Summary of key findings

1. In this dispute, the European Communities claimed that the following ten categories of measures constituted subsidies to Boeing's large civil aircraft division that were inconsistent with the SCM Agreement:
       
   1. State of Washington and municipalities therein — various tax and non-tax incentives provided by the State of Washington and the City of Everett, notably in connection with the location of the 787 assembly facility in Everett 
   2. State of Kansas and municipalities therein — property and sales tax breaks provided by the City of Wichita and interest payments by the State of Kansas on Kansas State Development Bonds
   3. State of Illinois and municipalities therein — tax and non-tax incentives provided by the State of Illinois, the City of Chicago and Cook County in connection with the relocation of Boeing's headquarters
   4. National Aeronautics and Space Administration (NASA) — payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under eight NASA aeronautics R&D programmes
   5. Department of Defense (DOD) — payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under 23 DOD Research, Development, Testing and Evaluation programmes
   6. Department of Commerce (DOC) — payments and access to government facilities, equipment and employees provided to joint ventures/consortia in which Boeing participated under the Advanced Technology Program
   7. NASA/DOD — “Waivers”/“transfers” of intellectual property rights under NASA and DOD R&D contracts and agreements entered into with Boeing
   8. NASA/DOD independent R&D and bid and proposal reimbursements
   9. Department of Labor 787 worker training grants
   10. Tax breaks exemptions under legislation relating to Foreign Sales Corporations (“FSC”)  and the Extraterritorial Income Exclusion Act (“ETI”) and successor acts
2. The European Communities estimated that the total amount of the alleged subsidies was $19.1 billion between 1989 and 2006.  More than half of this amount was accounted for by the value of the alleged NASA R&D subsidies, which, according to the European Communities, was $10.4 billion in this period.
3. The European Communities claimed: (a)  that the United States acted inconsistently with  certain provisions of Articles 5 and 6 of the SCM Agreement because the effect of the alleged subsidies was to cause adverse effects to its interests in the form of serious prejudice;  (b) that the United States acted inconsistently with Article 3 of the SCM Agreement because the FSC/ETI and successor act subsidies and taxation measures enacted pursuant to Washington State Legislature House Bill 2294 (“HB 2294”) constituted prohibited export subsidies; and (c) that the United States had violated agreed obligations concerning support to the large civil aircraft sector  are set forth a bilateral 1992 Agreement between the United States and the European Communities on trade in large civil aircraft, thereby constituting serious prejudice to the European Communities' interests. 
4. The Panel upheld the European Communities' claims that: (a) someof the measures maintained by the States of Washington, Kansas, Illinois and municipalities therein, the NASA aeronautics R&D measures, some of the DOD aeronautics R&D measures, and the FSC/ETI and successor act subsidies, constituted specific subsidies.  The Panel estimated the total amount of these subsidies between 1989 and 2006 to have been at least $5.3 billion;  (b) the FSC/ETI and successor act subsidies constituted prohibited export subsidies; (c) some of the specific subsidies (i.e. the NASA and DOD aeronautics R&D subsidies, the FSC/ETI and successor act subsidies and the Washington State and municipal B&O tax subsidies) caused adverse effects to the European Communities' interests in the form of serious prejudice, finding that the effect of these subsidies was displacement and impedance (or threat thereof) of Airbus large civil aircraft from third country markets, significant price suppression and significant lost sales. 
5. The Panel rejected the European Communities' claims that: (a) the other challenged measures constituted specific subsidies and/or that they caused serious prejudice; (b) the Washington State taxation measures enacted under HB 2294 were prohibited export subsidies.
6. The Panel exercised judicial economy in respect of the European Communities' claims that: (a) the specific subsidies caused adverse effects in the form of a threat of significant price suppression; (b) the United States had acted inconsistently with the bilateral 1992 Agreement between the United States and the European Communities on trade in large civil aircraft, thereby constituting serious prejudice to the European Communities' interests.
7. With respect to its finding that FSC/ETI and successor act subsidies constitute prohibited export subsidies, the Panel did not consider it necessary or appropriate to make any additional recommendation because of the pre-existing DSB rulings and recommendations regarding those measures.  With respect to its finding that certain subsidies caused adverse effects to the interests of the European Communities, the Panel recommended, as provided for in Article 7.8 of the SCM Agreement, that the United States take appropriate steps to remove the adverse effects or withdraw the subsidy.
8. The panel report addresses many important issues relating to the interpretation of Articles 1 and 2 (definition of subsidy and specificity), Article 3.1(a) (prohibited export subsidies) and Articles 5 and 6 (adverse effects) of the SCM Agreement.  For example, as noted above, the Panel found that R&D funding received by Boeing under certain NASA aeronautics R&D programmes, and some of the R&D funding received by Boeing pursuant to DOD R&D programmes, constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.  A fundamental question addressed by the Panel in this regard was whether or not the R&D transactions at issue were excluded from the scope of Article 1 of the SCM Agreement as “purchases of services”. 

