Update on Boeing Subsidies

Whaddaya know? Just four days after I mentioned that Boeing did not repay the billions it had already received from the 2003 Washington subsidy package (h/t Greg LeRoy), the World Trade Organization approved EU retaliation for these subsidies in the form of $4 billion per year of tariffs on U.S. goods.

 Predictably, Boeing and the U.S. government are crying foul, saying it wasn’t fair to allow tariffs on a subsidy that had already been terminated, but not acknowledging that the company had already received about ¾ of the tax breaks the state provided for in 2003, or approximately $2.4 billion in nominal terms at the originally reported figure of $160 million per year. Note that the Times continues to report this figure as $100 million per year, while CNBC reported that the company saved $200 million in 2018 due to the tax breaks, so YMMV. In any event, it’s still a lot of money.

 Moreover, when Boeing announced the end of 787 production in Washington, Governor Jay Inslee said that the company’s “favorable tax treatment” in the state needed to be reconsidered. According to the Seattle Times, the main tax breaks saved the company $1.4 billion in 2014-2019. You can see why the European Union and Airbus complain that Boeing is still being subsidized.

 Don’t forget that Airbus is also subsidized. The WTO authorized the United States to impose $7.5 billion in tariffs annually on EU products over “launch aid” given to Airbus in the form of low-interest loans and about $4 billion in grants. As several of the New York Times interviewees noted, the dueling, WTO-approved tariffs may finally create the impetus to negotiate an end to the Boeing-Airbus subsidy war. Time will tell.

Boeing Moves More Jobs from Washington State to South Carolina

As first reported in The Wall Street Journal, Boeing is ending production of the 787 Dreamliner at Everett, Washington, and moving it to its newer facility in North Charleston, South Carolina. The company says this is the most efficient approach to reducing production of the jet from 10 per year to six per year in response to falling demand due to the coronavirus pandemic. 

Moving production to South Carolina means that more than 1,000 Boeing workers at its Everett plant will likely lose their jobs as they no longer have a model to build.

This development marks the latest step in Boeing's long-term assault on its unionized Washington workforce. When the state legislature there approved its $3.2 billion ($2 billion present value) subsidy deal for the 787 in 2003, legislators there were under the impression that they had “won” the project, that Boeing was now required to build all 787s in Washington. They were shocked and angered when the company announced that it would set up another assembly line in “right-to-work” South Carolina, complete with some $900 million in incentives, creating a plant that remains non-union to this day.

In large part, this new move became possible because this February, the company asked Washington to end the 2003 subsidy package, which had been ruled an unlawful subsidy by the World Trade Organization and upheld by WTO's Appellate Body (click on "Summary of key findings") in 2012. After getting hammered by the European Union in WTO compliance proceedings, Boeing decided it would clean its slate to be better positioned to attack EU-based Airbus for the subsidies it has received. The United States notified the WTO Dispute Settlement Body in May that Washington had terminated the subsidies in March. With no subsidy from Washington, the company no longer felt obligated to produce any 787s there. Note that there has been no indication that Boeing gave back the approximately $160 million a year it had received already under the 2003 subsidy deal.

According to the company, it did not receive any incentives to bring the remaining 787 production to South Carolina. That would be the right approach for Boeing to take if it wants to avoid further hassle with the World Trade Organization. Of course, we have seen plenty of examples where subsidies have been discovered long after a project was first announced. Think Foxconn in Wisconsin or Nissan in Mississippi. Call me cynical, but I wouldn't put it past Boeing to find a way to get a subsidy for the “new” jobs in South Carolina. After all, from 2003-2012, the company had net negative state income taxes overall nationally.

Between the runaway jobs and the World Trade Organization subsidy rulings, if there were ever a time and a company calling for no development subsidies, Boeing is it in 2020.

Cross-posted with Good Jobs First.

Thanks to Greg LeRoy for suggesting this article and for editorial improvements.

Wow! Boeing asks for end of Washington State subsidies UPDATED X 2

The New York Times is reporting that Boeing Corporation has requested that the state of Washington stop providing it with tax breaks that the World Trade Organization (WTO) has on multiple occasions ruled to be an illegal subsidy under the Agreement on Subsidies and Countervailing Measures. On February 19, State Senator Marko Liias and co-sponsors introduced a bill at the company's request to end these subsidies.

