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So Both Sides in KC-X Got Subsidies, Now What?

by John Reed on January 31, 2011

The World Trade Organization has apparently issued a final ruling saying that Boeing did indeed recieve unfair — not illegal — subsidies that benefit the development of its aircraft fleet.

According to the New York Times, the WTO ruled, in a confidential report, that Boeing received about $5 billion in subsidies. The WTO focused on about $24 billion in R & D contracts Boeing receives from the military and NASA along with Washington state tax breaks that European governments say gave the Chicago-based company a technological and financial edge.

Last summer, the WTO found that EADS had received billions in unfair subsidies as well, something that was key in allowing EADS to eat up large amounts of Boeing’s market share around the globe, according to the U.S. trade representative.

This comes as the U.S. Senate is once again taking up the so called, “Level-Field” bill, that will require the Pentagon to factor in the impact of the subsidies in its evaluation of Boeing’s KC-767-based and EADS A330 MRTT-based offerings in the $35 billion KC-X contest.

Many who have watched KC-X closely didn’t think the proposed law would have a chance of getting passed before the Air Force choses its new tanker (something that may happen in the coming weeks).

A similar bill was first introduced in late Spring of last year when it appeared the service would award a contract sometime between September and mid-November.

Oh how things have changed. The Air Force has repeatedly delayed the contract award so that it can be as confident as possible that this round of the contest has been run by the book.

Remember, in 2008, Boeing successfully protested the service’s award of KC-X to EADS, claiming that the requirements laid out in the RfP for that contest weren’t clear enough. That came after the whole Darleen Druyun tanker leasing affair.

Hopefully this bill won’t delay the contest any longer. The KC-135 is great, but as we all know, the oldest are 50 years old and desperately need replacement.  So both sides received subsidies. Fine, lets just move on with the contest.

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{ 29 comments… read them below or add one }

@Earlydawn January 31, 2011 at 4:40 pm

So let me get this straight – the WTO (and by extension, Europe) is upset that Boeing has a superior operating environment?

This is getting insane. What ever happened to shopping on the basis of the best product and the best price. It's not a jobs program!

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Justin H January 31, 2011 at 6:30 pm

You are right. The WTO is pretty much run by the Europeans.

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brian January 31, 2011 at 5:33 pm

Since when is a tax break a "subsidy"? Does Europe really contend that letting someone keep their own property a "gift from the government"? Oh wow thank you Mr. tax man for letting me keep my own toothbrush! I don't anything, it all belongs to the crown!

Talk about twisting words until they mean nothing. The fact is, is that the Airbus at its current sales price is unprofitable without European taxpayers kicking in the doe. Those "subsidies" the Euros are yapping about are only applicable if Boeing makes money. So they first have to make a profit, unlike EADS which can't compete on price, or keep a refueling boom attached to their plane. Unfair americans and there unfair "Welding" advantage.

Now yes Boeing does get research grants, because Boeing is often asked to develop new things as a service to the government (so does EADS). Sometimes this technology ends up for civilian uses like the Internet, but this is nothing the wholesale funding of R&D and Manufacturing for their civilian fleet that EADS gets. Its ridiculous to compare the 2 companies in this way.

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diminutive January 31, 2011 at 8:29 pm

>Since when is a tax break a "subsidy"?

Assume two producer, X & Y Corps. They begin with a similar tax level, say, 25%. If X Corp lobbies the government to reduce its taxes to 15% while Y Corp stays at 25%, it's clearly the case that the government is favoring X Corp.

If Washington State tells Boeing "locate in Washington and we will exempt you from 400m in taxes" it is a subsidy and identical to simply giving Boeing 400m dollars.

Tax expenditures are still expenditures.

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brian February 1, 2011 at 10:53 am

Assume 2 women Lisa and Beth. Lisa sells her body to men on the street corner, Beth simply goes to hotel bars to hook up with traveling married business men for fun. They both are tramps, but only one is a whore.

"Tax Expenditure" is a phrase like "unpaid whore" in this situation. It is contradicts itself. If the state of Foo says I will give company Bar $400 Million, then the state of Foo is giving Company Bar $400 Million irrespective of the taxes it collects. It is a gift of the state from the pockets of others living in the state. If Foo says, hey if you agree to produce your Widgets in this state I won't raid your PROFITS for $400 Million then that is not some evil plot to rob the state but simply a bargain the state makes, because the amount of money it would collect overall in taxes are far less than if Company Bar made its widgets elsewhere in a lower taxed jurisdiction. The reality is that State of Foo knows it won't get that $400 Million no matter what because no sane corporation would invest 10's of billions there just to have the Foo raid their property. So Foo says "F*&^ it, Just invest your Billions here and we won't tax you what you would never pay anyway".

Why anyone takes those scumbags at the WTO seriously is beyond me. I personally think they are the take from EADS. Who knows, EADS might even be writing those payoffs off of its taxes as Europe allows. (Know thats a real "tax subsidy", rewarding people to spread corruption)

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Jeff February 1, 2011 at 6:34 am

A tax break given in exchange for a specific action is the definition of a tax subsidy. From the WTO perspective, an unfair subsidy is any money given as financial assistance in which the purpose is to allow improved competitiveness by the domestic company agianst foreign import.

