Tanker Wars: Boeing Says Law On Its Side In Subsidies Dispute

An interesting asymmetry has emerged in how the Boeing and Northrop Grumman teams have reacted to the government’s release of a draft request-for-proposal in the Air Force tanker competition. The Northrop Grumman team, which is bidding a modified Airbus A330 commercial transport, keeps complaining about the government’s proposed acquisition strategy. Boeing, on the other hand, has said almost nothing about the strategy but complains constantly about Airbus commercial subsidies. The World Trade Organization recently ruled that some subsidies from European governments to Airbus were illegal, and its pending report on the subject contains a chapter about how the A330 was unfairly benefited by improper launch aid.

The Boeing attack on subsidies has put Northrop and Airbus parent company EADS in a bind, because attractive pricing was to be a cornerstone of their bidding strategy. But with Boeing raising the issue of unfair subsidies on a nearly daily basis, it will be hard to offer a good price for the Northrop plane — which is much bigger than the 767 Boeing is offering — without raising questions about how the companies can afford to bid so low. When you add this complication to the other risks associated with bidding on the fixed-price development contract for the tanker, it isn’t hard to see why Northrop Grumman president Wes Bush is beginning to doubt whether he should bid at all.

Proponents of the Northrop-Airbus plane have tried to squelch Boeing’s subsidies campaign by arguing it is improper to retaliate before the WTO findings are final and a competing case against alleged Boeing subsidies is decided. But Boeing has issued a powerful rebuttal citing the relevant law. First, it notes that the case brought regarding Boeing in the WTO doesn’t even allege that it received illegal launch subsidies, which is the heart of the Airbus case (the A330 received over $5 billion in improper launch aid). Second, it says that WTO rules forbid linking cases in the way that Northrop proponents propose. Third, it argues that once the WTO finding becomes final within a few weeks, any U.S. government action on subsidies would no longer be preemptive, and the fact that Airbus will appeal is immaterial — the U.S. has a right to take remedial action. Finally, it contends that the Federal Acquisition Regulation (FAR) requires contracting officers to consider “any potentially unfair competitive advantage” that an offeror may have by making adjustments to its acquisition strategy.

The bottom line on Boeing’s position is that the WTO has given the U.S. government a green light to take unfair subsidies into account in the tanker competition, and it is legally bound by the FAR to do so. Boeing doesn’t say it might formally protest if the government fails to act, but it seems to have built a solid legal foundation for taking that course. The Pentagon is so eager to avoid this issue that it hasn’t even read the WTO’s draft decision on Airbus subsidies, which is held under lock and key at the office of the U.S. Trade Representative. But with the world’s leading trade body saying that one of the two entrants in its tanker competition has received illegal support from foreign governments, it can’t wish away this latest twist in the tanker saga.