for industrial
application or commercial exploitation94 The government support is specifically limited
to costs of items such as personnel instruments equipment and consultancy exclusively
for the research activity95
Although the provision clearly determines the allowable level of assistance costs
depending on the characteristics of RampD subsidy ambiguity lies in distinguishing the
type of RampD subsidy It is consistent with the rules that governments have full freedom in
supporting fundamental research activity unrelated to industrial objectives However in
many cases results of general scientific research activity can be used for commercial
purpose and it is difficult to know where to draw a line between the fundamental
research and the industrial research activities96 The WTO has not yet provided any
standard to distinguish them
Another important point of this provision is that the rules on non-actionable
RampD subsidies do not apply to civil aircraft products The footnote of the Agreement
notes that civil aircraft is subject to specific multilateral rules Due to this exclusion
aircraft RampD subsidies at issue discussed in this paper belong to either prohibited or
actionable subsidies
93 Ibid note 29 94 Ibid 95 Ibid Article 82(a)(i)-(v) 96 Ahn (2007) at 363
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
27
V ANALYSIS ON THE WTO DISPUTE
The DSU made rulings on aircraft subsidy disputes based on the SCM
Agreement97 and numerous programs were alleged to be subsidies that are inconsistent
with the WTO Table 3 lists each countryrsquos measures at issue Among the various
subsidy programs this study will focus on research and development subsidies that are
highlighted in the table Canadarsquos measure at issue was found to be a prohibited
subsidymdashconstituted a financial contribution conferred a benefit and contingent upon
export performancemdash and the challenged measures of the EC and the US were found to
be actionable subsidiesmdashconstituted financial contributions conferred benefits and
specific98
Table 3 Categorizing Measures of Canada EC and US according to Subsidy Type
Country Subsidy Type ProgramsMeasures
Canada
Export Development Subsidy
Export Development Corporation (EDC) program
Debt Financing Canada Account program (Canada account debt financing)
Corporate Restructuring Measures amp Equity
Infusions
Sales to a Bombardier by the Ontario Aerospace Corporation of a 49 share in another civil aircraft manufacturer (in de Havilland )
97 Some studies discuss fundamental features of resolving the aircraft disputes Moon (2008) questions whether applying SCM Agreement to the large aircraft industry is appropriate inasmuch as the industry has been exempted from being ruled under the SCM Agreement due to the industry characteristics of requiring subsidies Meier-Kaienburg (2006) discusses whether the WTO is an adequate forum to resolve the disputes between Airbus and Boeing since the case is complex and high stakes
98 In order to be actionable subsidies it requires adverse effects to be found However the aim of the paper is to define the characteristics of subsidies that are either found to be consistent or inconsistent with the WTO and provide implications for policy making Since the afterward effects of the subsidies at issue are irrelevant to policy suggestions for this reason the paper does not discuss the Panelsrsquo rulings regarding the adverse effects
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
28
Grants
Benefits provided under the Canada-Quebec Subsidiary Agreement on Industrial Development Benefits provided by the Government of Quebec under the
Societe de Developpement Industriel du Quebec
Research and Development (RampD)
Subsidy Technology Partnerships Canada(TPC) and DIPP
EC
Launch Aid Member State Financing
A350 contracts (existence of measure not established and claim dismissed) A300 A310 A320 A330A340 A330-200 A340-500600 and
A380 contracts
Design and Development Financing
Loans
Loans by European Investment Bank Credit Line by European Investment Bank
Infrastructure amp related Grants
Muhlemberger Loch industrial site Lengthened runway at Bremen airport Provision of ZAC Aeroconstellation site Roads for ZAC Aeroconstellation site Expansion of Nordenham facility Grant for Broughton Wales site Grants for expansion and modernization of plants in Puerto de
Santa Maria Illescas Puerto Real Sevilla and La Rinconada
Corporate Restructuring Measures amp Equity
Infusions
German Government Share Transfer Debt Forgiveness by German Government
Capital contributions by French government to Aerospatiale between 1987 and 1994 1998 transfer by the French government of its 4576 percent
interest in Dassault Aviation to Aerospatiale
Research and Technology
Development (RampTD) Subsidy
EC Framework Program French government grants German federal grants German sub-federal grants Spanish PROFIT Loans Spanish PTA Loans UK CARAD grants UK Technology Program
US
HB2294 Tax incentives by State of Washington
Business and Occupation (BampO) tax reduction BampO tax credits sales and use tax exemptions for computers Sales and use tax exemptions for construction
Local government tax reduction
Everett local BampO tax reduction
Infrastructure-related subsidies (Washington-Olympus Master Site
Agreement)
Road improvements around Boeingrsquos Everett facility Construction of a rail barge transfer facility Expansion of Terminal by Port Waiver of landing fees Everett and County rates for water etc Provision of coordinators Illinois statersquos relocation package Illinois statersquos lease retirement
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
29
Labor-related subsidies (Washington-Olympus Master Site Agreement)
Job training incentives
Incentives (Washington-Olympus Master Site
Agreement) Incentives related to the 747 LCF
Incentives (Washington-Olympus Master Site
Agreement) Costs of legal proceedings
Tax breaks Tax breaks arising from Industrial Revenue Bonds by Kansas
state
Production-related subsidy
Kansas Development Finance Authority payment of interest on bonds for production of 787 fuselage
Research and Development Subsidy
NASA Aeronautics payments NASA Aeronautics access to Facilities DOD Aeronautics RampD Contracts DOD Aeronautics RampD Assistance Instruments - Payments DOD Aeronautics RampD Assistance Instruments ndash Access to
Facilities DOC Aeronautics RampD NASADOD IP Waivers of Patent Rights NASADOD IP Waivers of Data rights Trade Secrets NASADOD IP Reimbursement
1 CANADA-AIRCRAFT CASE
Among the various subsidies of the Canadian government that Brazil alleged to
