EU mulls new Airbus subsidy model to appease Biden

Germany, Spain and France are sparring with Brussels over whether to scrap their traditional subsidies to aerospace giant Airbus in a bid to end a transatlantic trade war with Washington.

Since 2019, Europe and the United States have slapped heavy tariffs on each other in their conflict over state support for Boeing and Airbus. The companies hit with retaliatory duties on the EU side range from vineyards to makers of engineering components.

Brussels’ preferred solution — about which several trade diplomats were skeptical — is to scrap long-running Airbus subsidies known as “launch aid” and instead shift the European model of funding innovation in the aviation sector more toward military spending, as part of the EU’s broader industrial strategy.

Ironically, this tactic of government cash boosting companies through purchases of warplanes and other military kit at unprovably inflated prices is a ruse that Brussels has long accused the U.S. of exploiting.

For now, the EU is under greater pressure to change its subsidy model than the U.S. because Europe is on the hook as a more extravagant subsidizer. In 2019, the World Trade Organization allowed the U.S. to impose tariffs on $7.5 billion of EU exports to respond to Airbus subsidies — almost double the amount that the EU won in its parallel case against aid for Boeing ($4 billion).

Officials in Madrid, Paris and Berlin told POLITICO they were engaged in tense discussions with the European Commission — the EU’s executive body — over how to restructure the aid. Brussels, they said, was preparing to make an offer to U.S. President Joe Biden’s administration.

The European subsidy model at the heart of the dispute is called Repayable Launch Investment. Under this scheme, the governments of Germany, France and Spain have granted Airbus loans for developing new aircraft models that the manufacturer only repays if the model becomes a commercial success.

The WTO says this type of aid is not illegal in itself but that European countries used it at excessively generous terms. France, Spain and Airbus came to an arrangement last year they claimed would make their RLI terms WTO-compatible, but the Americans still insist that Europe must ditch the mechanism, diplomats said.

Two European trade officials said that one proposal being discussed with the capitals was indeed to completely phase out RLI, as that would please the Americans.

Another EU diplomat confirmed that phasing out RLI was one of the options discussed, but said the all-important question of whether France would back it depended on the overall “package” — including what the U.S. side would offer in exchange. (Airbus is based in Toulouse.)

The two officials said Paris and Madrid feared Brussels would be going too far with such a proposal. A person briefed on launch aid negotiations said it was also unlikely that Germany would want to give up RLI, arguing that it uses the same scheme for other industries.

Asked whether the EU was indeed proposing ending all RLI schemes, a European Commission spokesperson said: “The EU is ready to engage with the new U.S. administration … Our aim is to find solutions to our ongoing trade disputes, including on Airbus/Boeing.”

A spokesperson for the German economy ministry said that “these are internal consultations with the Commission, the aim is to enter into talks with the new U.S. administration and quickly reach a negotiated solution with the U.S.”

The question of a bigger “package” on offer is connected to work that EU countries are conducting in relation to a common “defense fund.” Instead of RLI, the EU could in future cushion Airbus with lavish defense contracts, much as the U.S. has done with its NASA and military contracts for Boeing, said one EU official.

The advantage to this subsidy model is that countries have more leeway to cite defense as an overriding priority and as grounds for non-disclosure of data in trade disputes in Geneva.

On Wednesday, Internal Market Commissioner Thierry Breton will publish a “plan on synergies between civil, defence and space industries,” with ideas on how to link defense spending and industrial policy aims.

But one official from an Airbus country said it was hard for the EU to replicate the types of military contracts that the U.S. has because EU defense budgets are smaller.

What’s more, many EU countries source a large part of their military equipment from U.S. suppliers and take a skeptical view of French ambitions to reserve an EU defense fund for EU industries.

In general, the European diplomats and someone briefed on Airbus’s thinking said it would be very unlikely that the European side would want to entirely give up the tried-and-tested RLI in favor of a more theoretical defense spending model.

Airbus declined a request for comment.

Stuart Lau and Thibault Larger contributed reporting.

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