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THE U.S. JET TRANSPORT INDUSTRY:

GLOBAL MARKET FACTORS AFFECTING U.S. PRODUCERS

(109–20)

HEARING

BEFORE THE

SUBCOMMITTEE ON

AVIATION

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 25, 2005

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

CHARLES W. DENT, Pennsylvania

TED POE, Texas

DAVID G. REICHERT, Washington

CONNIE MACK, Florida

JOHN R. ‘RANDY’ KUHL, JR., New York

LUIS G. FORTUN ̃ O, Puerto Rico

LYNN A. WESTMORELAND, Georgia

CHARLES W. BOUSTANY, JR., Louisiana

JEAN SCHMIDT, Ohio

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

(II)
SUBCOMMITTEE ON AVIATION

JOHN L. MICA, Florida, Chairman

THOMAS E. PETRI, Wisconsin

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

ROBIN HAYES, North Carolina

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

CHARLES W. DENT, Pennsylvania

TED POE, Texas

JOHN R. ‘RANDY’ KUHL, JR., New York,

Vice-Chair

LYNN A. WESTMORELAND, Georgia

DON YOUNG, Alaska

(Ex Officio)

JERRY F. COSTELLO, Illinois

LEONARD L. BOSWELL, Iowa

PETER A. DEFAZIO, Oregon

ELEANOR HOLMES NORTON, District of

Columbia

CORRINE BROWN, Florida

EDDIE BERNICE JOHNSON, Texas

JUANITA MILLENDER-MCDONALD,

California

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

TIM HOLDEN, Pennsylvania

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

BEN CHANDLER, Kentucky

RUSS CARNAHAN, Missouri

JOHN T. SALAZAR, Colorado

NICK J. RAHALL II, West Virginia

BOB FILNER, California

JAMES L. OBERSTAR, Minnesota

(Ex Officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Allgeier, Ambassador Peter F., Deputy, United States Trade Representative ... 9

Bogosian, Hon. Joseph H., Deputy Assistant Secretary for Manufacturing,

United States Department of Commerce ........................................................... 9

Busch, Marc L., Associate Professor, Queen’S College School of Business,

Kingston, Ontario, Canada .................................................................................. 28

Douglass, John W., President and CEO, Aerospace Industries Association

of America ............................................................................................................. 28

Moss, Bryan T., President, Gulfstream Aerospace Corporation .......................... 28

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Costello, Hon. Jerry F., of Illinois .......................................................................... 63

Oberstar, Hon. James L., of Minnesota ................................................................. 83

Tauscher, Hon. Ellen, of California ........................................................................ 87

PREPARED STATEMENTS SUBMITTED BY WITNESSES

Allgeier, Ambassador Peter F. ................................................................................ 40

Bogosian, Hon. Joseph H. ....................................................................................... 46

Busch, Marc L .......................................................................................................... 60

Douglass, John W .................................................................................................... 65

Moss, Bryan T. ......................................................................................................... 71

SUBMISSION FOR THE RECORD

Bogosian, Hon. Joseph H., Deputy Assistant Secretary for Manufacturing,

United States Department of Commerce, reponse to a question from

DeFazio ................................................................................................................. 26

(1)

THE U.S. JET TRANSPORT INDUSTRY: GLOBAL

MARKET FACTORS AFFECTING U.S. PRODUCERS

Wednesday, May 25, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON AVIA- TION, COMMITTEE ON TRANSPORTATION AND INFRA- STRUCTURE, WASHINGTON, D.C.

The subcommittee met, pursuant to call, at 10:03 a.m., in Room

2167, Rayburn House Office Building, Hon. John L. Mica [chairman of the subcommittee] presiding.

Mr. MICA. I would like to call this hearing of the House Aviation

Subcommittee to order. Although we have a memorial service going

on on the steps of the Capitol and some members will be participating in that event and will be delayed, I would like to go ahead and

start this hearing and keep it on time. And certainly we do remember the sacrifices and service of those in uniform as we begin this

hearing today. With the permission of the minority, we are going

to proceed.

The topic of today’s hearing is U.S. Jet Transport Industry: Global Market Factors Affecting the United States Producers. The order

of business before us will be two panels of witnesses, and we will

begin today’s hearing with statements from members and then we

will turn to the two panel of witnesses that we have. I will begin

with my statement and then yield to other members.

One of the most important responsibilities of the members of this

subcommittee is to maintain fair international market competition

for United States companies and their employees who manufacture

aircraft. More than 600,000 men and women in the United States

dedicate themselves every day to advancing the science and economics of flight by designing, producing, and delivering sophisticated aircraft to customers around the globe. Maintaining and even

enhancing the vitality of this industry is critical to our domestic

and international commerce. This morning, our subcommittee will

focus attention on the recent Commerce Department report entitled, and I quote, ′′The United States Jet Transport Industry. Competition, Regulation, and Global Market Factors Affecting United

States Producers.′′ This report was mandated in the Vision 100 legislation, our FAA

reauthorization legislation, produced by this committee, and provides an ideal platform for the committee to hear testimony from

leading United States Government officials and industry experts on

the current state of our aerospace sector. The report and testimony

we receive today will detail the unfair competitive practices by

manufacturers in our country that they have experienced, and also
2

it will detail the resulting substantial erosion of United States market share as well as a reduction in the levels of employment in this

country.

Let me clearly state, this administration and the United States

Congress cannot and will not tolerate the unfair subsidization of

manufacturing, promoting, financing, or the development of commercial aircraft. I believe that this Nation’s aerospace industry is

in a crisis in terms of its ability to compete on a level playing field.

I am convinced that other Members of Congress from both sides of

the aisle and from all political spectrums share this view.

We have witnessed a substantial decline in market share of our

United States manufacturers over the past years. Key aerospace

companies in the United States including Lockheed Martin and

McDonnell Douglas exited the commercial aircraft manufacturing

business in the 1980s and 1990s. Much of the decline in the domestic industry occurred at the same time the market share of Europe’s Airbus was steeply increasing.

