The EU and US have agreed to extend a truce holding off punitive tariffs in their nearly two-decade dispute over aircraft subsidies to Airbus and Boeing as part of a broader effort by the two traditional allies to reset trade ties.

"This really opens a new chapter in our relationship because we move from litigation to cooperation on aircraft," EU chief Ursula von der Leyen said.

The feud that reached the World Trade Organization in 2004 saw both sides impose tariffs on $11.5 billion (€9.5 billion) worth of each other's goods. The duties were suspended for four months in March this year as the EU and US worked toward settling the dispute. Both sides have now agreed to keep the tariffs suspended for five years as they work on a deal on what subsidies to allow.

What prompted the truce?

The truce comes amid a broader push by US President Joe Biden to mend ties with allies, which took a major beating during Donald Trump's term, thanks in part to punitive tariffs on EU goods worth billions of euros.

The agreement is also meant to allow the Western aircraft manufacturers Airbus and Boeing to focus on the threat posed by China's state-owned planemaker Comac, which is looking to end their duopoly in the civil aircraft industry.

 "Today's announcement resolves a longstanding trade irritant in the U.S.-Europe relationship. Instead of fighting with one of our
closest allies, we are finally coming together against a common threat," US Trade Representative Katherine Tai told reporters in Brussels. "We agreed to work together to challenge and counter China's non-market practices in this sector in specific ways that reflect our standards for fair competition."

Tai said the tariffs would remain suspended as long as "EU support for Airbus is consistent with the terms of this agreement" and US producers are able to "compete fairly."

The coronavirus pandemic, which pushed the global economy into the worst recession since World War II, further set the stage for negotiations. The aviation sector has been one of the worst-hit with much of international travel remaining suspended. Imposing punitive tariffs on struggling aircraft and parts makers would have only worsened their plight.

"I don’t think it’s terribly significant [for Airbus and Boeing], but it does de-risk them slightly. It just needed to happen," Teal Group aviation analyst Richard Aboulafia told DW.

Airbus welcomed the deal, saying it would provide "the basis to create a level playing field."

"It will also avoid lose-lose tariffs that are only adding to the many challenges that our industry faces,'' an Airbus spokesperson said.

What is the dispute all about?

The European Union and the United States claim that each other's airplane manufacturer is unfairly subsidized.

It was the US that first filed a case with the World Trade Organization (WTO) in 2004, claiming that Airbus, which is jointly owned by Germany, France, Spain and Britain's BAE Systems, had received $22 billion (€19.4 billion) in illegal subsidies. US officials estimated that the subsidies had resulted in an economic benefit of more than $200 billion.

The EU retaliated with a countercase, alleging that Boeing had received $23 billion in "trade-distorting" subsidies in the US, mainly for its research and development projects. 

What did the WTO find?

Over the years, the WTO has ruled that both sides unfairly subsidized their aircraft makers.

In 2018, the WTO's appeals body upheld a 2016 ruling that the EU had supported Airbus with subsidized loans for the development of new aircraft — the A380 superjumbo and the A350 twin-aisle jet. The world body also found that the loans, which were repayable on delivery, amounted to illegal assistance.

A year later, the WTO handed the EU a victory in its countercase, saying America's favorable contract terms and tax breaks to Boeing had hurt Airbus sales. Interestingly, both the US and the EU claimed victory on hearing the decisions.

Ruling on the US sanctions request, the WTO in October 2019 allowed the US to impose tariffs on up to $7.5 billion worth of EU goods, the largest award in the trade body's history but well below the US request. The US trade office had estimated the harm from the EU subsidies to Airbus at $11 billion in trade each year. 

In 2020, the WTO allowed the EU to impose tariffs worth $4 billion on US goods. That figure fell short of the EU's estimate of $12 billion in damages caused to Airbus by US support of Boeing.

In the meantime, the US eliminated a preferential tax rate for aerospace manufacturing last year to comply with the WTO rules. It said later there was no valid basis for the EU to retaliate against any US goods now that the subsidy had been removed.

In July 2020, Airbus, for its part, agreed to modify the terms of the repayable launch aid granted by France and Spain for the development of the A350 aircraft. The European Commission said the changes meant that the bloc was in full compliance with the rulings of the WTO in the dispute and that there was no ground for the US to maintain its countermeasures on EU exports.