be inconsistent with the WTO RampD subsidy at issue was the funds provided to the
regional aircraft industry under the Technology Partnerships Canada (TPC) program and
its predecessor scheme Defense Industry Productivity Program (DIPP)99 Brazil argued
that these programs were in a form of a prohibited export subsidy Under the TPC the
government was supposed to support other industries yet in reality aircraft industry
received most of the benefits According to Brazil TPC targeted conditionally repayable
investments in project that result in a high technology product for export ndash the firms were
99 Regarding DIPP the Panel said no relevant evidence is provided by Brazil and it will not be discussed in this paper
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
30
supposed to repay only when the business becomes commercially successful and when
the technology development is not successful the beneficiary firms did not have to
repay100
According to Canadarsquos defending argument TPC supported a broad sectors and
technologies in all industrial sectors of Canada Moreover the basic objectives of the
program were to maintain and build the industrial technology and skill for internationally
competitive products Canada asserted that the application documents of TPC identify
export performance as a condition for eligibility for contributions and there is no
requirement for the products resulting from the RampD investment to be exported
As TPC program was alleged to be prohibited export subsidy the Panel
examined whether the measure constituted a financial contribution conferred a benefit
and contingent upon export performance (Table 4) It found a prima facie case that TPC
assistance to the Canadian regional aircraft industry has taken the form of subsidies TPC
contributions were found to be direct transfer of funds by Canada government and with
no doubt constituted financial contribution within the meaning of Article 1101 Regarding
whether a benefit was conferred the Panel noted that that at least three specific TPC
contributions in the regional aircraft sector were negotiated on terms with a less than
commercial rate of return102
Regarding whether TPC program was contingent upon export performance the
Panel found that TPC assistance to the Canadian regional aircraft industry was in fact tied
100 WTDS70R para 9284 101 Ibid para 9306 102Ibid para 9307
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
31
to export performance and therefore constituted export subsidies103 Before drawing this
conclusion the Panel noted that there must be a prima facie case that the facts
demonstrate that TPC assistance to the Canadian regional aircraft industry would not
have been granted but for anticipated exportation or export earnings104 Some of the
evidence that the Panel took into consideration are as follows Canadian aerospace sector
exports a large proportion of its output TPC Business Plan notes that TPCrsquos approach in
the aerospace and defense sector is to directly support the near market RampD projects with
high export potential TPC Annual Report states that TPC is proud to be an investment
partner in this export-oriented success story Industry Canada press released quotes
Industry Minister Manley stating that TPCrsquos investment in these projects will help
increase the global competitiveness of this industry while supporting jobs in Montreal in
Halifax and across the country generating economic growth and export dollars the
statistics of TPC and the public statements and TPC recount and emphasize the amount of
export sales generated by these contributions 105 Based on these facts the Panel
concluded that the TPC assistance to the Canadian regional aircraft industry was tied to
anticipated exportation or export earnings and therefore contingent in fact upon export
performance106 On appeal the Appellate Body upheld the Panels finding although it
noted the Appellate Body noted its disapproval of the but for test for contingency relied
103 Subsidies are prohibited when subsidies are either in law or in fact contingent upon export performance (SCM Agreement Article 31) and Canadarsquos TPC program was alleged to be in fact contingent upon export performance rather than in law
104 WTDS70R para 9340 SCM Agreement Article 3 note 4 states that subsidies are contingent in fact upon export performance when ldquothe facts demonstrate that the granting of a subsidyhellip is in fact tied to actual or anticipated exportation or export earningsrdquo
105 Ibid 106 Ibid para 9341
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
32
on by the Panel107
Table 4 Panel Findings on Canada RampD Subsidies whether they constitute ldquoexport subsidiesrdquo under Articles 1 amp 3
ProgramsMeasures
Article 11(a) Financial
contribution Article 11(b) Benefit
Article 31(a) Contingent upon export performance
Direct transfer of funds
de jure de facto
Technology Partnerships Canada (TPC) Yes Yes Yes
Defense Industry Productivity Program (DIPP)
Lack of relevant evidence provided by Brazil
2 EC-AIRCRAFT CASE
In the EC-Aircraft case all of the RampD programs at issue except for UK
Technology were found to be specific subsidies The programs found to be inconsistent
with the WTO were EC Framework Programs French grants German federal grants
German sub-federal grants Spanish PTA and UK CARAD only the UK Technology
Program was found to be consistent (Table 5) Overall the government RampD subsidies
took the form of loans and grants under the technology programs They were funded to
aeronautics-specific industries or large civil aircraft-specific RampD projects Loans to
Airbus were found illegal because they were provided at a rate below market rate and
specific The grants were found to be illegal because they conferred benefits and were
ring-fenced for aeronautics RampD at a sub-level of the programs
107 For more details on the Appellate Body decisions (WTDS70ABR) and the compliance issues (Canada - Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 215 of the DSU WTDS70RW and WTDS70ABRW) see Ahn (2007)
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
33
Table 5 Panel Findings on the EC RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Potential Direct
Transfer of Funds
Article 21(a)
de jure
Article 21(c)
de facto
EC grants for LCA-related RampTD projects
Second Framework Program (1987-1991) Third Framework Program
(1990-1994) Fourth Framework Program
(1994-1998) Fifth Framework Program
(1998-2002) Sixth Framework Program
(2002-2006)
Yes Yes Yes
French government grants Yes Yes Yes
German federal grants
Luftfahrtforschungsprogramm I (LUFO I) Luftfahrtforschungsprogramm
II (LUFO II)
Yes Yes Yes