Of course, Boeing's move did not come from the goodness of the company's heart. It represents part of its maneuvering in its WTO war with Airbus. 16 years ago, the United States challenged Airbus' EU subsidies at the WTO and the European Union fired right back with a complaint against Boeing's subsidies from the state and federal government. Both won as plaintiffs and lost as defendants. (The same was true for Canada and Brazil, which alleged illegal export subsidies to Embraer and Bombardier regional jets.) As I noted over six years ago, while the federal government had eliminated its subsidies to Boeing through NASA and the Department of Defense, the state and local subsidies were continuing merrily along. Indeed, the WTO Appellate Body affirmed this again last year (h/t NYT), with the state subsidies valued at $100 million per year.

As a result, the company wants to clean its slate in order to help the United States press its case against Airbus and the unresolved issues there with EU subsidies. (Note that in the WTO, only countries have standing to file complaints; companies cannot do so.) Airbus received billions of dollars worth of subsidized loans in so-called "launch aid." This is quite an amazing dispute: Not only has it lasted ever since the World Trade Organization came into being in 1995, but a settlement to the dispute was supposed to be part of the agreements creating the WTO.

The bill is expected to pass in the current legislative session, which ends March 12. Thus, thanks to the European Union and the World Trade Organization, Washington taxpayers will save $100 million a year going forward.

Update: CNBC reports that the tax break saved Boeing $200 million in 2018, double the amount mentioned above.

Update 2: My colleague Kasia Tarczynska at Good Jobs First reminds me that Boeing also receives subsidies in Missouri and South Carolina. This led me back to the WTO's report on U.S. compliance as modified by the Appellate Body. While the dispute, for whatever reason, did not include Missouri subsidies, it also covered a variety of subsidies beyond Washington state, including Industrial Revenue Bonds (IRBs) from Wichita, Kansas, and 11 subsides that comprised the South Carolina package. If I have this correct, the Dispute Panel found that the United States had not removed the state and local subsidies in Washington, while the Appellate Body added that only some of the subsidies in South Carolina were in violation of the rules, and it was unclear if Wichita's IRBs constituted a "specific subsidy" that could be sanctioned. It is possible, therefore, that Boeing may have some more cleaning up to do to get to the blank slate it wants to have when it presses against Airbus subsidies.

EU goes to WTO over Boeing subsidies

Just as I predicted, the European Union has filed a World Trade Organization complaint against Boeing's new round of subsidies from Washington state totaling $8.7 billion from 2025 to 2040 (h/t @ThomasCafcas). I'll go out on a limb and predict that the EU will win this case.

Okay, that's not really out on a limb: The WTO found that Boeing's last round of state and local subsidies violates its Agreement on Subsidies and Countervailing Measures, and the facts are exactly the same -- except for the fact that the subsidies have grown from $160 million a year to $543 million a year, more than three times as much. This case is a slam-dunk.

Of course, after it loses, it's not like Washington state will comply with the ruling. It's not complying with the last ruling. But it gives us an opportunity to remember that Boeing embodies everything that's wrong with corporate America. According to Citizens for Tax Justice, from 2003 to 2012 Boeing made $35 billion in pre-tax profit, an average of $3.5 billion a year. It made this much despite the fact that its competitor Airbus is also subsidized. Its post-tax profit was $36.9 billion, which is to say that it received a net refund of $96 million from Washington state and $1.8 billion from the IRS over that 10-year period. In other words, it paid no state or federal income tax at all!

Not only that: Boeing demanded, and ultimately won, a concession from the Machinists' union to end its defined-contribution pension and replace it with a 401(k) plan. So one of the last remaining true pensions in the private sector bites the dust, contributing to our coming retirement crisis.

Finally, Boeing used the availability of huge relocation subsidies in other states as a bludgeon against both Washington state and the union. Ultimately, the states need federal rules to end this madness.

How to deal with the growing incentives competition

This article was originally published in the Columbia FDI Perspectives series of the Columbia Center for Sustainable Investment, #131, September 29. I have left it largely unchanged, except for adding a link and a comment, and correcting a grammatical error.

As I discussed in an earlier Perspective,[1] the use of investment incentives is pervasive and growing. The most recent example [this was completed prior to the Tesla auction] of a big bidding war was when Boeing threatened to move production of its 777-X aircraft out of Washington state, prompting some 20 states to offer incentive packages to the company (including $1.7 billion from Missouri). In the end, Washington gave Boeing a package of tax incentives worth a record-breaking $8.7 billion over the 2025 – 2040 period to stay, and the unions made substantial concessions regarding pensions.