Understanding and addressing the current state of our U.S. aerospace industry is not a partisan issue. Last year, more than 240

Members of the House signed a letter to then U.S. Trade Secretary

Bob Zoellick commending him for his dedication to ensuring that

United States companies can compete on a level playing field, and

also his decision to file a trade case at the World Trade Organization over the continued European government subsidization of its

commercial aircraft manufacturer, Airbus. As most of the members

of the subcommittee will recall, Senator Kerry was very vocal last

year during the presidential campaign about the European’s willingness to violate WTO subsidies agreement through what has totaled some 35 billion dollars that they have provided to Airbus over

the years.

President Bush and his U.S. trade representative, Bob Zoellick,

who just left office, and now our current U.S. trade representative

and former colleague from Ohio, Rob Portman, along with Ambassador Allgeier, have been at the very forefront of our administration’s effort to eliminate so-called launch aid to Airbus. Anyone who

is reading newspaper editorials such as The Wall Street Journal,

The New York Times, The Long Beach Press Telegram, The Denver Post, The Boston Herald, The Minneapolis Star Tribune, The

Chicago Tribune, just to name a few, or watching television, realizes the concerns expressed today are not limited just to the U.S.

Congress and to this administration. Many well-respected opinion

leaders and editorial writers, in fact, around the globe, including

those in Europe, have been particularly critical of the European

government’s continued use of government funds to support Airbus

at a time when it has already achieved market share parity with

its American competitors.

In a March 2005 Financial Times editorial—these aren’t my

words, this is the Financial Times British editor who wrote:

Launch aid, Airbus’s unique subsidy, is an especially blatant violation of the principles of fair competition. The EU should let go.

State support for private companies becomes indefensible as they

mature. Infant industries must grow up. And that is the end of

that quote.
3

Where else can any other business secure a loan at deeply discounted rates of interest where the repayment of the loan is based

on whether or not the business is considered an economic success?

I think most people in the United States would love to be in a position to borrow money to buy a business or a house where they need

not repay the loan if the person or company happens to be short

of cash that year or the owner loses his or her job. Those terms

have been, in fact, available to Airbus and its customers since its

creation in 1969.

Here is another quote. This isn’t Mica speaking or someone from

the administration. In a German editorial, an editor recently wrote:

This assumption of corporate risk by the state also gives Airbus the

ability to pursue fantasies such as the A380, a monster of an airplane that might not have gotten off the ground without $3.7 billion in launch aid and another $1.7 billion in taxpayer-funded infrastructure improvements. Again, not my quote.

Unfortunately, the aerospace manufacturers in the United States

have been forced to try to compete with companies that receive

these massive subsidies provided by the combined treasuries of European governments. The European governments’ aerospace agenda

is, in fact, very clear. It is reflected in the comments of French

Prime Minister Jospin in the year 2000. This is what he said: We

will give Airbus the means to win the battle against Boeing. Not

my quote, his quote.

Airbus’s deliveries in 2003 and 2004 of more commercial aircraft

than Boeing for the first time in history suggests that they are not

far from reaching this goal.

The United States, I believe, must draw a line in the sand and

make it impossible and take every possible measure to stop the unfair subsidization of the development, manufacture, promotion, and

financing of commercial aircraft. All commercial aircraft. Furthermore—and when I say all commercial aircraft, we are also looking

at other subsidization by other foreign manufacturers, and we are

going to deal with that in additional hearings and meetings.

Furthermore, those who may deal in the tactics of bribery or government inducements violate international standards and will be

held accountable.

I have begun to take steps to make certain that they will be held

accountable.

Linkage between a foreign airlines receiving preferential treatment for landing rights or slots from airports if the company purchases Airbus aircraft is also under review by this subcommittee.

International intimidation as was demonstrated in the case of a

Turkish airline where its purchase of Airbus aircraft last year was

allegedly linked as a condition for Turkey’s admission to the European Union, is another practice that bears scrutiny. An article in

U.K.’s Economist of June 2003 entitled: Aircraft and Bribery:

Airbus’s Secret Past, raises some very serious questions about

these tactics that have been routinely used for decades. And, again,

I have taken measures and steps to look into and further investigate and take actions against these practices.

If the Congress and the administration do not act now to level

the playing field for United States manufacturers of aircrafts and

engines, then the 600,000 men and women who still remain in the
4

aerospace industry, our entire aircraft manufacturing sector I fear

will be eliminated from the international marketplace.

We look forward to hearing from our distinguished witnesses on

these and other issues affecting United States aerospace industry.

I am pleased now to recognize the ranking member of this subcommittee, Mr. Costello.

Mr. COSTELLO. Mr. Chairman, thank you. And, Mr. Chairman, I

apologize for running late. I had a group of college students in my

office, and they vote in my district so I spent a little bit of time

with them.

Mr. MICA. I should have said this, and I apologize. Just a second.

Don’t ever try to stop a hearing that I announce. I just want to

give people a warning. Do not ever try to stop a hearing that I have

announced. Thank you.

Mr. COSTELLO. Is there a message here, Mr. Chairman, that we

are not—on our side of the aisle?

Mr. MICA. No, it is not to your side. In fact, you have been most

cooperative and I appreciate that.

Mr. COSTELLO. Okay.

Mr. MICA. You just came in at the end here. And I just want to

make it clear that this subcommittee will not be intimidated to

push issues of national significance aside by intimidation or by

whatever means.

Mr. COSTELLO. Mr. Chairman, thank you. Again, I apologize for

running late. I will submit my statement for the record, and ask

unanimous consent that all members submit their statement for

the record.

Mr. MICA. Without objection, so ordered.

Mr. COSTELLO. Mr. Chairman, I thank you for calling today’s

hearing to examine the competitiveness of the U.S. aircraft manufacturing industry. We must do everything that we can in the Congress to ensure that U.S. companies can compete on a level playing

field.