Luftfahrtforschungsprogramm III (LUFO III)
Yes No
German sub-federal grants
Offensive Zukunft Bayern I II Bayerisches
Luftfahrtforschungsprogramm Hightechoffensive Bayern
(1999-2003) Airbus Materials amp System
Technology Centre Bremen (AMST I) Airbus Materials amp System
Technology Centre Bremen II (AMST II) Luftfahrtforschungsprogramm
Hambrug (2000-2005)
Yes Yes Yes
Spanish government loans
Spanish PROFIT Loans Yes Yes No Yes
Spanish PTA Loans Yes Yes Yes
UK government grants
UK CARAD grants Yes Yes Yes
UK Technology Program Yes Yes No
21 EC Measures Found to be Illegal
Unlike Canadarsquos RampD policy measures that were challenged to be prohibited
export subsidies the ECrsquos measures were alleged to be actionable subsidies Accordingly
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
34
the Panel examined the specificity of the measures after examining whether each of the
challenged RampTD measures constitutes a subsidy
Regarding the financial contribution element the Panel found that all the RampTD
measures were financial contributions Regarding the RampTD measures at issue except for
German LuFo III program the Panel found that they fall within the definition of a
financial contribution since they are ldquogrants involving direct transfers of fundsrdquo or
ldquoloansrdquo108 As to German LuFo III program the Panel recalled that a commitment to
provide funds may well be a financial contribution if in the form of a lsquopotential direct
transfer of fundsrsquo and fall within the definition of a financial contribution
On the question of whether each of the challenged RampTD measures conferred a
benefit on Airbus except for the German government funding under the LuFoIII program
all the challenged RampTD measures were found to confer a benefit upon Airbus
According to the Panel the question of benefit is ldquoresolved by reference to the marketrdquo
meaning that a benefit will be conferred whenever a loan ldquois granted to a recipient on
terms more favorable than those available to the recipient in the marketrdquo or whenever a
grant given places the receiver in a ldquobetter position than it would otherwise have been
inrdquo109 In case of PTA loans and the PROFIT loans from the Spanish government the
Panel ruled that they were provided on terms more favorable than would have been
possible on the market and thus conferred benefits upon Airbus110 Other challenged
measures were also proven to place Airbus in a better position than it would otherwise
108 WTDS316R para 71496 109 WTDS316R paras1497-71503 110 Ibid paras 71499-1500 71503
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
35
have been in without the grant and were found to confer benefits 111 However
concerning the LuFo III program at the time of the dispute the program was mere a plan
and the payments were not transferred unlike two other previous programs (LuFo I amp II)
In line with this the Panel noted that benefits were associated with the amount of funds
that were promised not the promise itself and dismissed the claim that the funding
commitment under the LuFo III program conferred a benefit on Airbus112
In finding of specificity the Panel required an answer to a question whether the
granting authority expressly limited access to the subsidies to certain enterprises The
Panel found that the RampTD subsidies granted to Airbus under each of the EC Framework
Programs are specific Although the overall aims of the Framework Programs were
expressed as advancing EC RampTD activities in general the granting authorities allocated
funding in line with the objectives and priorities identified in the aeronautics research
related work programs By allocating a budget to the companies undertaking research in
the aeronautics sector the legal regimes the granting authority limited access to subsidies
and the subsidies under the Framework Programs were found to be specific113
Regarding the PROFIT loans under the Spanish government the Panel first
rejected the claim of specificity by the US due to lack of evidence Since the EC
submitted less than satisfactory information to the Panel it drew an ldquoadverse inference
from instances of non-cooperationrdquo by the EC and stated the subsidies under the PROFIT
111 Ibid para 71501 112 WTDS316R para 71502 113 Ibid paras 71562-1566
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
36
I and II are specific114 Other RampTD measures including French government grants
German federal and sub-federal government grants loans under the Spanish PTA
program and UK government grants under CARAD were found to be limited to certain
enterprises and thus specific
22 EC Measures Found to be Legal
Among the challenged subsidies granted by the EC to Airbus the UK
Technology Program was found to be not specific and therefore consistent with the SCM
Agreement The UK Technology Program was a research program intended to fund
RampTD activities and funding was provided through competition Grants provided to
Airbus under the UK Technology Program were found to be not specific since the TP is a
research program intended to fund RampTD activities across a broad range of economic
sectors115 Funds were awarded through the open competitions and the research themes
varied from year-to-year The research themes were seven key technology areas (eg
Bioscience and Healthcare Technology Emerging Energy Technology Information and
Communication Technology) and the themes were not focused on particular economic
sectors In addition the brochure explicitly identified various sectors including the
aerospace automotive construction and etc as potential beneficiaries
114 WTDS316R paras 71579-1580 115 WTO WTDS316R paras 71584-1591
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
37
3 US-AIRCRAFT CASE
While the ECrsquos RampD subsidies were in the form of direct grants or loans the
RampD assistances provided by the US to Boeing were indirect provided through co-
project between the government agency and Boeing The EC alleged that the US has
provided subsidies to assist Boeingrsquos research development design and production of its
large civil aircrafts through National Aeronautics and Space Administration (NASA)116
DOD and DOC aeronautics RampD programs at issue117 The Panel found that Boeing had
received actionable RampD subsidies from the National Aeronautics and Space
Administration (NASA) and the US Department of Defense (DOD) through RampD
Programs and general support Although it is not discussed in detail in this study the
WTO-incompatible NASA and DOD subsidies were found to cause serious prejudice to
the interests of the EC The NASA and the DOD aeronautics RampD subsidies were found