What can be done to control such auctions, which are often international in scope? The most robust control method, regional in scope, is embodied in the European Union (EU) Guidelines on Regional Aid. These rules guarantee transparency, set variable limits (in terms of “aid intensity,” which equals subsidy/investment) for aid levels based on each region’s per capita income, and reduce the value of aid to large investment projects over €50 million. They require projects to stay at least five years and mandate the use of clawbacks for firms that fail to meet their commitments in investment contracts. Moreover, the guidelines provide demerits for firms in a dominant position in their industry, although they do not mandate a particular reduction in aid.

The other international control measure comes under the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures. While these rules are more tailored to production subsidies than to investment incentives, the latter certainly come under the purview of the Agreement as well, as illustrated by the EU’s successful complaint against subsidies for Boeing in the states of Washington, Illinois and Kansas.

However, this case also illustrates the limits of WTO subsidy control. The EU has already filed a compliance complaint,[2] and there is little likelihood the United States (US) will comply anytime soon (the US Trade Representative’s office claims that the US has complied, but as long as the state and local tax credits continue in Washington state, that is not correct). Indeed, as mentioned, Washington state has approved a new round of subsidies for Boeing that is likely to initiate a new WTO dispute. 

While the WTO rules require frequent notification of subsidies, there is no penalty for failure to notify, with the result that subsidy notifications are of very uneven quality. Federal states outside the EU frequently make poor quality notifications regarding subnational subsidies. Finally, the TRIMs and GATS agreements regulate performance requirements, but not investment incentives.

What, then, can be done against incentives competition? First, there must be continuing efforts to improve the transparency of location subsidies. This is necessary for jurisdictions to make effective investment promotion policy (especially in a region such as the European Union and the United States, where there are many competing governments) as well as for international policy discussion.

Second, the EU’s example shows that incorporating subsidies rules into regional agreements can be a fruitful way to bring bidding wars under control. For many products, such as automobile assembly and steel, corporate location decisions still focus on a single region, meaning that such rules would be geographically comprehensive enough for a variety of industries. Consequently, major stakeholders—including the Columbia Center on Sustainable Investment, the International Institute for Sustainable Development, the United Nations Conference on Trade and Development, the World Association of Investment Promotion Agencies, the International Monetary Fund, the World Bank, and the Organisation for Economic Co-operation and Development—should unite in promoting location subsidy guidelines within regional trade areas. There are no doubt numerous other non-governmental organizations that would endorse such a move.

Third, WTO notifications should be strengthened. Incomplete notifications should be flagged and countries involved should be pressured to give cost estimates for subsidies at all levels of government. Still, it is difficult to envision that sanctions for non-compliance will be introduced.

Fourth, no-raiding zones could be a first step for countries to negotiate controls over investment subsidies. A no-raiding agreement simply commits a state to not give a subsidy to relocate an existing facility from another state; it would not apply to new investments. Their track record is mixed—several agreements among US states failed quickly, but Australia (2003-2011) and Canada (1994-present) have been more successful.[3] Despite these mixed results, it is easier to demonstrate to policymakers the futility of relocation subsidies, since they create no new jobs, than it is to do for incentives for new investment, which could make this a more feasible first step.

Though national and subnational jurisdictions have incentives to offer location subsidies, these proposed measures would help keep their value to more reasonable levels with a lower likelihood of distorting competition and international investment flows.

---

[1] Kenneth P. Thomas, “Investment incentives and the global competition for capital,” Columbia FDI Perspectives, No. 54, December 30, 2011.

[2] Emelie Rutherford, “EU wants $12 billion in U.S. sanctions over Boeing subsidy spat,” Defense Daily, September 27, 2012.

[3] Kenneth P. Thomas,  “Regulating investment attraction: Canada’s Code of Conduct on Incentives in a comparative context,” 37 Canadian Public Policy, 3 (2011), pp. 343-357; Kenneth P. Thomas, “EU control of state aid to mobile investment in comparative perspective,” 34 Journal of European Integration 6 (2012), pp. 567-584.

 From: Kenneth P. Thomas, "How to deal with the growing incentives competition," Columbia FDI Perspectives, No. 131, September 29, 2014. Reprinted with permission from the Columbia Center on Sustainable Investment (ccsi.columbia.edu).

 
Cross-posted at Angry Bear.