Mr. Chairman, the United States must make a strong stance

against trade barriers that hamper U.S. manufacturers from competing on a level playing field. I look forward to hearing from our

witnesses today, in particular, our U.S. trade ambassador, and concerning the issues of the European Union before the World Trade

Organization regarding the subsidies provided to Airbus. I think

we have to take a hard look at the lack of adequate funding for

basic aerospace research and development, which is a significant

impediment to the future of the U.S. large civil aircraft manufacturing industry in the United States. NASA’s research budget has

steadily declined over the last decade from a high of 1.54 billion in

fiscal year 1994 to the fiscal year 2006 budget request of $852 million.

To understand the effects of this lack of basic R&D funding on

the aerospace industry, I have requested that the Government Accounting Office conduct a comprehensive assessment of U.S. aeronautical research and development efforts and a comparison of

these efforts with those of the European Union and other nations.

Mr. Chairman, I look forward to hearing the testimony of our

witnesses today, and, as I said, I will submit my entire statement

for the record.
5

Mr. MICA. I thank the gentleman. Are there other opening statements? Mr. Westmoreland.

Mr. WESTMORELAND. Thank you, Mr. Chairman. I appreciate you

having this hearing, and I think everybody out here realizes your

commitment to making sure that our manufacturers are on an

equal playing field. I just want to say that I look forward to hearing from all the witnesses, and especially Mr. Bryan Moss from

Gulfstream Aerospace in Georgia, which does a wonderful job of

manufacturing planes that people use all over this country. And I

look forward to hearing his testimony because they are an example

of what kind of product American companies can produce. And

hearing his testimony as to not only the unfair competitiveness I

guess that we do from foreign countries being able to subsidize

other things, but even the own regulations that we do within our

own country to hurt the people that manufacture here. So, Mr.

Chairman, that is all I need to say.

Mr. MICA. Mr. Larson.

Mr. LARSEN. Mr. Chairman, thank you to you and Ranking Member Costello for holding this hearing. I want to start by thanking

the administration and the office of the U.S. Trade Rep for the

work that they have done in attempting to reach an agreement

with the European and to end the subsidies to Airbus. This is of

importance to my district located in the Puget Sound region of

Washington State, which is home to the largest Boeing commercial

facility. My district has seen first-hand what competing with an

unfairly subsidized organization can do. In the past five years, Boeing has cut overall employment by more than half, from 104,000

employees in 2000 to a little over 50,000 employees today. Most of

these employees, both those currently working and those laid off,

live in Puget Sound. A factor in the loss of these jobs has been

Airbus’s remarkable pace of growth and continued increase of industry market share, an increase that would be commendable, but

for the fact that it is buoyed by the unfair practice of launch aid.

Airbus’s global market share of aircraft deliveries skyrocketed

from roughly 25 percent in 1992 to 52 percent in 2003. I strongly

supported the USTR’s decision last October to end the US-EU 1992

agreement on aircraft and request WTO consultations on a new

agreement.

The 1992 agreement to allow 33 percent of Airbus’s aircraft development costs be funded through launch aid has run its course.

I was encouraged when the U.S. and the EU reached agreement on

negotiation terms that would end subsidies, but let us be clear, the

subsidy is exactly what launch aid is. And through the work of the

USTR, the EU has agreed to use a definition of subsidy in the

WTO subsidies agreement as a foundation for the new agreement.

Although these discussions have stalled, again, I want to emphasize, I want to thank former USTR Bob Zoellick for his commitment and persistence in working to resolve this issue, and look forward to the new USTR, our former colleague, Mr. Portman, to continue to make this issue a top priority.

EU’s continued launch aid for Airbus is unacceptable and must

end. Launch aid for Airbus consists of no or low-interest government loans for up to a third of the cost of new Airbus aircraft. Repayments of many of these loans are dependent upon the sales of
6

Airbus aircraft. If Airbus does not sell the amount of planes it targets, it simply does not pay that portion of the loan. Therefore, a

third of the risk does not sit with the company, but rather with the

treasuries of its government sponsors. This is an incredibly unfair

advantage for Airbus. Launch aid once perhaps served a purpose

in getting Airbus off the ground, but that time has long since

passed.

Airbus is clearly a mature company that does not need risk-free

government loans to be competitive. In order for American workers

to succeed in the aerospace industry and in all industries, they

must be allowed to compete on a fair and level playing field. When

the playing field is neither fair nor level, good paying jobs in the

U.S. are lost.

I look forward to continuing to work with the administration, the

USTR, and this subcommittee to bring an end to these unfair subsidies. Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman. Any other members seek recognition? Mr. Ehlers.

Mr. EHLERS. Very briefly, Mr. Chairman. I just want to thank

you for calling this hearing. I think it is one of the most important

hearings we are going to have. I am tremendously bothered by the

unfair competition that we face, and I really appreciate you calling

the hearing. Thank you.

Mr. MICA. I thank the gentleman. Mr. DeFazio.

Mr. DEFAZIO. Thank you, Mr. Chairman. Thank you for this long

overdue hearing.

You know, I recall a conversation I had with senior management

at Boeing back during the early Clinton era and the negotiation of

the first WTO agreement, and I suggested to them that this was

a defective agreement, that the agreement did not deal with aviation subsidies. And they said that they didn’t want to raise those

issues. They were confident in their company, confident that they

could deal with this, and also had fear that some of their customers

were European airlines that might retaliate if they took steps to

just create a truly competitive market in dealing with Airbus.

Well, those executives are long gone and probably living in very

large homes with wonderful capital accumulation, but many of

their employees have lost their jobs and more will lose their jobs

because of the shortsightedness of both the company at the time in

terms of taking on this issue and pushing the administration and

discouraging those of us who would have done that. Entering into

an agreement as a Nation can be faulted on President Clinton and

this administration for these so-called free trade policies that are

hemorrhaging our industrial might, sending family wage jobs overseas, allowing unfair competition, allowing intellectual and technological blackmail by countries such as China.

The problems do not begin and end with subsidies to Airbus;

they are much larger. And, in many ways, the Europeans are more

enlightened than we are in looking at an absolutely critical sector

that can provide very high wage jobs and provide technologies that

have both civilian and military application and act to protect it and

promote it.