to cause significant price suppression significant lost sales and threat of displacement
and impedance of exports from third country markets with respect to the 200-300 seat
wide-body LCA product market118 While the measures mentioned above were found to
be illegal subsidies several measures were found to be consistent with the WTO The
measures that are consistent with the WTO are as follows DOC Advanced Technology
Program DOD aeronautics RampD contracts and waiver of patent rights by NASA amp DOD
(Table 6)
116 NASA is a government agency of the US responsible for space program and aeronautics and aerospace research
117 WTO WTDS353R para 460 118 Wittig (2011) at 150
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
38
31 US Measures Found to be Illegal
The US government subsidies that were found to be illegal took the form of
payments and access to facilities employees and equipment under contracts andor
agreements between the US government and Boeing Moreover the research results
were primarily for the specific industries
NASA Aeronautics RampD
NASArsquos provision of payments and access to government facilities for LCA-
related RampD through eight aeronautics RampD programs was found to be illegal because
Table 6 Panel Findings on the US RampD Subsidies whether they constitute ldquospecific subsidiesrdquo under Articles 1 amp 2
ProgramsMeasures at Issue Article 11(a)
Financial contribution Article
11(b) Benefit
Article 2 Specificity
Category Sub-category Direct transfer of funds
Provision of Goods
and Services
Article 21(a) de jure
Article 21(c)
de facto
NASA Aeronautics RampD
payments Yes Yes Yes
Access to facilities equipment amp employees
Yes Yes Yes
DOD Aeronautics RDTampE
Aeronautics RampD contracts No
Aeronautics RampD Assistance instruments - Payments
Yes Yes Yes
Aeronautics RampD Assistance Instruments ndash Access to
Facilities equipment amp employees
Yes Yes Yes
DOC Aeronautics RampD
DOC Advanced Technology Program
Yes Yes No
NASADOD IP Waivers
Patent Rights Assumed as yes No
Data RightsTrade Secrets Not a separate subsidy from the ones above
NASADOD Reimbursement
IRampDBampP Program Failed to prove that the measure exists
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
39
the programs were conducted for the benefit of the receiver and were limited to Boeing
When examining the measure at issue the Panel first noted two issues raised 1) whether
purchases of services are excluded from the scope of the definition on subsidy and 2)
whether NASArsquos RampD contracts are characterized as purchases of services To the first
question the Panel defined that the purchases of services are excluded from the scope of
the definition of the subsidy The reasoning was that the SCM Agreement stipulates
government provision of goods or services or purchase of goods as a financial
contribution but the provision omits purchase of services119 In order to be defined as
purchases of services the Panel noted that it depends on the nature of the work that
Boeing was required to perform under the contracts mdash whether the RampD that Boeing was
required to conduct was principally for its own benefit or whether it was principally for
the benefit and use of the US Government The Panel noted that the work under the
aeronautics RampD contracts with the NASA was for Boeingrsquos own benefit or use rather
than for the government use Based on the reasoning the Panel made a decision that the
eight aeronautics RampD Programs conferred a benefit and therefore constitute subsidies
The reasoning behind the decision was that no commercial entities would have paid to
another commercial entity to perform RampD that is principally for the benefit or use of the
beneficiary
Regarding the specificity of the program the measure was found to be specific
The EC alleged that the subsidies were explicitly limited to enterprises that participate in
aeronautics-related RampD and to those industries that satisfy the objectives of the Space
119 WTO WTDS353R para 7955-958
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
40
Act where the Programs derived from One of the evidence provided by the EC was that
Boeing received all contracts awarded by NASA and that Boeingrsquos active participation at
the highest levels of the NASA Advisory Council makes NASA to grant subsidies based
on Boeingrsquos views and needs The US provided evidence that rebuts only the parts of the
ECrsquos arguments The Panel found that the US did not provide sufficient evidence to
rebut ECrsquos argument and ruled that the NASArsquos measure as a whole is specific
DOD Aeronautics RDTampE (Payments and Access to Facilities)
DODrsquos aeronautics RampD ldquoassistance instrumentsrdquo including payments and
access to facilities were found to be specific financial contributions based on the evidence
that the work under the program was principally for Boeingrsquos benefit and use The EC
argued that DOD made payments to Boeing to perform RampD related to dual-use
technologies by allowing the US LCA industry to participate in DOD-funded research
and enabling it to exploit the research result The Panel first examined whether the DOD
subsidy programs are characterized as purchase of service The Panel looked at the
evidence including the legislation and the types of instruments entered into between DOD
and Boeing to see whether DOD had any use for the results of the RampD programs The
evidence demonstrated that the work Boeing performed under the RampD assistance
instruments with DOD was principally for the benefit and use of Boeing For instance
according to the US among the measures under DOD assistant instruments referred to
transfer a thing of value to the recipient The Panel ruled that the assistance instruments
are not purchases of service but belongs to a provision of goods or services
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
41
The Panel then turned to the question whether a benefit was conferred from the
DOD assistance instruments measure Based on the reason that no commercial entity
would provide payments and access to its facilities to another commercial entity on the
condition that the other entity perform RampD activities principally for the benefit and use
of that other entity the Panel concluded that the program conferred a benefit120
As to determining the specificity of the program the Panel noted the evidence
that almost half of all DOD RDTampE funding went to five enterprises all of which are in
aircraft industry Based on this evidence the Panel ruled that subsidies were sufficiently
