United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint): some comments

This paper provides limited comments on portions of the Appellate Body (AB) judgment. With respect to the existence of a subsidy under contracts with NASA and DOD, we find the discussion of whether Boeing has received a financial contribution to be a distraction from the core issue – whether the mix of monetary compensation, access to government personnel and facilities, and IP rights ‘overcompensated’ Boeing for the services it rendered (or whether the government paid more for those services than they were worth to the government). The panel's analysis of this core issue, which focused on whether Boeing was the principal beneficiary of the contracts, is flawed, but the alternative approach of the AB is equally flawed. The analogy between an R&D joint venture and equity infusion is dubious, and the existence of a benefit simply does not turn on how one dimension of the contract (the allocation of the resulting intellectual property rights (IP)) is specified. We also argue that even a contract that confers a ‘benefit’ (or economic rent) on Boeing could still be an efficient arrangement for the allocation of cost and prospective revenues between the two partners. With respect to adverse effects, we argue that the panel and AB failed to develop an adequate counterfactual with respect to product developments; that is, it is not implausible that if Boeing had not received a subsidy and would accordingly have developed the 787 later, Airbus would also have delayed the development of the A350. To determine the existence of adverse effects, the panel and AB should have considered the profit (or sales) of Airbus relative to what would have happened in this counterfactual world. Finally, we observe that the analysis of lost sales and ‘price suppression’ fails to consider the specific features of competition in the aircraft industry. Unlike what happens in the market with posted prices, when contracts are individually negotiated, whether the outcome of competition is affected by a subsidy depends on the relative cost position of the bidders. When Boeing is the lowest cost bidder, the only effect of the subsidy is to increase its rent, with no effect on sales or prices for Airbus.