Why Boeing's Special Relationship With US Agencies Has Ended

Boeing Co. (NYSE: BA), the No. 1 U.S. aerospace company, got a boost as the U.S. Trade Representative said it had met a six-month deadline for implementing changes in the manner the U.S. government provides it with advantages over rival Airbus Industrie of Europe.

Boeing shares closed up 8 cents at $70.05.

“Any adverse effects of the subsidies in question have ceased to exist, or a ‘genuine and substantial relationship of cause and effect’ no longer exists,” the USTR said about Boeing on Monday.

The ongoing row between Boeing and Airbus centers around how much each company benefits from government backing. Any resolution is likely to have both companies adjusting their relationships with the governments that depend on them for jobs and revenue.

The World Trade Organization had accused both of accepting what it considers illegal public support: $18 billion of EU taxpayer funds in the case of Airbus and between $3 billion and $4 billion of U.S. public funds to Boeing, including preferential tax treatment from Washington state amounting to $3.1 billion from 2006 to 2024 and $476 million in subsidies from the city of Wichita, Kan., where Boeing has major operations.

Chicago-based Boeing said in January that due to defense spending cuts it will shut down operations in Wichita, at the cost of 2,160 local jobs, and move them to three other states.

The U.S. Trade Representative said joint research and development (R&D) programs by the U.S. Department of Defense and the National Aeronautics and Space Administration have been shuttered and that it had modified the way contracts agreements are drawn up to eliminate Boeing’s exclusive rights to publicly funded R&D programs.

For example, a NASA program to develop quiet aircraft technology that passed on the rights to that research to Boeing exclusively has ended. It also scrapped limited exclusive data rights contract clauses that give taxpayer-funded research to specific companies to use as if they were innovated and copyrighted by them.

Boeing was accused of reaping $3.8 billion in indirect subsidies through its special relationship with NASA and the U.S. Defense Department.

The USTR also said the City of Wichita was issuing industrial revenue bonds to Boeing that are in compliance with trade agreements and that no such bonds had been issued since 2007. Washington, the state where Boeing was founded and where it still has a strong industrial presence, is offering a lower tax to its aerospace and retail industries that is in compliance with international trade agreements, the USTR added.

The EU Trade Commission has said it will look into the changes made to see if it allays its concerns.

“The WTO ruled that billions of dollars of subsidies to Boeing were illegal, and the US was given until today to bring those to an end. We will now immediately review their compliance package to check whether the U.S. have taken the necessary steps to end these subsidies and their adverse effects,” said John Clancy, a representative for EU Trade.

For its part, Airbus was quiet about the USTR's comments. In March the European aerospace giant applauded a report by the WTO’s Appellate Body that concluded Boeing had received “at least $5.3 billion” in direct subsidies from the U.S. Treasury and “an additional $2 billion” in state and local subsidies.

When addressing accusations by Boeing it has received $18 billion in direct subsidies from the governments of France, Germany, the UK and Spain, Airbus contends that it participates in a “system of loans to Airbus by European governments.”

Nonsense, says Boeing in a reply to Monday’s announcement. It said Airbus receives, among others gifts, so-called “launch aid subsidies” that helped make its A350 aircraft. It also says the A380 superjumbo continues to benefit from “very substantial subsidies.”

“The U.S. has now complied with the WTO ruling. Unfortunately, the same cannot be said of Airbus and its government sponsors, which have thumbed their noses at the WTO,” Boeing said in its statement.

Airbus has also accused Boeing aircraft of being born out of public funding.

“Consequently, the B787 – previously known as the ‘Dreamliner’ – is now to be called the ‘Subsidy-liner’ (B7aid7). The WTO ruling proves it is the most highly subsidized aircraft in the history of aviation,” Rainer Ohler, spokesperson for EADS NV (EPA:EAD), the parent company of Airbus, said in a statement after the WTO issued its six-month moratorium in March, which ended Sunday.