Whereas we enter into this sort of bizarre laissez-faire view of

trade where we let the Chinese steal and/or blackmail U.S. compa-
7

nies for their best technology. We have until very recently allowed

Airbus to receive extraordinary subsidies without even raising a

peep; and we allow company leaders to pursue the offshore movement of technology jobs, chasing the cheapest labor around the

world.

So the problem is much bigger for the United States of America

than what we are confronting here today, but at least we are beginning to take on one aspect of this problem with the launch aid subsidies. And there are other subsidies that go there. If you buy an

Airbus, you are probably going to find you might be able to get a

slot at an airport in Europe that you couldn’t get if you happened

to buy a Boeing and wanted to land there. So there are many other

ways in which they have been promoting, and, again, in a way that

certainly shows the United States with its laissez-faire philosophy

is losing out in the world market here.

I am not tremendously confident in the dispute resolution of the

WTO. It does not follow the rules of jurisprudence, it doesn’t have

any rules regarding conflict of interest, and it is a very faulty process. But we should pursue this as hard as we can. I don’t know

what the chairman was referring to in terms of people trying to

short-circuit this hearing, but I think it is a timely hearing. I wish

that we did have people from Airbus here because I have questions

I would like to ask of them regarding this, and hopefully at a future date we will. Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman. Additional opening statements

from members? Ms. Norton. And, thank you, Ms. Norton. I understand today at 3:00 they are going to sign off, media stations, we

finally succeeded at least some plan for reopening Reagan National. I thank you. Mr. DeFazio worked on it, Mr. Costello, and

members on both sides of the aisle, Mr. Davis, Mr. Moran. So

thank you. And you are recognized.

Ms. NORTON. Well, thank you, Mr. Mica. Indeed, I was going to

begin by thanking you for this extraordinary breakthrough. It has

been 4 years, and it has not been my four years; it has been this

entire committee each and every step of the way, the ranking member sitting at the time Mr. DeFazio was with him, Mr. Costello,

and the chairman of the committee, Mr. Young. But, Mr. Mica, I

particularly appreciate that you held a hearing and the anchor that

I think really sent the message home that Congress, the committee

took very seriously the notion that general aviation was down in

Reagan and up everywhere else including New York right after 9/

11.

So I can’t say enough to thank the committee for the way in

which it has led this effort. And I think that the bill that you

marked up in April was the final message and was the reason that

we have this breakthrough now. There are some encumbrances

that are completely unjustifiable, and I think that, as time goes on,

we will be able to knock those down. The notion you have to land

a corporate jet before you land in D.C., have an air marshal get on

armed, and then proceed to National really does once again send

the message that, in 4 years, we haven’t learned to protect our own

Nation’s capital. That is not true.

And I ask the committee to look further at the encumbrances so

that we can get going. There are some things perhaps we ought to
8

be doing here that we don’t do other places, but some of these encumbrances simply cannot be justified.

I did want to say a word, Mr. Chairman, about this hearing, because I think this is a very important hearing. You have recently

had hearings on the state of the airlines themselves and hearings

that were very important as we look at the future of the aviation

industry and our country.

This is very troubling. This issue is very troubling. This is an industry, one of our most highly skilled industries. It has been—it is

being miniaturized before our very eyes, lost half its employees in

the last 15 years, yet it has kept a positive balance, trade balance

when at odds with what the country at large has done. We can’t

afford to lose this industry, especially for the reasons it appears

that it is experiencing some trouble, and that is government involvement and with the competition, launch aid and other such activities.

We have got to find a way not to be the only country who follows

trade rules and the rules of ordinary commerce. And when others

do not follow them, we have simply got to step up and take the appropriate action before we lose yet another major industry in this

country. So I am particularly grateful for today’s hearings, Mr.

Chairman.

Mr. MICA. I thank the gentlelady.

Mr. Poe.

Mr. POE. Thank you, Mr. Chairman. Having lived in Texas

where we have numerous Boeing employees, this hearing is very

important. I appreciate you, Mr. Chairman, having this hearing.

We know what the problem is: The European Union is determined

to create an advantage for Airbus in spite of agreements, in spite

of the rule of law by any means necessary. In any event, Boeing

is one company that still competes well, but I look forward to some

answers to this problem now that we know what the issue is. I look

forward to the answers coming from both of our panels today. So

thank you, Mr. Chairman.

Mr. MICA. Mr. Pascrell.

Mr. PASCRELL. Mr. Chairman and Ranking Member Costello, I

have been long pressing for the Federal Government to develop a

national manufacturing policy in the legacy of Alexander Hamilton.

Under our Nation’s trade policy, we have seen the steep decline in

our manufacturing base in general. For the past 2 centuries, our

Nation has grown its economy based upon production, the production of our grandparents and our parents for the most part. If we

believe that service jobs alone will sustain our position in the

world, I think we are kidding ourselves. We are also delusional if

we do not see the manufacturing capacity as essential to the national security of this country. And I believe the government is an

accessory to the fact of that decline.

Trade deficits are growing as far as the eye can see. We are entering into free trade pacts without any coherent strategy. These

agreements are more like investment deals where we are encouraging firms to move jobs offshore. It is no secret that in particular,

domestic airline manufacturing industry is in dire straits. Tens of

thousands of Boeing employees have lost their jobs in the last year.
9

The administration needs to play hardball with the European

Union to bring Boeing and its workforce the level playing field that

it deserves. With so many American jobs on the line, if the World

Trade Organization cannot solve this dispute properly, I think we

should seriously think of putting that organization out of its misery.

Along with international trade I think we must take care of business at home and plan for the future. We must increase funding

for research and development, and educational opportunities for

our students to prepare them for the necessary engineering and

problem solving skills. Too many firms are packing up and expanding their R&D operations overseas. In our budget, these are certainly not the priorities we have seen. I am hopeful that hearings

such as this one will convince us to reexamine how we are spending our resources.

