THE European Union has been given a major boost in its battle with the United States over subsidies to giant aircraft manufacturer Boeing after the World Trade Organisation declared America’s export tax exemption scheme illegal.

Six years after the trade body first ruled against the concession, then known as the Foreign Sales Corporation, it confirmed yesterday that, despite some changes, its successor, the American Jobs Creation Act introduced last year, also violated international rules.

In its judgment, the WTO panel stated that the US continued to fail “to withdraw the prohibited subsidies and bring its measures into conformity” with earlier rulings. It noted that while Congress had repealed the original FSC tax scheme, its support for a transition period and the permanent grandfathering of existing contracts had continued the subsidies.

The system allows American exporters to exclude from tax on their gross income that portion of their receipts that relates to foreign trade. The European Commission has argued that thousands of US companies such as Boeing, Microsoft and General Motors have benefited from the system by setting up offshore subsidiaries. The European Commission was quick last night to use the ruling to try to strengthen its hand in the increasingly bitter argument with Washington over the scale of state subsidies to the world’s two largest aircraft manufacturers: America’s Boeing and Europe’s Airbus.

With both sides accusing the other of using illegal aid, the dispute has now been referred to the WTO for arbitration after bilateral efforts to find a settlement collapsed earlier in the year. In a statement last night, the Commission maintained that Boeing had been the largest beneficiary of the scheme, receiving “about $750 million in illegal subsidies”.

Peter Mandelson, the European Trade Commissioner, contrasted the advantages that the EU estimates Boeing has received from the scheme with Washington’s counter-accusations that Airbus is a major recipient of illegal European government aid. “The US is asking European companies to abide by the WTO definition of subsidies regarding grants to Europe’s civil aircraft sector. So, I hope that the US authorities will choose to act consistently in these matters,” he said.

The European Union challenged the original Foreign Sales Corporation regime as far back as 1998, claiming that the fact the Federal Government did not collect tax revenue on exports was an illegal subsidy.

The WTO found in the EU's favour in both 1999 and 2000. In 2003, the WTO authorised the EU to retaliate by imposing sanctions in the form of duties of up to $4 billion on US exports.

When the US failed to repeal the export subsidy measures, the sanctions were introduced in March 2004 on a range of agricultural, textile and industrial products. These were suspended earlier this year while both sides tried to find a solution to the dispute. They could be reintroduced at the start of next year if the US fails to comply with the WTO ruling.

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