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brian February 1, 2011 at 10:27 am

No a "tax subsidy" would be taking some of my hard earned income and giving it to some welfare queen popping kids out she can't support because of her crack addiction. Thats rewarding someone for a specific act.

Whats going on here is the government is punishing people for not building planes by taxing them at higher rates for their income. But for any of this to be applicable, they have to make a profit. The WTO should be objecting to the US and local government punishing companies engaging in lawful commerce by taxing them at higher rates than favored industries as we should all be paying the lower rates.

But what the WTO is doing here is trying to equivocate between a true Subsidy and letting people keep their own property. The 2 are not equivalent, one makes a gift of another's property such as the case is with EADS and the other the government is letting Boeing KEEP THEIR OWN PROPERTY.

I know this is a difficult concept to understand, that individuals can own property including the means of production, and that in and of itself is not a generous bequeath of the government but simply the natural order of things. The government takes property rights, but it is not the source of property rights.

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Jeff February 1, 2011 at 11:47 am

Your example of crack addict fails, since the deffinition of a subsidy in this instance is money provided as financial assistance to a buisness. She is not a buisness.

The WTO was determining if a specifically subsidies were being given. There are deffinitions to that, and while you disagree with those deffinitions, it doesn't invalidate the WTO's criterias for determining such a thing.

You are confusing distinctly different things. A tax break , in this instance a tax credit is not the same as a tax deduction. A tax deduction would mean Boeing gets to keep more of its money; a tax credit is explicitly a type of subsidy, where instead of returning money collected in excess of what's owed as with a tax deduction, the tax credit is money given by the Government to the company from the tax collected money that legally belongs to the Government.

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brian February 1, 2011 at 12:22 pm

Well you make a valid point that some items in our code that take the form of Credits are in fact subsides like the EITC, which is a fully refundable non-contributory credit (a credit which crack addicts my money), the credits and deductions here are not, and fall in line with normal taxation policy, such as accelerated expensing of R&D costs and depreciations of capital assets. (Which isn't really a tax break but a shifting of taxes from one period to another)

Overall your claim overall is a strawman, the fact that our tax code is screwed up is no measure of a subsidy, simply because it lowers the effective tax rate of Boeing or any other company. The WTO can sit there with a straight face when comparing 2 companies and say the tax structure is 1 country is unfair and the other is just fine? EADS is not taxed by Europe on any of their Foreign sales while Boeing is (2x no less), even if its temporarily sheltered in a Foreign Sales Corporation? Its comparing apples to oranges, and ridiculous. Those running the WTO has no shame.

The only effective analysis of a subsidy, of which can only be defined as a Gift of the State to an entity. In this modest, comparable, restrained and easily understood model you can clearly see EADS is a workfare program dumping subsidized planes on the market and Boeing which is a profitable listed company.

William C. January 31, 2011 at 6:07 pm

Now what? We hit our heads on a brick wall while waiting for another several months sorting out some other type of complaint.

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Oblat February 1, 2011 at 2:19 am

Many military socialists are there for the very reason of escaping globalization and the increased competition it brings. The theory was that because nobody else was spending like drunken sailors it didn't actually matter if the industry was a disaster zone of corruption and incompetence run apparatchiks that would feel more than comfortable in Soviet Russia.. It was a cozy place sheltered from the chill winds of competition.

But then two things happened firstly the easy money was gone and American taxpayers are pushing two to one to end the free ride for the military. Secondly China's exponential growth started to get noticed. Suddenly it mattered if the tankers were the best we could get and not just easy money for a Boeing that is badly stumbling in the commerical world.

Anybody really think that Boeing will have to pay the government back $ if it delivers after 7 successive delays the way Boeing has to pay it's commercial customers? Of course not it will still make a profit – the whole objective of the contract is to avoid having to deliver on time and on budget.

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Curt February 1, 2011 at 3:22 am

"Remember, in 2008, Boeing successfully protested the service’s award of KC-X to EADS, claiming that the requirements laid out in the RfP for that contest weren’t clear enough."

To be fair, the Boeing never claimed and the GAO never found the solicitation selection criteria was confusing. The GAO agreed with Boeing when they found that the Pentagon
1. Miscalculated the results, using EADS info to calculate some of the Boeing scores and vice a versa. In other words sloppy accounting or intentional deception depending on your viewpoint.
2. did not follow the published selection criteria in awarding the contract. They based their decision on criteria that was not in the solicitation.

The GAO recommended re-evaluating the award using the published criteria and awarding the contract in 2008. It was the USAF and DoD that decided to do it all over again.

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Justin H February 1, 2011 at 5:56 am

This should have been a no bid contract, which we've already done before. Canada just did it with the F-35. It should have just been given to Boeing from the start.