limited to a group of enterprises or industries and thus constituting specific subsidies121
32 US Measures Found to be Legal
DOD Aeronautics RDTampE (Contracts)
In contrast to the DODrsquos assistance instruments that were found to be illegal
subsidies its procurement contracts were found to be consistent with the WTO The US
argued that research is a service and thus the procurement contracts were purchases of
services For a transaction to be ldquopurchases of servicesrdquo work performed should be
principally for the benefit or use of the government rather for the benefit of the service
seller The work that Boeing performed under its aeronautics RampD contracts with DOD
was principally for the benefit and use of DOD and is therefore characterized as a
ldquopurchase of servicesrdquo and does not constitute financial contributions
120 WTO WTDS353R paras 71183-71184 121 Ibid paras 71197-71198
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
42
The US Department of Defense provided payments to Boeing to perform RampD
that is related to dual-use technologies They allowed the US LCA industry to participate
in DOD-funded research and enabling it to exploit the research result The Panel decided
that DOD RampD contracts were purchases of services and thus not a financial contribution
The reasoning behind the decision was that the purpose of the RampD contacts was the
acquisition of services for government benefit not for the industryrsquos benefit Also
purposes of the DOD programs do not generally demonstrate that the DOD aimed to
transfer technology to Boeing Among the measures under DOD procurement contracts
referred to acquiring goods or services for the direct benefit or use of the US
government the work that Boeing performed was principally for the benefit and use of
the DOD The US acknowledged that ldquoRampD contractsrdquo are used only when the principal
purpose is the acquisition of supplies or services for the direct benefit or use of the federal
government
DOC Aeronautics RampD Advanced Technology Program
The EC argued that Department of Commerce (DOC) made payments to Boeing
to perform RampD under the Advanced Technology Program (ATP) and the subsidy is
specific The EC provided three reasons to the argument First the subsidy was
available only for the sub-set of US-produced goods that perform research into ldquohigh risk
high pay-off emerging and enabling technologiesrdquo according to the purpose written in the
ATP Rule Second the program emphasized ldquoon solving generic problems of specific
industriesrdquo as stipulated in the ATP statute Lastly the eight projects under the ATP were
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
43
limited to a group of enterprises and industries
The Panel noted that the subsidy is specific when it is provided to a ldquosufficiently
limited group of enterprises or industriesrdquo not when it is limited in any way at all The
Panel looked at each argument by the EC To the first argument the Panel stated that
ldquohigh risk high pay-off emerging and enabling technologiesrdquo does not appear to be
limited to a group of enterprises or industries Panel also looked at where the ATP
funding was provided to and it found that the funding was expended across the various
fields including advanced materials and chemicals biotechnology electronics computer
hardware etc To the second argument of the EC the Panel noted that the statement
ldquosolving generic problems of specific industriesrdquo is included under the broader context in
which the program is supposed to ldquoaid industry-led United States joint research and
development venturesrdquo Reading the full provision the Panel found it clear that ATP
funding is not limited to ldquospecific industriesrdquo To the ECrsquos third argument the Panel said
that specificity must be analyzed at the level of the subsidy program ndash in this case at the
level of the entire ATP In order to examine the subsidy at the level of individual
payments provided reasons are supposed to be provided The EC failed to prove that the
ATP as a whole is specific and also did not provide reasons for examining specificity at
the individual project level Based on these reasons although the ATP is a subsidy the
Panel found that the subsidy is sufficiently broadly available and thus not specific122
Intellectual Property Right WaiversTransfers
Regarding waivers and transfers of patent rights by NASA and DOD the Panel
122 WTO WTDS353R para 71240
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
44
ruled they are consistent with the WTO In examining this measure at issue the Panel
assumed arguendo that the allocation of patent rights under NASADOD RampD contracts
and agreements with Boeing involves a subsidy Looking first at the specificity of the
measure the Panel stated that allocation of patent rights is uniform under all US
government RampD contracts agreements and grants In all cases the contractor or partner
owns any inventions that resulted from performing research funded by the US Based
on this evidence the Panel ruled that the measure is not specific and thus consistent with
the WTO
VI POLICY IMPLICATION amp CONCLUSION
This paper has reviewed and analyzed various RampD subsidies that were disputed
under the WTO in order to see the different characteristics of illegal and legal RampD
subsidies according to the WTO ruling As to the feature of illegal RampD subsidies the
subsidies were in the form of grants or loans that were granted based on export earnings
or specifically limited to a certain enterprise or industry In the Canada-Aircraft case the
illegal RampD subsidy was in the form of conditional repayable loans to aircraft
development projects and directly supported the near market RampD projects with high
export potential Illegal subsidies in the EC-Aircraft case had characteristics that were
direct grants or loans and were specifically limited to Airbus or the European aircraft
industry Loans to Airbus were found to be at a rate below market rate and grants were
found to be specifically allocated for aeronautics RampD at a sub-level of the programs In
the US-Aircraft case due to the characteristics of the close link with the military sector
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
45
the subsidies were indirectly provided through co-projects between government agency
and commercial aircraft enterprises
In contrast government RampD assistance measures found to be consistent with
the WTO were provided to a wide range of industries or results from the government-
funded RampD projects were used for the benefit of government Open competition
