Thursday, October 07, 2004

Ding! Ding! Round 30!

FT link

One of those stories that never goes away. Yes, the US-EU trade dispute over both sides' alleged subsidies for civil aircraft builders is back on.
"In a dispute settlement case filed at the Geneva headquarters of the WTO, the US alleged that Airbus had received a total of at least $15bn in illegal "launch aid" from the France, UK, Germany and Spain, allowing it to overtake Boeing as the world's largest aircraft maker. The US also said it would terminate a 1992 bilateral agreement that had curbed but not ended subsidies, alleging minor violations by the EU.

The EU Commission responded immediately by filing a counter-case charging that Boeing had received about $23bn in prohibited subsidies since 1992 in the form of research and development assistance from US government agencies. The EU also challenged pledges from Washington state to offer about $3bn in tax breaks for Boeing production of its new 7E7 jet.

That both sides have offered their respective industries handsome sums in state funding cannot be disputed. However, it is at least arguable that the entire dispute is the creature of special pleading from both parties. Boeing, for their part, will want to keep well off the issue of its head-lock on US Air Force contracts, especially after the recent exposure of corruption around the giant order for KC-767 tankers. On that occasion, Airbus offered a variant of the A-330 with similar capabilities and much greater capacity and range. Boeing got the order, though, in a deal allegedly helped by the fact that they had a gap in work for the 767 production line until work on the 7E7 began. You can bet the EU representatives will do their level best to smear Boeing, the Pentagon and the Washington State authorities over the affair.

You can also bet that the US side will do their best to run down everything European. Great fun for journalists, sure. But the damage to transatlantic trade could be significant, especially when you take into account the currency factor. The huge US trade deficit has yet to push down the dollar by much chiefly because several big Asian economies have been intervening in the foreign exchange market to keep their currencies low against the dollar, boosting their export industries. It's in the nature of the game that currency intervention in this direction is unlimited - a central bank need never run out of its own currency. With a huge US budget deficit too, the obvious policy is to buy US treasury bills - after all, they bring in an income too.

The problem is, though, that the pressure must be released somewhere. If you are an Asian business left holding reams of your own currency (that is being artificially held low), you will have an incentive to convert it to euros. After all, the flip of the intervention is that any supplies you buy in dollars will be more expensive. The result, for Europe, is that the euro surges against the dollar, rendering EU exports to the US expensive. And US-EU trade questions that much more spiky.

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