After 17 years, potential truce looms in U.S.-Europe jet subsidy war

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(Jun 15): The United States and Europe are speeding efforts to reach a pact to end a 17-year-old dispute over aircraft subsidies but may settle for a prolonged truce in recent tariff wars, people familiar with the matter said.

A deal to either end or pause the world's largest corporate trade dispute would grant relief to dozens of other industries affected by tit-for-tat tariffs that were suspended in March. They face a renewed trade war within weeks if there is no progress.

U.S. Trade Representative Katherine Tai discuss the dispute in her first face-to-face meeting with EU counterpart Valdis Dombrovskis on Monday ahead of Tuesday’s U.S.-EU summit. She travels to Britain on Wednesday.

The European Commission, which oversees EU trade policy, and the United States are keen to find a solution by July 11 when the current suspension of transatlantic tariffs comes to an end.

The two sides have been targeting a pair of treaties - one between the United States and European Union, the original parties, and another between Washington and London following Britain's exit from the EU - on new ground rules for aerospace.

Barring a detailed accord, they could opt for a standstill agreement pushing back the resumption of tariffs by years, but no final decision has been reached, one of the people said.

U.S. President Joe Biden has vowed to reset relations with European partners after four tumultuous years under former President Donald Trump.

Trade experts say a deal to freeze the conflict over jet subsides, some of which have been rescinded or wound down, would give both sides more time to focus on broader agendas such as concern over China's state driven economic model.

The tariffs on $11.5 billion of goods were progressively imposed from 2019 after the United States and EU both won partial victories at the World Trade Organization over claims of unfair aid for planemakers Boeing and Airbus.

The dispute has dragged on since 2004 when the United States withdrew from a 1992 aircraft subsidy pact and took the EU to the WTO, claiming Airbus had managed to equal Boeing's share of the jet market thanks in part to subsidised government loans.

The EU counter-sued over what it termed unfair R&D support and subsidised tax incentives for Boeing.

In a potentially key breakthrough, the United States has watered down opposition to the principle of future public loans for Airbus but insists they must be demonstrably market-based and notified in advance, people familiar with the talks said.

But hurdles remain over the extent to which that could effectively allow Washington to approve or block European projects, they added. The EU vehemently opposes any U.S. veto.

Even more critical is the benchmark to be used when deciding whether the interest on any future loans is market-compatible.

Under the 1992 subsidy pact, one third of a project could be financed by direct government support such as loans and cleared indirect R&D support up to 4% of a company's revenue.

One option is to revisit that framework with market rules replacing subsidy quotas and a new cap on indirect R&D support.

None of the parties agreed to comment on the talks.

CHINA 'ON RADAR'

In December 2020, outgoing U.S. Trade Representative Robert Lighthizer told Reuters the U.S. and Europe should cooperate in opposing future aerospace subsidies used by China.

The U.S. has floated a joint review of aerospace funding in non-market economies like China, two of the people said.

"There's no question that the rise of China's aircraft industry is ... on everybody's proverbial radar," U.S. Chamber of Commerce Senior Vice-President Marjorie Chorlins said on Monday, noting what she described as China's "heavy subsidisation".

Like the United States, the EU has sparred with Beijing on trade and security this year. But its 27 nations could struggle to agree a common front on topics like aerospace.

In April, for example, Hungary blocked an EU statement criticising China’s new Hong Kong security law, sparking a row over the right of member states to veto EU foreign policy.

The Chinese embassy in Washington had no immediate comment.

Brexit has also complicated negotiations.

Britain and the United States came close to striking an aerospace agreement in December that could have forced the hand of Brussels in its own talks with Washington.

But it collapsed amid British concerns over jobs and was eventually overtaken by political distractions surrounding unrest in Washington in January, several sources said. A British official said a balanced deal had been out of reach at the time.

Britain's ability to negotiate trade deals independently of the EU is central to its new "global Britain" stance. But its flexibility on Airbus is cramped by its role as one of four core nations involved in the planemaker, pre-dating its EU accession.

Airbus, which has 14,000 staff in Britain, has made plain work could shift abroad if the UK turns its back on aerospace.