WTO: Boeing subsidy 'prohibited'

SEATTLE — The World Trade Organization ruled Monday that an extension of a business-tax reduction Washington state granted to Boeing in 2013 for the forthcoming 777X jet is a prohibited subsidy.

The term “prohibited” signifies the trade organization’s strictest legal category, denoting a subsidy that cannot be allowed to stand. If the ruling is upheld on appeal, action to remove the subsidy would be required.

Yet even then, legal experts on both sides of the case say the outcome will almost certainly leave Boeing’s bottom line untouched — and Washington state’s tax coffers none the richer.

“You can remove a subsidy in a hundred different ways that don’t in any way impact the benefit Boeing might get,” said Bob Novick, a former general counsel to the U.S. trade representative and now an outside counsel to Boeing on the trade organization dispute.

A lawyer on the European side of the case, who asked not to be identified because he spoke before the ruling is officially made public, agreed that Boeing, which has a large presence in Washington state, is unlikely to suffer financially.

Monday’s ruling is new. It’s a separate case from two original World Trade Organization lawsuits: one filed by the U.S. in 2004 over the Airbus “launch aid” and a countersuit Europe filed in 2005 over the state tax breaks to Boeing as well as research grants it got from NASA and the Department of Defense.

The European lawyer recalled that when the trade organization initially ruled in 2010 that government loans to Airbus to start production of its A380 superjumbo jet were prohibited subsidies, Boeing crowed about the outcome and demanded that Airbus either repay or restructure the loans.

That A380 ruling was reversed on appeal a year later. Now, Boeing’s biggest tax break is on the same chopping block.

And while an Airbus news release hyped the ruling as “a knockout blow to Boeing’s record-breaking subsidies” and demanded that the Washington state tax breaks “be withdrawn immediately,” Airbus Chief Executive Officer Fabrice Bregier conceded that he has “little faith in the US compliance with the WTO rulings.”

The latest ruling certainly means Boeing and Washington state will have to do something if the ruling withstands appeal.

The problem is a clause that was inserted into the 2013 tax-break legislation to protect jobs in the state: It says the extension of the business and occupation tax reduction out to 2040 will be terminated if the state determines “that any final assembly or wing assembly … has been sited outside the state of Washington.”

“That’s what killed them,” the European lawyer said.

The World Trade Organization interpreted that to mean the law expressly favors local production over imports — the definition of a prohibited subsidy.

For example, the 787 Dreamliner’s wing was built in Japan, yet this clause would punish Boeing if it outsourced the wing of the 777X.

Of course, that clause was inserted because of the state’s experience in providing similar tax relief to win local assembly of the 787. There was no similar clause in the 2003 legislation that established the original aerospace tax breaks for the 787.

Boeing did build that previous jet in Washington state and took the tax breaks and then five years later decided to put a second 787 assembly plant in South Carolina.

The biggest Dreamliner, the forthcoming 787-10 model, will be exclusively built in South Carolina.

So next time around, in 2013, state legislators required that, to qualify for the tax breaks, Boeing must build the 777X in Washington state and only Washington state.

But that contravened the trade organization’s ban on governmental support that explicitly stipulates work has to be local, and so triggered Monday’s ruling.

Business on 11/29/2016

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