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Jeff February 1, 2011 at 11:54 am

I think there is something to be said for this mind set but it comes down to the numbers. In pursuing the "contest" did we spend more time, energy, and money than the value od what Boeing would have been given beyond what their current bid is? Did we save anything or did we end up with a better product faster?

An industry is healthy when its flush with cash; in the long run does is it beneficial to diminish the profits of an industry that needs that money when we expect them to independently innovate?

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mat February 1, 2011 at 4:29 pm

As for no bid that works both ways as US expects to sell thousands of F35 and other planes to foreign buyers it has to allow others to compete for US orders otherwise you can buy F35 just for US forces probably at no less than 200mio$ a piece with any real reduction in numbers built.

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Oblat February 1, 2011 at 7:28 am

Many military socialists are there for the very reason of escaping globalization and the increased competition it brings. The theory was that because nobody else was spending like drunken sailors it didn't actually matter if the industry was a disaster zone of corruption and incompetence run apparatchiks that would feel more than comfortable in Soviet Russia.. It was a cozy place sheltered from the chill winds of competition.

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tribulationtime February 1, 2011 at 1:20 pm

Premio!! tanto joder conque EADS era subsidiada y por eso era más barata…..Larga Vida a La…

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Old_Bear February 1, 2011 at 1:31 pm

Er, guys, may I just point out that Airbus is selling a lot airliners than Boeing at the moment, yes a lot of it may be down to better deals, but mostly it is down to what is the best aircraft for the job. The reason that the USAF went for the Airbus rather than Boeing the last time, was that the Airbus could carry more fuel.
As for the flame war over the subsidies, what it boils down to was that Airbus got the money from the European Union up front (because it is a neo-socialist organisation), while Boeing got the money from the US Government through the backdoor.
If you want to have a good laugh go and look up the political outrage of the US Congress in the mid 1950's when Boeing had the audacity to misuse Government funds in converting it's design for the 717 Tanker aircraft (KC-135) into a passenger jet, the 707, or acuarately designing at the same time.
Major political furfight that was.

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jsallison February 1, 2011 at 2:59 pm

Actually, no. We would get less defense because the waste would continue.

Here's our requirements for piece of equipment X. No one gets one f'n dime until we have a working prototype in hand and whoever best meets the specs gets the contract. Now, is that so f'n hard? Just how many flag rank powerpoint rangers does it take to make that happen? Bueller?

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darren moran January 31, 2011 at 10:48 pm

It's called globalisation, friend, which basically means, we buy your stuff, you buy our stuff……
It's what friends do.!!!!

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PacificSentinel February 1, 2011 at 6:22 am

And if you ONLY BUY AMERICAN you run the risk of not buying the best possible product, that’s why you have the competition in the 1st place, to find the BEST!

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Jeff February 1, 2011 at 6:37 am

You realize which ever aircraft is purchased roughly the same number of components will be made here and abroad. Both companies use foreign and domestic manufacturers for components.

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William C. January 31, 2011 at 11:17 pm

Even if the Russian bid was fully considered I don't think it would be in our best interests, when unlike the Airbus or Boeing offerings none of the work is here in the States.

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DVind July 25, 2012 at 10:18 am

Byron, TINSTA ALLONS, TINSTA ALLONS!

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Rick February 1, 2011 at 1:41 am

Globalization of our defense needs your say?
What do you suggest we do next?
-How about we buy our next fighter from the Russian, I hear that they have some fine designs and their economy really seems to need it?
-How about we buy our MRE's from China, that'll be a big hit with the troops, and it'll be cheaper.

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Gregory Savage February 1, 2011 at 10:25 am

This is the lamest argument. Hardly anything is made from start to finish in one place. The point is EADS is a European company while Boeing i US. I don' t see the French and Germans going out of there way to buy anything that the US makes. If they do purchase its normally to copy. So with that said, I don't think that I give a shit what the Europeans think.

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Riceball February 1, 2011 at 12:33 pm

If EADs gets the contract a certain percentage of their tanker would have to be made in the US, it's US law (I think) that weapons for our military be made in the US whether the company making it is foreign or domestic. Take the M9 from Beretta and the SCAR from FN, both are foreign companies (Italian & Belgian respectively) but they both have plants in the US where they make M9s and SCARs for us and don't just simply ship them in from their factories overseas.

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Mat February 1, 2011 at 4:24 pm

You are high right ,there is probably no single european country without US military hardware that was bought without real competition ,for example 90% of tankers and awacs planes in europe are US made .For years US forces haven't bought much foreign stuff and as for made in USA thing new boeing planes have no more US made parts than any EADS plane sold in US as Eeads USA ha built plants in US that build stuff for US maket
As far as copying goes Boeing probably would need to copy more than EADS as EADS developed more new planes in past 20 years.
Most boeing plane designs are now 30-40 years old ,same goes for helicopters

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Riceball February 1, 2011 at 12:40 pm

It doesn't really matter since even if Airbus gets the contract the KC-X will be made in the US regardless, granted components might come from overseas but the plane will be built here. The profits might go to Airbus but American workers will be getting jobs and getting paid for not only making the planes but building the factory or factories to build them in as well.

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