Boeing Co. received an illegal tax break from Washington state as part of $8.7 billion in aid to assemble the 777X and manufacture the jetliner’s carbon-fiber wing there, the World Trade Organization said.
An incentive cutting a state levy on gross receipts by 40 percent is a prohibited subsidy that must be removed, a three-judge panel said Monday in Geneva. The tax break, which takes effect when the first 777X is delivered in 2020, gives an unfair advantage to the U.S. planemaker to the detriment of overseas manufacturers, the WTO determined.
The European Commission said Boeing would gain $5.7 billion from the disputed benefit, while the U.S. company put the value at $1 billion over 20 years. The decision marks the latest twist in a longstanding clash between the U.S. and the European Union over government incentives to ease the heavy costs of developing new jetliners for Chicago-based Boeing and Europe’s Airbus Group SE.
The ruling is “an important victory for the EU and its aircraft industry,” EU Trade Commissioner Cecilia Malmstrom said in a statement. “We expect the U.S. to respect the rules, uphold fair competition, and withdraw these subsidies without any delay.”
Boeing said the WTO rejected six of the seven incentives challenged by the EU and singled out a tax break on future 777X revenue, while allowing the incentive to stay in place for other jetliners the company makes in the Seattle area.
“In rejecting virtually every claim made by the EU in this case, the WTO found today that Boeing has not received a penny of impermissible subsidies,” J. Michael Luttig, the planemaker’s general counsel, said in a statement. The company expects the 777X tax break to be upheld if appealed, he said.
“We expect little material impact on either Boeing or Airbus from WTO rulings,” Douglas Harned, an analyst at Sanford C. Bernstein & Co., said in a note to clients. “Remedies available to enforce WTO rulings are limited in practice; countries can replace one subsidy with another; and WTO cases tend to be subject to multiple appeals.”
Shares of Boeing and Airbus fell less than 1 percent in trading Monday, to $149.16 and 60.05 euros, respectively, at 11:01 a.m. in New York.
If the U.S. appeals the decision, as expected, the case would follow the same circuitous legal process as 2011 WTO rulings that barred European aid for the Airbus A380 superjumbo and U.S. perks for Boeing’s 787 Dreamliner. The otherwise close trade partners have been sparring over aircraft incentives for more than a decade after the U.S. terminated a previous agreement on the matter.
The WTO found in September that the European Union failed adequately to remedy some of the incentives deemed illegal in 2011 and compounded the issue with below-market loans for the planemaker’s A350. The U.S. would be allowed to pursue retaliatory sanctions if the finding stands. The EU is appealing the ruling and disputing U.S. claims of $22 billion in damages.
The WTO also is expected to determine next year whether the U.S. and Boeing have adequately addressed $5.3 billion in illegal benefits that flowed to the planemaker from NASA and state aid a decade ago as it developed the 787.
The most recent dispute centers on $8.7 billion in state aid approved in 2013 by lawmakers in Washington, Boeing’s traditional manufacturing hub, as the planemaker threatened to manufacture the redesigned 777 elsewhere. Washington landed the 777X work, as well as a composite-wing factory, after pledging to extend through 2040 tax incentives for aerospace-related companies that had been due to expire after 2024.
The measure has drawn fire locally because it didn’t require Boeing to maintain employment at a set level to maintain the tax breaks. Airbus on Monday blasted the incentives, claiming they cost the company at least $95 billion in lost aircraft sales.
Tom Enders, chief executive of the European planemaker, called for a global framework that would end the “ridiculous series of disputes” and spell out permissible aircraft subsidies for manufacturers in Canada, Russia and China. “This WTO battle is a battle of the past which benefits only the armies of lawyers both sides employ for more than a decade,” he said.