And I know this is not a simple matter. I know that Airbus, up

to 40 percent of the value of the Airbus airplane can original in the

United States. I am very aware of that. I am also aware that Airbus spends in excess of $5 billion in the United States. But the fact

of the matter is I think that what I have said previous still holds.

And I would like to hear from the two folks who are in front of us

a coherent approach and not simply a focused approach to forget

about what the umbrella problem is. Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman. Any other additional opening

statements? If there are no additional statements, we will turn to

our first panel. And we have two witnesses. The witnesses are Ambassador Peter F. Allgeier, Deputy United States Trade Representative, and the Honorable Joseph H. Bogosian, Deputy Assistant

Secretary for Manufacturing of the United States Department of

Commerce.

TESTIMONY OF AMBASSADOR PETER F. ALLGEIER, DEPUTY,

UNITED STATES TRADE REPRESENTATIVE; AND HON. JOSEPH H. BOGOSIAN, DEPUTY ASSISTANT SECRETARY FOR

MANUFACTURING, UNITED STATES DEPARTMENT OF COMMERCE

Mr. MICA. I would like to welcome both of you, and recognize

Ambassador Allgeier first.

Mr. ALLGEIER. Thank you very much, Mr. Chairman. I would

like to thank you and Ranking Member Costello and the other

members of this subcommittee for providing the opportunity today

to address this very important issue of the U.S. civil aircraft industry and the factors and policies affecting our producers.

Today I wish to focus on a particular global factor affecting our

producers, and that of course is the subsidies for the development

and production of large civil aircraft, and on the administration’s

ongoing efforts to end the subsidies to the European aircraft manufacture Airbus.

Today I will discuss some historical background on the subsidy

issue, but I would like to focus on our efforts working with our industry to end EU aircraft subsidies.

As we all know, Airbus was established in 1970 as a European

consortium of French and German and then later Spanish and U.K.
10

companies. Ultimately, it became a single integrated company, 20

percent owned by BAE Systems of the U.K. And 80 percent owned

by European Aeronautic Defense and Space Company, EADS. And

EADS itself is 15 percent owned by the French state, 5 percent

owned by Spain.

Over its 35-year history, Airbus has benefited from massive

amounts of subsidies from EU member states and from the EU

itself, and these subsidies have enabled the company to create a

full product line of aircraft and to gain more than a 50 percent

share of the global large civil aircraft market.

Every major Airbus aircraft model was financed with government

subsidies taking the form of launch aid, that is financing with no

or low rates of interest, and repayment tied to and entirely dependent on the sales of financed aircraft. In addition, EU governments

have forgiven Airbus debt, have provided equity infusions, have

provided dedicated infrastructure support, and have provided substantial amounts of research and development funds benefiting

civil aircraft projects.

Since 1985 the United States has been involved in several rounds

of negotiations with the Airbus partner governments and with the

European commission itself, with the objective of achieving greater

discipline over the subsidies provided to Airbus. In July of 1992,

the two sides negotiated a bilateral agreement limiting government

support for large civil aircraft programs.

That agreement included a prohibition on future production support and a limitation on the share of government support for development of new aircraft models limiting it to 33 percent of the

project’s total development costs. Three years—so at that point

there were no multilateral rules that applied here. In 3 years later,

however, the WTO subsidies agreement entered into force, and that

agreement applies in full to subsidies of large civil aircraft. If a

member provides a subsidy that is inconsistent with the agreement’s terms, it is subject to challenge at the WTO.

Now, despite these obligations, the EU has continued to subsidize Airbus. The $3.7 billion that you mentioned, Mr. Chairman,

in launch aid that they have—the European governments have

committed for the A380, the super jumbo, was the largest amount

of funds committed for a single project. And, as you pointed out,

the EU provided further loans and infrastructure support that

pushed the total amount of subsidies to the A380 to date to approximately $6.5 billion. Now we see that Airbus is on the verge

of launching another new aircraft, the A350, and it has requested

to date $1.7 billion in risk-free launch aid for that aircraft as well.

Mr. Chairman, our current effort to end the subsidization of Airbus began early last year when it became apparent that EU member states were considering subsidies for this newest plane, the

A350. President Bush instructed the U.S. Trade Representative to

pursue all options to end the subsidization of Airbus, including the

filing of a WTO case if that were necessary. The U.S. industry has

fully supported this approach.

Unfortunately, the EU was not willing to agree to the goal of

ending new subsidies. Therefore, on October 6th of last year we initiated the first stage of dispute settlement proceedings at the WTO.

We also exercised our right to terminate that 1992 agreement.
11

On January 11th, when we were on the verge of moving to the

next stage of our WTO challenge, we reached agreement with the

incoming trade commissioner of the European Union, Peter

Mandelson, on a framework for negotiating an end to subsidies. We

agreed with the EU at that time on a 90-day time frame for the

negotiations, and the agreement included a common goal explicitly

stated in writing of ending subsidies as defined by the WTO subsidies agreement.

In March, however, EU officials backed away from the agreed objective of ending the subsidies because certain EU member states

want to continue providing launch aid and subsidies to Airbus, in

particular for the Airbus A350. Now, the EU argues that it needs

to continue providing launch aid to offset subsidies that Boeing allegedly receives from NASA and the Department of Defense. There

is no basis for the EU’s claim. We do not agree that NASA and defense contracts provide subsidies to Boeing’s production and development of large civil aircraft.

And, in any event, Airbus and its parents, EADS and BAE systems, have space and defense businesses that rival that of Boeing,

but only Airbus receives launch aid. There is no similar type of financing available in the United States. Launch aid, as a number

of the members have already pointed out, is a particularly distortive type of subsidy because it shifts enormous up front expense

and commercial risk of developing new aircraft from Airbus to European taxpayers. If Airbus guesses wrong about the project of a

particular aircraft, it does not need to repay the money. Moreover,

because repayment is tied to sales, Airbus receives a substantial

grace period before it needs to begin repayment. For example, Airbus has not even begun repaying the $3.7 billion that it received

5 years ago for the A380.

