European attempts to 'muscle in' on the growing US defence market may backfire unless trade tensions ease

If Europeans think traffic on the two-way street is rather one-sided, it is likely to get worse before it gets better. The US reaction to the events of 11 September has been to step up spending on defence and homeland security, but the money will be spent at home - and woe betide any foreign company that tries to muscle in on the action.

That appears to be the message delivered to Europe's EADS after it tried to offer an Airbus A330-based aerial refuelling tanker to the USAir Force as an alternative to the Boeing 767 for the 100-aircraft lease deal mandated by the US Congress in the wake of the attacks. "It raises hackles when Europe tries to intervene in US politics," says John Douglass, president of the US Aerospace Industries Association (AIA). And tempers flared in Washington DC when EADS tried to overturn the 767 tanker deal, he says. "Many saw it as outrageous that a foreign entity should try to influence the political process in the USA."

The 767 tanker lease is just one of several issues that are fuelling trade tensions between the Europe and USA. The issues are not just in aerospace, but aerospace stands to lose most if the tensions flare into a trade war. "Trade is not on an intellectual level, it is on an emotional level," Douglass says. "We need to calm everything down." Douglass, in his roles as AIA president and a member of the Commission on the Future of the US Aerospace Industry, plans to meet with his European counterparts at Farnborough 2002 in a bid to find ways to ease the trade tensions.

Understanding needed

Douglass is concerned Europeans do not understand how much has changed in the USA since 11 September. "It is a different world. There are a lot of implications for the USA, but there are also long-term implications for the relationship between the USA and the European Union [EU]." For aerospace, these changes are taking place against a background of trade tensions, industrial consolidation on both sides of the Atlantic, widening gaps between US and European defence budgets and capabilities, the expansion of NATO and European moves to operate independently of the transatlantic alliance.

Recent trade moves have been both positive and negative, says Douglass. Europe's caving in on the airliner Stage 3 hushkit ban was positive - for the USA - while its blocking of the General Electric/Honeywell merger was negative. While Europe views the 767 tanker lease as a thinly disguised subsidy for Boeing, the USA is baffled by Europe's decision to develop the Galileo navigation satellite system and Airbus Military A400M transport.

In US eyes, Galileo will simply duplicate the capability provided by the global positioning system and will be financed by charging users a fee for services the global positioning system(GPS) offers for free. The USA is concerned Europe will make Galileo incompatible with GPS deliberately, to force users to buy the equipment and pay the charges. And while the USA has been pushing the EU to spend more on defence, it did not have in mind the development of a competitor for the Boeing C-17 and Lockheed Martin C-130 transports.

Despite these ups and downs "there is a solid feeling on both sides that we should not drift into a trade war," says Douglass. This resolve could be put to the test as the EU is considering trade sanctions against the USA in retaliation for steel tariffs and export-tax breaks. "If there was any real retaliation against the US aerospace industry, then Congress would instantly act by imposing tariffs on Airbus," he says.

In an effort to reduce the trade tensions in aerospace, AIA and its European counterpart AECMA have been meeting for some time. "The dialogue has been helpful, but vague, not concrete," says Douglass. "With the 100th anniversary of flight next year, it would be a good time to make a serious step forward on trade by acting industry to industry then making recommendations to the governments."

Basic work still needs to be done, he says, starting with rationalising the statistics each side uses to bolster its arguments on the trade balance between the EU and USA. In AIA's view, "the USA has a slight surplus with the EU in aerospace, but it is declining because of the impact of Airbus," says Douglass.

Disputes linger

Long-running disputes over subsidies also need to be addressed, with Europe arguing that its direct launch aid for Airbus simply offsets the indirect benefits to Boeing of US defence spending. "The US spends more than $50 billion on defence research and the EU spends around $4 billion - that's problem number one," says Douglass. "But European R&D is heavily concentrated in the civil sector," while US government funding for commercial aerospace is declining. "The way to get to an equal basis is to understand the numbers then advocate a roughly equal level of investment," he says.

"Beyond that we need to think of ways to make the process more transparent - issues such as how US companies operate in Europe and vice versa, and how we influence each other's governments," Douglass adds. As a result of EADS lobbying against the 767 tanker deal, US industry would like both sides agree to notify each other of political interventions. "What is the rational way for the USA to express its concerns about fair treatment in the EU?" he asks. And vice versa?

Source: Flight International