Summary of key findings

This dispute concerns a number of US measures affecting trade in large civil aircraft (“LCA”).  The European Communities claimed that the United States has provided subsidies to US producers of LCA, namely The Boeing Company, and that such subsidies are prohibited and/or actionable under the Agreement on Subsidies and Countervailing Measures(the “SCM Agreement”).  In particular, the European Communities challenged:  (i) a number of state and local measures granted to US LCA producers by the states of Washington, Kansas, and Illinois, and municipalities therein;  (ii) payments and other support provided to Boeing by the US National Aeronautics and Space Administration (“NASA”), US Department of Defense (“USDOD”), US Department of Commerce, and US Department of Labor;  and (iii) export subsidies allegedly granted to Boeing pursuant to provisions of the US Internal Revenue Code relating to Foreign Sales Corporation (“FSC”) / extraterritorial income (“ETI”) and successor legislation.  The European Communities argued that these subsidies, which in its view amounted to $19.1 billion over the period 1989-2006, caused serious prejudice to its interests within the meaning of Articles 5(c) and 6.3 of the SCM Agreement.  The Panel however determined the value of the subsidies to be at least $5.3 billion.

As an initial matter, the Appellate Body found that the Panel had erred in denying various requests made by the European Communities with respect to the information-gathering procedure under Annex V of the SCM Agreement.  The Appellate Body found that the initiation of an Annex V procedure occurs automatically when there is a request for initiation of such a procedure and the DSB establishes a panel.  However, the Appellate Body declined to make findings as to whether the conditions for an initiation of an Annex V procedure were fulfilled in this dispute. 

As regards the measures under the eight NASA R&D programmes at issue and the 23 USDOD Research, Development, Test, and Evaluation (“RDT&E”) programmes at issue, the Appellate Body found that the payments and access to facilities, equipment and employees provided to Boeing under the NASA procurement contracts, and the payments and access to facilities provided to Boeing under the USDOD assistance instruments, constitute financial contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement.  Because the Appellate Body took a different approach to the Panel's, it did not need to resolve the issue of whether measures properly characterized as purchases of services are excluded from the scope of Article 1.1(1)(i) of the SCM Agreement.  Consequently, the Appellate Body declared the Panel's interpretation that such measures are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement to be moot and of no legal effect.   The Appellate Body also declared moot the Panel's finding that the USDOD procurement contracts are properly characterized as purchases of services and thus are not financial contributions under Article 1.1(a)(1).  However, as neither participant had requested it to do so, the Appellate Body did not complete the analysis regarding the USDOD procurement contracts at issue in this dispute.  The United States did not appeal the Panel's finding that the access to facilities, equipment and employees provided to Boeing under the NASA Space Act Agreements constitute a financial contribution under Article 1.1(a)(1).