Mr. Chairman, the administration continues to believe that a negotiated outcome that ends launch aid and other WTO incompatible subsidies would be the preferred route for resolving this matter. But let me be clear. If we conclude that a negotiated solution

to end the subsidies is not possible in the near term, we will return

promptly to the WTO. We are working very closely with the industry on this strategy. The administration is committed to ending the

subsidization of Airbus and to establish a level playing field for

trade in large civil aircraft. It is up to the Europeans to decide if

they are prepared to withhold all launch aid while negotiating an

agreement, or if they would rather take their chances in a WTO

dispute proceeding.

We look forward to working with you, Mr. Chairman, the members of this subcommittee, other interested members of Congress,

and of course the U.S. industry to stop the unfair subsidization of

Airbus. Thank you very much.

Mr. MICA. Thank you. And we will withhold questions until we

have heard from our second witness, who is the deputy assistant

secretary for manufacturing, Joseph Bogosian. Welcome. And you

are recognized, sir.

Mr. BOGOSIAN. Good morning, Mr. Chairman, Ranking Member,

and distinguished members of the subcommittee. On behalf of the

U.S. Department of Commerce, thank you for the opportunity to
12

share our views today. I would like to submit my written testimony

and our report for the record, and make a brief opening statement.

Working in the International Trade Administration, I oversee our

12 manufacturing industry teams, including aerospace. Our mission is to advance U.S. commercial economic competitiveness.

Namely, we identify policy challenges, we analyze data to develop

policy positions, and we advocate those positions domestically and

internationally.

Mr. Chairman, as you know, pursuant to Congress’s request, the

Commerce Department in collaboration with other agencies recently submitted the U.S. jet transport industry report. It examines

the industry, reviews relevant international trade agreements and

provisions and U.S. and European government policies, and identifies potential obstacles confronting U.S. manufacturers in an increasingly global market.

The U.S. commercial aerospace companies involved in the production of large civil aircraft have lost significant global market

share over the last 25 years primarily to their European counterparts. We went from three U.S. manufacturers of large civil aircraft in the 1970s to only Boeing today. A subsidized 35-year-old

Airbus delivers more new commercial aircraft than Boeing and has

received more orders for new aircraft five out of the last 6 years.

Canadian and Brazilian regional jets increasingly are being used

by airlines on routes that once were served by Boeing and Airbus

aircraft. The two U.S. manufacturers of large civil aircraft engines

have experienced similar, though less drastic losses of global market share to their European competitors. U.S. parts and components companies face more difficulty maintaining their market

share in an increasingly global industry. They will increasingly

look to non-U.S. manufacturers for a growing percentage of their

business.

Aerospace manufacturers and countries such as Russia, Japan,

South Korea, and China will continue to build their expertise and

market share. Passenger and cargo airlines also have undergone a

significant transformation since deregulation in 1978. Today, legacy airlines are struggling to stay solvent, and low cost carriers are

a formidable presence.

The evolving market has led to new demands for aircraft models

with new capabilities and changes in the way aircraft are purchased and operated. These market-based factors have brought

changes to the U.S. aerospace manufacturing industry.

I now turn to the nonmarket factors such as government policies,

funding, and regulations that have also brought significant change.

In our report, we review 12 policy categories; I will discuss a few

of those today. Trade agreements have done much to liberalize and

level the international playing field for the aerospace industry.

Many of these agreements need to be updated to keep pace with

the evolving industry. Foreign government financial support to

aerospace manufacturers is a very critical obstacle to fair and open

global trade. The report lays out this issue in detail, and Ambassador Allgeier described the problem and how the U.S. government

is vigilantly addressing this concern.

Nontariff barriers such as standards and regulations will have

an increasingly significant impact on U.S. aerospace exports. For-
13

eign government standards and regulations should not have a discriminatory commercial impact against U.S. products like they

have in the past. Regulations should have a scientific basis and

take commercial realities into consideration. This is particularly

important right now as Europe develops environmental standards

regarding emissions and noise and as manufacturers seek safety

certification for their new and innovative aircraft.

The air transportation system’s ability to grow is limited by government regulations and old technology. Increasing liberalization of

air services and improvements to air transportation systems will

open new markets for air passengers and cargo and support aircraft sales.

The United States has led the world in fighting bribery. Unfortunately, problems still remain. We encourage foreign governments to

strengthen and fully enforce these laws so U.S. companies can compete fairly.

Existing government aircraft finance rules and regulations have

helped neutralize the role of export financing. These provisions,

however, need to be updated to reflect current commercial financing practices and the emergence of the two new major jet transport

manufacturers.

At the conclusion of the report, we outline our ongoing current

efforts to address the challenges we have identified. Here are some

of those efforts:

We are working to update multiple aerospace-related trade

agreements and policies so that they will accurately reflect the

state of global aerospace and airline industries. We are seeking recourse through the WTO and through bilateral negotiations to

bring an end to subsidies for development of new large civil aircraft. We are working with our foreign counterparts through the

OECD to update international aircraft finance and bribery provisions. We are working with other countries to develop new global

standards and recommended practices, and with other agencies

here at home through the JPDO to transform the air transportation system.

We are conducting negotiations aimed at increasing liberalization

of international air services that will further support expansion of

the global aviation system.

Overall, we remain vigilant in addressing all these nonmarket

factors impacting U.S. industries’ competitiveness.

Again, Mr. Chairman, Mr. Ranking Member, thank you for this

opportunity to discuss with you our report and findings. There are

many things that we can do together in support of our shared constituency. I look forward to today’s discussion and, probably more

importantly, to working with you beyond today’s hearing. Thank

you.

Mr. MICA. I thank both of our witnesses. And we will start with

a couple of questions.

One of the problems that we seem to have is getting hard financial information on the extent of some of the subsidization. Airbus

and its parent company do a lot of business, or attempt to do business or are attempting to do additional business in the United

States. Ambassador, are our financial reporting requirements adequate and transparent enough that, under current law, we have
14

the information we need to go after Airbus and its parent company

in some of these trade disputes?