targeting technology development was found to be consistent with the WTO Contracts
where the result is primarily for the government benefit were found to be consistent as
well If patent rights that resulted from the co-project between a government and
industries are waived equally to any participant of the project then it was also found to be
consistent with the WTO
Based on these illegal and legal aspects of subsidy programs several important
implications for government policy can be drawn Governments should be cautious in
making policy that their supports would not be directly targeted towards a near market
RampD projects with high export potential As aid to specific enterprises or industries
became an issue for most of the measures in order to support industries in a way that is
consistent with the WTO a government can consider planning RampD subsidies that are
targeted towards technology rather than a specific industry Governments can also provide
subsidies through open competitions providing an opportunity to receive government
support to a wide variety of industries
As new government-financed competitors from Japan China and Russia are
trying to enter the civil aircraft market any government can also be a target of the dispute
over RampD subsidies However once they successfully produce and export commercial
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
46
aircrafts in the world market the domestic subsidy policies or the subsidized firms can be
subject to a complaint under the WTO Thus it would be important for a government to
carefully review whether its measure is consistent with the WTO
It has to be noted that the policy suggestions mentioned above do not guarantee
that the government will be able to avoid litigation even though it adopts what is
suggested as policy implication It is a fundamental question whether it will be safe if a
government provides RampD subsidies according to the suggestion of the paper As
litigation over RampD subsidies has been a minor issue the study was to shed light
on how countries especially developing countries can provide RampD subsidies that
are consistent with the WTO and to suggest what might be criteria for RampD
subsidies The study can be furthered by also looking at the appellate body
decisions on the disputes
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
47
REFERENCES
Andersen Peder (2009) ldquoNew Civil Aircraft Competitors on the Horizonrdquo USITC Executive Briefings on Trade April 2009
Aris Stephen (2002) Close to the Sun How Airbus Challenged Americarsquos Domination of
the Skies London Aurum Press Baldwin Richard and Kruigman Paul (1988) Industrial Policy and International
Competition in Wide-bodied Jet Aircraft in Robert E Baldwin ed Trade policy and empirical analysis National Bureau of Economic Re- search Conference Report series Chicago University of Chicago Press 45- 71
Spencer Barbara J and James A Brander (1985) ldquoInternational RampD Rivalry and
Industrial Strategyrdquo Review of Economic Studies 50(4) 707-22 Buterbaugh Kevin and Richard M Fulton (2008) The WTO Primer Tracing Trades
Visible Hand through Case Studies Palgrave-Macmillan Press Carbaugh Robert J and John Olienyk (2004) ldquoBoeing-Airbus Subsidy Dispute A
Sequelrdquo Global Economy Journal 4(2) Chanda Soumyadipta (2011) ldquoThe Battle of the Big Boys A Critical Analysis of the
Boeing Airbus Dispute Before the WTOrdquo (October 12) Available at SSRN httpssrncomabstract=1944588 or httpdxdoiorg102139ssrn1944588
Crowley Meredith A and David Palmeter (2009) ldquoJapan ndash Countervailing Duties on
Dynamic Random Access Memories from Koreardquo World Trade Review 8 (1) 259ndash272
Davidson C and P Segerstrom (1998)ldquoRampD Subsidies and Economic Growthrdquo Rand
Journal of Economics 29(3) 548ndash577 Goldstein Andrea E and Steven M McGuire (2004) ldquoThe Political Economy of Strategic
Trade Policy and the Brazil-Canada Export Subsidies Sagardquo The World Economy 27 541ndash566
Fisher Daniel I (2002) ldquoSuper Jumbordquo Problem Boeing Airbus and the Battle for the
Geopolitical Future Vanderbilt Journal of Transnational Law 35 865-892
Irwin Douglas A and Nina Pavcnik (2004) Airbus versus Boeing revisited international competition in the aircraft marketrdquo Journal of international economics 64(2) 223-245
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
48
Kang Moonsung (2008) ldquoGlobally Optimal RampD Subsidy Policy an Economistrsquos View on the WTO Subsidy Agreementrdquo Journal of Economic Integration 23(2) 346-359
Levick Michael J (1993) ldquoThe Production of Civil Aircraft A Compromise of Two World Giantsrdquo 21 Transportation Law Journal 433
Low Patrick (1993) Trading Free The GATT and US Trade Policy New York The Twentieth Century Fund Press
Matsushita Mitsuo Thomas J Schoenbaum amp Petros C Mavroidis (2006) The World Trade Organization Law Practice and Policy New York Oxford University Press
Meier-Kaienburg Nils (2006) ldquoWTOs Toughest Case An Examination of the
Effectiveness of the WTO Dispute Resolution Procedure in the Airbus-Boeing Dispute over Aircraft Subsidiesrdquo Journal of Air Law and Commerce 191-250
Olienyk John and Robert J Carbaugh (2011) ldquoBoeing and Airbus Duopoly in
Jeopardyrdquo Global Economy Journal 11(1) Pavcnik Nina (2002) Trade Disputes in the Commercial Aircraft Industry World
Economy 25 May 2002 733-751 Rosenthal Paul C and Robert TC Vermylen (2000) ldquoThe WTO Antidumping and
Subsidies Agreements Did the United States Achieve Its Objectives During the Uruguay Roundrdquo Law and Policy in International Business 31 871-895
Sykes Alan O (2005) ldquoThe Economics of WTO Rules on Subsidies and Countervailing
Measuresrdquo in A Appleton P Macrory amp M Plummer eds The World Trade Organization Legal Economic and Political Analysis Vol II New York Springer Verlag
Tyson LD (1992) Whorsquos Bashing Whom Trade Conflict in High Technology Industries
Washington DC Institute for International Economics United States International Trade Commission (USITC) (1998) ldquoThe Changing Structure
of the Global Large Civil Aircraft Industry and Market Implications for the Competitiveness of the US Industryrdquo USITC Publication 3143 Washington DC US International Trade Commission
United States International Trade Commission (USITC) (2012) ldquoBusiness Jet Aircraft
Industry Structure and Factors Affecting Competitivenessrdquo USITC Publication 4314 Washington DC US International Trade Commission
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
49
Wittig Stephan (2010) ldquoThe Airbus-Boeing Dispute Implications of the WTO Boeing Decisionrdquo Intereconomics 45(5) 262-263
