OECD - Brazil pact to end aircraft export subsidies

The world's major civilian aircraft exporting countries have reached an agreement to limit government financing deals, after two years of hard negotiations, in an effort to end acrimonious trade disputes, the Organisation for Economic Cooperation and Development (OECD) has announced.

Major civilian aircraft exporters include the US, Canada, France, Germany and the UK, all OECD member countries, and Brazil, a very successful third world Johnny-come-lately. Other signatories include Australia, Japan, Korea, New Zealand, Norway, Switzerland and the European Community.

The pact limits government support for the sale of all types of aircraft, from jumbo jets to small planes and helicopters. The signatories agreed to set maximum repayment periods, minimum loan guarantee fees and minimum interest rates on official export credit financing for sales of commercial aircraft. In recent years, government financing for airliner sales worldwide has totalled between $7 billion and $10 billion each year.

With regard to large aircraft like those produced by Boeing and Airbus, the new agreement governs official financing for all new civilian aircraft contracts signed after 30 April 2007. Firm purchase contracts signed before this date remain eligible for the originally agreed terms and conditions, for all deliveries till 31 December 2010, after which the new understanding will apply to these contracts as well.

Describing it as a landmark agreement, the OECD said all the world's major civil aircraft exporting countries, including past foes Canada and Brazil, have signed. Hopefully, the pact will bring to an end a long-simmering dispute between Canada and Brazil over the government subsidies they give their respective aerospace champions — Bombardier and Embraer. Both countries have gone to the World Trade Organisation (WTO) several times with their complaints.

Not surprisingly, the Montreal-based Canadian aircraft maker Bombardier Inc hailed the pact as a major step forward. No immediate comment was forthcoming from Brazilian aircraft maker Embraer SA.

However, the new agreement does not apply to the ongoing battle between the United States and the European Union over allegations of illicit subsidies to their respective aircraft makers, Boeing and Airbus, since October 2004, after a gentleman's agreement on the issue broke down. The two are the world’s largest civilian aircraft makers, but export financing is not an issue in the US-EU dispute over subsidies for Boeing and Airbus.

Brazil is not an OECD member but its inclusion is important because it is a major exporter of regional airliners. The new deal replaces a 1986 agreement, which did not include Brazil. OECD Secretary-General Angel Gurria called it a "breakthrough in international trade diplomacy". By creating a level playing field in official support for export deals, competition for sales of civilian aircraft will now focus more on price and quality, rather than on the level of government support.

Bombardier Aerospace spokesman Marc Duchesne was plainly pleased. "This is excellent news. It means that products will be sold based on quality and price, and not on the level of government subsidies," he said. The pact is meant to help exporting countries against the threat of possible trade suits over allegations of unfair subsidies at the WTO.

Embraer complained two years ago that Bombardier's proposed C Series mid-size jet had received $700 million in government funding, which represented unfair competition. Earlier, a 2000 WTO decision authorised Canada to apply up to $2.1 billion in sanctions against Brazil for providing cheap loans to Embraer customers.

The new ASU should "establish all the principles on how much support for aircraft manufacturing there can be without stepping across the boundaries into illegal subsidies", an OECD statement said. "The watchword is improved stability and transparency in the international civil aviation market and in the manufacturing sector."

The United States welcomed the agreement, saying it would "level the playing field for the US airline industry". The US Treasury called the understanding "a significant international economic policy achievement". It is drafted so as to allow countries that become big civilian aircraft exporters in the future, such as Russia and China, to join it if they wish.