Mr. ALLGEIER. Mr. Chairman, just to let you know and the other

members of the subcommittee know that we are fully prepared to

move forward promptly in the WTO. Our legal team has been

working for many months to pull together the material that we

need to make a very strong case in the WTO.

Mr. MICA. Do you need any additional legislative authority to

probe finances which are sort of guised in international corporations, but may not be transparent?

Mr. ALLGEIER. I don’t think that we need additional legal author- ity at this point. It is not hard to see $15 billion subsidy.

Mr. MICA. All right. There was a previous case and ruling similar

in nature, I believe it was a Canadian case, that set some precedent in the WTO in 1994, was it? Does this provide us with a ruling that would also indicate we would have favorable results if we

pursue this with WTO?

Mr. ALLGEIER. The case that you are referring to was one involving Brazil and Canada. Their Embraer and Bombardier programs.

It did help to clarify some of the rules with respect to subsidization

focusing primarily on export subsidies. What we are looking at here

is a somewhat different kind of subsidy, but we certainly, as I said,

feel confident that we have a very strong case.

Mr. MICA. Is some of that aid in the form of what they call royalty-based loans? How does this differ, and can you explain again

how you feel this is unfair subsidization?

Mr. ALLGEIER. Well, yes. Very clearly, the kind of—well, there

are various forms of support that Europe provides. The most egregious one, in our view, is this launch aid, which is money that is

provided to Airbus. And, as we have said, Airbus does not have to

pay that back at all unless they are successful in marketing that

particular model. And so that is the particular kind of launch aid

that is, as I said, most egregious. But there also are other forms

of support that Airbus receives that we believe fall within that definition of the WTO agreement on subsidies.

Mr. MICA. What is the WTO standard for determining whether

such government assistance violates international trading disputes?

Mr. ALLGEIER. There are a number of elements to that. First of

all, whether there is a financial contribution that provides a benefit

to the company receiving it. And that financial contribution can

take a number of forms. It can be a direct transfer of funds, grants,

loans whatever. It could be foregoing government revenues or

taxes. It could be the provision of government goods and services

that are not at a market rate. The subsidy, the transfer must be

specific to an enterprise or an industry—fits the bill here—and, if

it is something other than an export subsidy or a domestic content

requirement, it must have an adverse effect. And obviously, if you

look at the market share that Airbus has been gaining year after

year, there is clearly an adverse effect upon U.S. industry.

So, for all of these different elements, we think that the support

that is provided to Airbus fits within that definition clearly, and

therefore should be ended and the subsidy should be repaid.

Mr. MICA. Thank you.
15

Mr. Bogosian, over the past years aviation industry manufacturing has been one of the lead export areas of the United States. We

are now running trade deficits excess of $700 billion a year. In the

past, one of our success areas in export has been commercial aircraft products from our aviation industry. What is the recent record

as far as the effect on our trade deficit? Do you have that information?

Mr. BOGOSIAN. What we show is that U.S. aerospace still leads

in terms of trade surplus as an overall industry sector. And given—

Mr. MICA. Hasn’t that been on a decline at least the last 5 or 6

years?

Mr. BOGOSIAN. It certainly has. And that is why it is time to stop

the bleeding, and we have to take action on very specific aspects

of this.

Mr. MICA. The last question will be, Ambassador, you said the

President and the administration are going to explore all options.

And I think Mr. Pascrell said he wants to hear, and I want to hear,

what other steps that we have. We have the WTO. We have Congress now getting involved. We will probably be taking some steps

to address this. I asked if you needed additional legal authority in

the financial area or any other realm to stop the bleeding, so to

speak. What does the Department of Commerce, what does our

USTR propose? Are there any other options or anything that we

can do to assist? Ambassador, and then we will get Mr. Bogosian.

Mr. ALLGEIER. I think the most important thing is what you are

providing here today and what you and the other members have

provided, which is, one, shedding light on these practices by the

Europeans so that everybody here understands the magnitude and

the trade distorting nature of them. And then, secondly, to support

us as we move forward either in an effective negotiation or in effective litigation.

Mr. MICA. Mr. Bogosian.

Mr. BOGOSIAN. As Ambassador Allgeier mentioned earlier, the

support in this case in terms of Boeing-Airbus issue comes in many

different forms. Launch aid is just one of them. There is also government assumption and forgiveness of debt. There is also direct

infusions of capital, government-funded manufacturing facilities--

all this support basically goes from the European government

treasuries to the benefit of private corporations. In 1998 and 1994,

for example, the German government gave 2.33 billion

deutschmarks to assume privately held debt. So even beyond the

royalty based loans that Airbus was operating under, this is the

private debt that Airbus had taken on and the German government

gave 2.33 billion deutschmarks in 1988 and 1994 to assume that

privately-held debt.

In 1997 and 1998, the German government forgave 7.34 billion

deutschmarks of the royalty based loans or the government debt

that had been given out. So, not only do they benefit from the royalty-based loans and the market distorting factors and the assumption of risk by the government for the launch of a private product,

they also benefit when those loans are forgiven.

Infusions of capital, again, are things that are pretty much unheard of and just unfair for a 35-year-old mature company. The

French government provided 2 billion francs as an equity infusion
16

to Aeroespatiale which at the time was an Airbus consortium partner which is now in one corporate entity. That was in 1987. And

in 1994, another 2 billion francs, again, as just a direct check and

equity infusion from the government into a private company’s coffers.

The WTO case, I believe, addresses these types of things, goes

after these types of things. As to your question, one of the other

matters that we are addressing is bribery, for example. I know

some of the members talked about that in their opening remarks.

The Commerce Department recently put out a study on the bribery

issue. I can share that with the committee after today’s hearings.

But bribery was a very serious issue. You had companies basically

writing off their bribes in their tax returns in Europe. U.S. companies were operating under the Foreign Corrupt Practices Act. Our

guys can go to jail; their guys can take a tax write-off. Well, we

finally got the bribery convention within the OECD, and so now

what we are working on is thay it’s all well and good that we have

the bribery convention, but we need to see actual laws put into

place that are as tough as the Foreign Corrupt Practices Act. And

then we need to see the enforcement of those laws to really shake

those people in their boots and do something about that.