Journal (Korean) Ahn Dukgeun (2007) ldquoLegal Issues for RampD Subsidies in the WTO Systemrdquo Korean
Forum on International Trade and Business Law 16(2) 357-384 Ahn Young-Su (2006) ldquoThe Subsidy Disputes of Civil Aircraft Industry in WTO and the
Suggestions for Korea Aircraft Industryrdquo The Journal of Korea Research Society for Customs 7(4) 193-216
Lee Eun-Jae (2006) ldquoA Study on Improvement of Korean Governments RampD Subsidy System under the WTO OECDrdquo Trade Remedy Review 1 68-113
Moon Joon Jo (2008) ldquoStudy on US-EU Aircraft Subsidy Dispute and WTO Dispute Settlement Systemrdquo Dankook Law Review 25(3) 85-107
GATTWTO Documents Agreement on Interpretation and Application of Articles VI XVI and XXIII of the
General Agreement on Tariffs and Trade (Subsidies Code) Agreement on Trade in Civil Aircraft The General Agreement on Tariffs and Trade 1947 WTO CanadamdashMeasures Affecting the Export of Civilian Aircraft WTDS70R
WTDS70AB WTO European Communities and Certain Member StatesmdashMeasures Affecting Trade in
Large Civil Aircraft WTDS316R WTDS316AB WTO United StatesmdashMeasures Affecting Trade in Large Civil Aircraft WTDS353R
WTDS353AB
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
50
APPENDIX
AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE EUROPEAN ECONOMIC COMMUNITY CONCERNING THE APPLICATION OF THE GATT AGREEMENT
ON TRADE IN CIVIL AIRCRAFT ON TRADE IN LARGE CIVIL AIRCRAFT
ARTICLE 1
Government-Directed Procurement Mandatory Sub-contracts and Inducements
With respect to issues concerning Article 4 of the GATT Agreement on Trade in Civil Aircraft (hereinafter referred to as the Aircraft Agreement) the Parties agree to act in conformity with the interpretative note to Article 4 of the Aircraft Agreement contained in Annex I of this Agreement
ARTICLE 2 Prior Government Commitments
Government support to current large civil aircraft programmes committed prior to the date of entry into force of this Agreement is not subject to the provisions of this Agreement except as otherwise provided below The terms and conditions on which such support is granted shall not be modified in such a manner as to render it more favourable to the recipients however de minimis modifications shall not be deemed inconsistent with this provision
ARTICLE 3 Production Support
As of entry into force of this Agreement the Parties shall not grant direct government support other than what has already been firmly committed for the production of large civil aircraft This prohibition shall apply both to existing and to future programmes
ARTICLE 4 Development Support
41 Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal based on conservative assumptions has established that there is a reasonable expectation of recoupment within 17 years from the date of first disbursement of such support of all costs as defined in Article 6(2) of the Aircraft Agreement including repayment of government supports on the terms and conditions specified below
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
51
42 As of entry into force of this Agreement direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed
(a) 25 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years of first disbursement plus (b) 8 per cent of that programmes total development cost as estimated at the time of commitment (or of actual development costs whichever is lower) royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 percent within no more than 17 years of first disbursement These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal
43 Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis
(a) 20 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 40 percent of forecast deliveries (b) 70 per cent of aggregate payments calculated in accordance with Article 42 are payable on the basis of the delivery of a number of aircraft corresponding to 85 percent of forecast deliveries
ARTICLE 5
Indirect Government Support
51 The Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft 52 As of entry into force of the Agreement identifiable benefits to the development or production of any of the products covered by this Agreement net of recoupment derived from indirect support shall not exceed in any one year
(a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement or
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
52
(b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement
53 Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement Where it can be demonstrated that the results of research and development have been made available on a nondiscriminatory basis to large civil aircraft manufacturers of the Parties benefits deriving from such technologies shall be excluded from the calculation in Article 52 However identifiable benefits may result when large civil aircraft manufacturers are responsible for or have early access to the conduct or results of such research lf a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above Benefits from indirect support resulting from the technology obtained through government-funded research and development or through other government programmes shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology
ARTICLE 6 General Purpose Loans
The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available through direct loans guarantees or otherwise to airlines other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing
ARTICLE 7 Equity Infusions
Equity infusions are excluded from the scope of this Agreement Equity infusions will not however be provided in such a manner as to undermine the disciplines in the Agreement
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
53
PURPOSE OF THE CHALLENGED RampD SUBSIDIES
Program Sub-Program Purpose
Canada TPC TPC funding was to support the near market RampD projects with high export potential
EC grants for LCA-related
RampTD projects
Second Framework Program (1987-1991) To assist the company in funding its research and
development efforts Each grant is for an individual discrete research project focusing on a particular aeronautics technology or production process
Third Framework Program (1990-1994)
Fourth Framework Program (1994-1998)
Fifth Framework Program (1998-2002)
To facilitate the development of aircraft and their subsystems and components
Sixth Framework Program (2002-2006)
To advance EC RampTD activities in order to strengthen the scientific and technological basis of EC industry To contribute to the creation of a European Research Area and innovation and promoting the development of scientific and technical excellence and the coordination of European research (71553)
