The World Trade Organization is expected to rule this week in a case about billions of dollars in European government loans to Airbus that Boeing argues are illegal subsidies.

The Boeing Company and its chief rival, European Aeronautic Defence & Space Co. (EADS) unit Airbus, are expected to find out this week which aerospace giant won the first round in a massive trade dispute. The World Trade Organization (WTO) will reportedly issue an interim ruling on a five-year-long U.S. complaint concerning loans provided by European Union (EU) countries over four decades by the end of this week.

The complaint argues that European governments unfairly financed Airbus’ rise to being the world’s number one planemaker.

“The U.S. filed the Airbus case in 2004, alleging EU member states gave illegal subsidies to the aircraft maker,” the Wall Street Journal reports this morning (subscription required). “The EU quickly launched a similar case against the U.S., alleging that the U.S. illegally subsidized Boeing. The EU case against Boeing is under review.”

The countersuit lodged by the Europeans claims Boeing received unfair subsides from the states of Washington, Illinois and Kansas. The case is running about six to nine months behind the U.S. one.

According to the 2004 filing, the United States alleges Airbus unfairly benefited from no-interest or low-interest loans from the British, Spanish, German and French governments to launch new aircraft. If a particular aircraft did not do well, Airbus was under no obligation to repay the loan, the U.S. claims

“The European Commission and its member states were also accused of financing, through the European Investment Bank, development, expansion and the upgrade of manufacturing facilities at certain Airbus subcontractors,” MarketWatch reports.

The Journal explains:

Boeing and the U.S. argue that Airbus has received launch aid on terms far more favorable than commercial investors would offer. Boeing says this has allowed Airbus to create more models and sell them faster than it could have on purely commercial terms. Airbus and EU officials say launch aid is closer to a commercial investment than Boeing contends. The Europeans also argue that Boeing has received billions of dollars in U.S. subsidies through local tax breaks and federal grants for aerospace and defense-research work.

The U.S. “hopes the trade body will condemn the E.U. [...] for providing what it calls illegal subsidies that give Airbus [...] an advantage in a market worth $3 trillion over the next two decades,” the Associated Press says.

“If the U.S. administration and Boeing are successful, the decision could prevent EU governments from sinking further launch aid into Airbus [...] for its new 11 billion euro (9.6 billion pounds) A350 airliner,” Reuters reports.

Production glitches have marred both the Boeing 787 Dreamliner and superjumbo Airbus A380 programs in recent years. The 787, Boeing’s first new model in more than a decade, is now about three years behind schedule.

Nonetheless, Airbus sold 90 planes and received 22 cancellations in the first half of the year while Boeing received 85 new orders and 84 cancellations during the same period. Between 1990 and 2008, rival Airbus’ market share rose from 15 percent to 56 percent of new jetliner deliveries. (Sources: The Wall Street Journal and Reuters)

“The ruling comes at a difficult time for the industry as record-breaking backlogs for commercial jets have been chipped away by customers hurt by the recession and a steep decline in air traffic,” MarketWatch notes.

Earlier this year, Boeing again delayed the first test flight of its revolutionary carbon-composite 787, further hurting the aerospace giant’s credibility and drawing customer criticism.

If the WTO backs the U.S., the ruling could pressure Europe to rethink how it funds a strategic company, forcing Airbus to find alternative investments for its A380. According to the AP, it could also affect competition for a $35 billion U.S. Air Force contract for air tankers.

“For either case to result in trade sanctions, the punishment permitted under WTO rules, one side would have to demonstrate that its business was harmed by illegal subsidies to the other,” the Wall Street Journal reports. “That could be hard, given the complexities of the aerospace industry, say people on both sides of the aviation dispute.”

The WTO is expected to post a final and public ruling before the end of the year.

Earlier this week, U.S. Trade Representative Ron Kirk told reporters he did not expect the WTO ruling on “the acrimonious dispute” between Boeing and Airbus to affect the current Doha Round of talks to forge a new global trade accord.

Resources

Boeing Set for Victory Over Airbus in Illegal Subsidy Case (subscription required)
by John W. Miller and Daniel Michaels
The Wall Street Journal, Sept. 3, 2009

Boeing, Airbus Expect Long-Awaited WTO Ruling in Round 1 of Battle over Airliner Subsidies
by Bradley S. Klapper
The Associated Press (via Chicago Tribune), Sept. 2, 2009

WTO to Rule on First Boeing-Airbus Trade Dispute
by Christopher Hinton
MarketWatch, Sept. 2, 2009

WTO to Rule on EU, U.S. Airbus Case
Reuters (via New York Times), Aug. 25, 2009

WTO Ruling on Boeing-Airbus Dispute Won’t Hit Doha Talks: US
Agence France-Presse, Sept. 2, 2009