 Moreover, the Appellate Body upheld, albeit for different reasons, the Panel's findings that the payments and access to facilities, equipment, and employees provided under the NASA procurement contracts, and payments and access to facilities provided under the USDOD assistance instruments, conferred a benefit on Boeing within the meaning of Article 1.1(b) of the SCM Agreement.  The Appellate Body did not review the Panel's finding that the access to facilities, equipment and employees provided to Boeing under the NASA Space Act Agreements conferred a benefit. 

The Appellate Body found that the allocation of patent rights under contracts and agreements between NASA/USDOD and Boeing — on the assumption that such allocation is a self-standing subsidy — is not explicitly limited to certain enterprises within the meaning of Article 2.1(a).  However, it found that the Panel erred by failing to examine the European Communities' arguments that such allocation is “in fact” specific under Article 2.1(c) of the SCM Agreement.  The Appellate Body thus found that the Panel's overall finding under Article 2.1 could not be sustained, but declined to find that such allocation is specific within the meaning of Article 2.1(c) of the SCM Agreement.

In relation to the Washington State B&O tax rate reduction, the Appellate Body upheld the Panel's finding that the reduction in the Washington State B&O tax rate applicable to commercial aircraft and component manufacturers constitutes the foregoing of revenue otherwise due, and therefore a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.  The Appellate Body also upheld the Panel's finding that the Washington State B&O tax rate reduction is a subsidy that is specific within the meaning of Article 2.1(a) of the SCM Agreement.

As for the subsidies provided by the City of Wichita (Kansas) through the issuance of Industrial Revenue Bonds ("IRB"), the Appellate Body upheld, albeit for different reasons, the Panel's finding that the IRB subsidies provided to Boeing and Spirit are specific within the meaning of Article 2.1(c) of the SCM Agreement.

With respect to the Panel's analysis of adverse effects, the Appellate Body observed that the Panel had conducted a separate analysis of adverse effects caused by the NASA/USDOD aeronautics R&D subsidies in the 200-300 seat LCA market (through their “technology effects”), and an analysis of the adverse effects caused by all the subsidies in the 100-200 seat and 300-400 seat LCA market (through their “price effects”). As regards to the analysis of the “technology effects”, the Appellate Body upheld the Panel's overall conclusion that the aeronautics R&D subsidies caused serious prejudice to the interests of the European Communities within the meaning of Articles 5(c) and 6.3(b) and (c) of the SCM Agreement with respect to the 200-300 seat LCA market. Specifically, the Appellate Body upheld the Panel's finding of significant lost sales and significant price suppression in the 200-300 seat LCA market, but reversed the Panel's finding of a threat of displacement and impedance with respect to the 200-300 seat LCA market as it relates to Kenya, Iceland, and Ethiopia (but not with respect to Australia) within the meaning of Article 6.3(b) of the SCM Agreement.

As for the Panel's analysis of price effects, the Appellate Body reversed the Panel's findings that the FSC/ETI subsidies and the B&O tax rate reductions caused serious prejudice to the interests of the European Communities within the meaning of Articles 5(c) and 6.3(b) and (c) of the SCM Agreement with respect to the 100-200 seat and 300-400 seat LCA markets.  In completing the analysis, the Appellate Body found that the FSC/ETI subsidies and the Washington State B&O tax rate reduction caused, through their effects on Boeing's prices, serious prejudice in the form of significant lost sales within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement with respect to the 100-200 seat LCA market.  

Moreover, the Appellate Body: (i) found that the Panel erred in failing to consider whether the price effects of the B&O tax rate reductions complement and supplement the technology effects of the aeronautics R&D subsidies in causing significant lost sales and significant price suppression, and a threat of displacement and impedance, in the 200-300 seat LCA market;  (ii) reversed the Panel's finding that the remaining subsidies had not been shown to have affected Boeing's prices in a manner giving rise to serious prejudice with respect to the 100-200 seat and 300-400 seat LCA markets;  and (iii) in completing the analysis, found that the effects of the City of Wichita IRBs complemented and supplemented the price effects of the FSC/ETI subsidies and the State of Washington B&O tax rate reduction, thereby causing serious prejudice, in the form of significant lost sales, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement, in the 100-200 seat LCA market.