French government
grants
Funding was directed at research endeavors in the area of civil aeronautics construction
German federal grants
LuFo I II III Grants to help fund Airbusrsquo civil aeronautics research and development efforts
German sub-federal grants
Government of Bavaria RampTD grants
For civil aviation research in Bavaria in close coordination with the federal governments aeronautical research programme The funding was made available for companies from Bavarias aviation industry including Bavarian universities and nonuniversity-affiliated research establishments located in Bavaria(71599)
Government of Bremen RampTD grants (AMST I amp II)
Allocated to the AMST site project to pursue research and development with the aim of strengthening Bremen as an aircraft construction site
Government of Hamburg RampTD grants
Aimed at encouraging Hamburgrsquos aerospace industry to increase its efforts in developing new technologies (ie to strengthen the technological productivity of Hamburgrsquos aerospace and supply industry) (71602)
Spanish government
loans Spanish PROFIT Loans
To encourage companies and other organizations to carry out RampTD activities across a wide array of economic sectors in accordance with a defined set of objectives (71570)
Spanish PTA Loans
Funding to aeronautics companies involved in the manufacturing design supply and maintenance of aircraft and aircraft parts and to engineering services companies and research institutions and universities developing specific technologies with aeronautics use
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
54
UK government grants
UK CARAD grants (Civil Aircraft Research and Development Program)
Funding from the government of the United Kingdom since 1992 for civil aeronautics-related RampD projects
UK Technology Program
Awarded through competitions that were limited to RampTD activities in the field of aeronautics-related technologies Research program intended to fund RampTD activities across a broad array of economic sectors (71587) Funding provided for the purpose of collaborative research and development and knowledge transfer networks (71587)
NASA Aeronautics
RampD123
Advanced Composites Technology (ACT) program
ACT program is to increase the competitiveness of the US aeronautics industry by putting the commercial transport manufacturers in a position to expand the application of composites beyond the secondary structures in use today to wings and fuselages
High Speed Research (HSR) program
Develop the technologies that industry needs to establish the viability of an economical and environmentally sound High Speed Civil Transport (HSCT) a vehicle that could provide US leadership in the long-range commercial air travel markets of the next century
Advanced Subsonic Technology (AST) program
To provide US industry with a competitive edge to recapture market share maintain a strongly positive balance of trade and increase US jobs
High Performance Computing and Communications (HPCC) program
To accelerate the development availability and use of high-performance computing technology by the US aerospace industry
Aviation Safety program (AvSP)
Emphasizing rapid and effective dissemination of the aviation safety technology to the US industry AvSP resources fund RampD contracts and grants which help ensure direct transfer of technology to the US industry and thus increase the likelihood of direct input into near-term products
Quiet Aircraft Technology (QAT) program
Focused on developing noise reduction technology for the US commercial aircraft industry to enhance its competitiveness to meet national and international environmental requirements and to facilitate market growth
Vehicle Systems program (VSP) To investigate and develop breakthrough technologies to maintain the superiority of US aircraft
Research and Technology Base (RampT Base) program
Through basic and applied research RampT Base developed critical high-risk technologies and advanced concepts for US aircraft and engine industries
123 WTDS353R Figure 2 NASA Aeronautics RampD Programmes Helped Boeing Build LCA
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
55
DOD Aeronautics
RDTampE
Aeronautics RDTampE contracts DOD funds RampD related to dual-use technologies ndashtechnologies applicable to both military and commercial aircraft
Aeronautics RDTampE assistance instruments ndash Payments amp Access to facilities equipment and employees
DOD provide their facilities equipment and employees for LCA-related RampD
DOC Aeronautics
RampD
DOC Advanced Technology Program
To improve the competitive position of US industry by supporting industry-led RampD projects (496)
NASADOD IP Waivers
Patent Rights NASA and DOD transfer to Boeing valuable patent rights rights to trade secrets and exclusive rights to certain data for LCA-related and other technologies Data RightsTrade Secrets
NASADOD Reimbursement
IRampDBampP Program
NASA and DOD reimburse Boeing for its own independent LCA RampD that is not related to any specific contract as well as for its bid and proposal costs
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt
56
국문
국가경 장에 있어 신 요 이 고 에 라 RampD(연구
개발)에 부지출도 늘어나고 있다 계무역 구(WTO) 체 에
부(또는 부 ) RampD 보조 SCM(보조 과 상계 법)에 허용가능
보조 (non-actionable subsidy) 규 어 있다 지만 이러 규
SCM 31조에 라 2000 1월에 종료 었다
본 논문 WTO체 에 RampD 보조 과 분쟁이 발생
ldquoCanada-Aircraftrdquo ldquoEC-Aircraftrdquo 및 ldquoUS-Aircraftrdquo 분쟁들
살펴보았다 이 분쟁들 항공우주 산업 물 이고 통신 및 컴퓨 등
IT 첨단 이 크 아 국가 경쟁 향상이라는 동인과 방
산업발 이라는 이 공 부 RampD 보조 에 WTO 통상법
입장 공 분쟁이다
본 연구에 는 근에 WTO 상소 구 판결이 나 ldquoUS-Aircraftrdquo
사 를 포함 존 항공 분쟁에 도 첨 문 가 었 주요 항공
RampD 보조 에 통상법 사 분 통해 항공 산업에 취해진 다양
RampD 보조 WTO체 합 에 해 분 고 향후 RampD 보조 에
WTO 입장에 해 살펴보았다
키워드 계무역 구 RampD 보조 WTO합 ldquoCanada Aircraftrdquo 분
쟁 ldquoEC Aircraftrdquo 분쟁 ldquoUS Aircraftrdquo 분쟁
번 2009-23760
ltstartpagegt10I INTRODUCTION 1II LITERATURE REIVEW 4III BACKGROUND OF THE INDUSTRY AND THE DISPUTES 6 1 CHARACTERISTICS OF THE CIVIL AIRCRAFT INDUSTRY 6 2 BACKGROUND OF CANADA AIRCRAFT CASE 10 3 BACKGROUND OF US V EC CASE 12IV AGREEMNTS ON SUBSIDIES 16 1 THE GATT 1947 amp TOKYO ROUND 1979 16 2 1992 CIVIL AIRCRAFT AGREEMENT 18 3 THE URUGUAY ROUND amp THE SCM AGREEMENT 19 31 Subsidies under the SCM agreement 20 32 Subsidies on Research and Development 25V ANALYSIS ON THE WTO DISPUTE 27 1 CANADA-AIRCRAFT CASE 29 2 EC-AIRCRAFT CASE 32 21 EC Measures Found to be Illegal 33 22 EC Measures Found to be Legal 36 3 US-AIRCRAFT CASE 37 31 US Measures Found to be Illegal 38 32 US Measures Found to be Legal 41VI POLICY IMPLICATION amp CONCLUSION 44REFERENCES 47APPENDIX 50plusmnsup1sup1regAtildeEcircmiddotIuml 56ltbodygt