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Tanker Wars: Why Boeing Thinks Subsidies Matter

Lexington Institute

The Air Force's plan to conduct an expeditious re-competition of its future tanker program has run into trouble. An initial award was overturned when the Government Accountability Office found major irregularities in the way proposals by Boeing and Northrop Grumman were evaluated. So now the two teams are back for a rematch under a radically revised acquisition strategy.

But the Northrop Grumman team is complaining that the new approach is stacked in Boeing's favor because it levels all non-cost factors, resulting in a "price shootout" that Boeing's smaller, cheaper plane is likely to win. Sen. John McCain has sent a private letter to Obama Administration officials weighing in on Northrop's side. (see related Northrop Grumman article)

Boeing, on the other hand, is complaining that the defense department must take into account a recent ruling by the World Trade Organization finding that the Airbus plane Northrop proposes to use for its tanker received billions of dollars in illegal subsidies. Under existing free-trade rules, government-funded launch aid is prohibited if it does harm to competitors and if it is contingent on export performance. Both restrictions seem to apply to the $5.7 billion that European governments gave Airbus to develop the A330 widebody airliner, the plane at the heart of Northrop's tanker proposal. Dozens of congressmen have weighed in on Boeing's side in a November 2 letter to President Obama.

It isn't easy for outsiders to sort out what is going on here, because each team is so good at pitching its side of the story. In addition, key documents like the WTO ruling and the McCain letter have not been released to the public. Northrop Grumman argues with some justification that it wouldn't be fair for the government to burden its tanker proposal with the WTO findings when those findings are still subject to appeal, and a companion case lodged against Boeing hasn't yet been adjudicated. Boeing responds that the WTO seldom reverses preliminary findings, that the Airbus subsidies are a matter of public record, and that the U.S. Trade Representative has challenged the legality of the subsidies for many years.

It is important to recognize that the argument over illegal subsidies is really between Boeing and Airbus (or between the United States government and the European Union), and that Northrop Grumman is a bystander that has been dragged in because Airbus made the plane it wants to use for its tanker. But once the controversy is seen for what it is -- a trade dispute -- it becomes obvious that Boeing is right and Airbus is wrong. European governments have violated free-trade rules by subsidizing Airbus for decades, providing benefits that an impartial panel of trade experts has determined to be illegal, and as a result of those benefits U.S. companies have lost hundreds of billions of dollars in sales. America's share of the global market for airliners has been cut in half as a direct result of these unfair practices.

Boeing and the U.S. Trade Representative argue convincingly that the availability of illegal launch subsidies has given Airbus huge pricing advantages in competing against Boeing in commercial markets -- advantages that are worth many times the original face value of the subsidies. The Airbus rejoinder that Boeing gets unfair advantages from military work or state and local aid is not convincing, since Airbus gets those benefits too.

In fact, the year the WTO case was brought, Boeing and Airbus had roughly equal military sales. And Boeing makes another persuasive point too: how can the Pentagon simply ignore the position of the U.S. Trade Representative, when trade deficits are destroying the value of the dollar and the military is planning to conduct many more competitions for weapons systems based on commercial products available from overseas sources?

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