The aviation industry is likely to enter 2001 dogged by two transatlantic trade disputes - one over engine noise and another over airliner sales.

The hushkit row, together with the longer-term issue of new engine noise standards, continues to strain relations between the US and the European Union (EU). Brussels has failed in its bid to halt the US procedural complaint to the International Civil Aviation Organisation (ICAO). The US complained to ICAO that the EU decision to outlaw engines hushkitted to meet Chapter 3 noise standards from April 2002 violates Article 84 of the Chicago Convention.

The EU has decided against taking its case to the International Court of Justice, and has instead issued a counter-memorial which is being discussed at ICAO. These discussions form part of the backdrop to the more substantive issue of a new engine standard beyond Chapter 3. ICAO's Committee on Aviation Environmental Protection (CAEP) is meeting in mid-January to try and thrash out agreement on this issue.

CAEP is considering three different noise standards of cumulative 8dB, 11dB and 14dB below Chapter 3. The key sticking point, however, is the timescale for the phasing out of Chapter 3 engines. The EUis looking for a faster phase out than the US is currently willing to accept. Insiders say that a trade off between noise levels and phase out timescales is a possibility, i.e. cumulative 8db with a shorter phase out time or 11db with a longer phase out time.

If agreement is reached at CAEP then the new standards will be put to member states for fine tuning, while ICAO's air navigation council will have to look at any phase out agreement. If agreement at CAEP cannot be reached then there are nine months to try and reach a compromise before the 33rd ICAO general assembly in autumn 2001. And the hushkit issue may well ramble on.

Meanwhile, a separate trade war between the EU and US could hit Boeing. Washington has passed a new foreign sales law designed to meet World Trade Organisation (WTO) objections, but Brussels claims this is worse than before. If they can convince the WTO of this, the EU could impose over $4 billion in tariffs on US exports.

This dispute could directly affect Boeing's aircraft sales. Under the old law, which allowed US companies to create foreign sales corporations in tax havens, the US taxed exports by those companies at much lower rates. The savings to Boeing exceeds $100 million annually, part of which it can pass on in the form of lower prices. Washington claims this programme helps US firms compete with European rivals, who earn tax breaks on overseas sales.

But the Europeans convinced a WTO panel that the US law illegally subsidised exports. Last February, the WTO upheld that decision on appeal and set a November deadline for the US to change its rules. Congress passed a new law that scrapped foreign sales corporations but kept the tax benefits for any foreign-earned income that meets certain conditions. Lawmakers reasoned that with this change, the law no longer singles out US-based companies for tax preference.

This does not satisfy the Europeans. EU trade commissioner Pascal Lamy complains that, "The new FSC (foreign sales corporation) rule is even worse than the previous one in terms of export subsidies." Boeing disagrees. Tim Neale, Boeing representative on this issue, says: "These changes may not be acceptable to the European Commission, but we think they will be to the WTO." It could be several months before the WTO rules on the revised law.

Source: Airline Business