So there are a number of fronts that we are working on on this

overall trade issue, on the trade balance issue, and bribery is yet

another one. And there are so many more that we can talk about.

Mr. MICA. Thank you. And we may be looking at some measures

where people guilty of that kind of activity are prohibited from conducting their business in the U.S. or with the U.S. or any of its entities. As I said in my opening remarks, we will follow up on that

aspect.

Mr. Costello. Thank you.

Mr. COSTELLO. Mr. Chairman, thank you.

Mr. Ambassador, we have heard about these subsidies for a number of years. We have just heard testimony this morning; and, in

written testimony, there is documentation about subsidies going on

for a number of years.

I am wondering, one,finally in 2004, we filed a complaint with

the WTO. Why did it take so long for our government to act in filing this complaint?

Mr. ALLGEIER. Yes, in this dispute, as in others, we strive to

work very, very closely with the affected U.S. interest, the affected

U.S. industry. For several years, the industry’s position was that

we should seek a reduction of the support, but there was concern

at the other ramifications if we were to take a WTO case, other

ramifications in terms of the effect on their sales in some of these

European markets.

Basically what happened is, as time went by and they saw their

market share eroding, they determined that the balance of interest

was in a more aggressive approach with respect to the WTO. We

have agreed with them on that, and that is why we terminated the

’92 agreement and initiated these WTO proceedings.

Mr. COSTELLO. In your testimony, you indicate that the administration would prefer to negotiate a settlement; and I wonder if you

might tell us, for the record, what the prospects of a settlement are

at this point?
17

Mr. ALLGEIER. First of all, let me be clear that our preference is

to negotiate a certain kind of settlement, not just any settlement.

The certain kind of settlement is one we have been extremely clear

on, and that is to eliminate the subsidies, not simply to put a cap

on them.

Frankly, as we read the papers in Europe—and we follow this

matter closely—I must say that it appears to me that at least some

of the European member states remain convinced that they need

to provide launch aid to Airbus; and, unless that attitude changes,

the prospects for a negotiated settlement are not high.

Mr. COSTELLO. There are some who would argue that Boeing receives subsidies. You touched on the issue of those who believe

that, because of the research and development done by NASA, that

Boeing has benefited, and they see that as a subsidy to Boeing.

There are others who would say that Boeing receives direct—or

indirect subsidies through State and local tax incentives. I wonder

if you might want to elaborate a little bit on the issue of does Boeing receive a subsidy because of the R&D from NASA and then the

other tax incentives by State and local government.

Mr. ALLGEIER. We have no doubt that if the United States proceeds with a case in the WTO against Europe, that Europe will file

a counter case; and they will allege in that case that there are subsidies in violation of the WTO agreement received by Boeing. We

certainly are fully prepared to defend U.S. interests if such a case

is filed by the Europeans.

Mr. COSTELLO. Well, you specifically mentioned a minute ago in

your testimony that it is your opinion—it is our government’s opinion that Boeing is not receiving a subsidy, it would not be considered a subsidy, the R&D through NASA; and I wonder if you want

to clarify that.

Mr. ALLGEIER. As I mentioned earlier, in sketching the elements

of the WTO agreement on subsidies, there are a number of factors

that have to be taken into account. One of them is the specificity

of any sort of support; that is, specificity that is going to a particular company for the production and development of large civil aircraft. The kinds of programs certainly that I understand that

NASA provides are more general programs in the area of space exploration and so forth.

So we feel that those are a different kind of engagement with industry than the launch aid, which is so clearly aimed at the production and development—or the development of large civil aircraft.

Mr. COSTELLO. I wonder, finally—a final question, if you would

walk us through how the dispute settlement mechanism is with the

WTO, how a panel is requested and how the process works, as well

as the time frame of litigating a case with the WTO?

Mr. ALLGEIER. Yes. I mean, the first step in a dispute settlement

process is to ask for consultations with the other party. That is

what we did in October. We held those consultations in November.

There is then a waiting period before one can ask for a panel. That

waiting period has already expired. So that is the stage in the proceeding where we are right now.

We were ready earlier this year—at the end of last year, I should

say—to go and request a panel when the new European trade com-
18

missioner came to us and said, I would like to see if we can solve

this through negotiations.

Now, if we go further in this process, we will ask for a panel to

be assembled. A panel is then assembled from trade experts; and

we must agree to the members of that panel, as must the European

Union. So that is the process for getting a balanced or an unbiased

panel.

Once the panel is formed, then each side comes in with its brief,

written submissions and oral presentations, and there is a back

and forth, a number of rounds. Then, ultimately, the panel makes

what is called an interim finding, which is shared confidentially

with the parties. We get a chance to respond, and then they come

out with their final determination.

At that point, either party can ask for an appellate body to review that panel. The appellate body reviews it. There is a very

compressed time frame for the appellate body to do that, and then

the appellate body comes out with its ruling.

Under the WTO, as opposed to its predecessor, the GATT, the

parties are required to comply with that finding. It used to be that

if a party objected it didn’t have to comply. Well, that wasn’t a very

effective dispute settlement process. So this is the process that we

have now.

Obviously, the time frame varies depending on the complexity of

the issue. This is a complicated issue. Normally, one would expect

there to be an 18-month, 2-year period to go through this process,

which is one of the reasons that we think that we should look to

see whether we can deal with this more efficiently or more quickly

through negotiations. But I want to emphasize we are not going to

sit around forever assessing whether to move forward with litigation.

Mr. COSTELLO. If you have to go forward with requesting a panel,

is there time—are there the deadlines for the panel? Once the

panel is assembled, both sides make their case, is there a deadline

for the panel to make a finding or a recommendation?

Mr. ALLGEIER. There are general time frames that apply to the

dispute settlement process. Then each panel has to work within

those time frames to set the precise timing for how much time they

are going to allow for people to prepare their briefs and how much

time for rebuttal and then how much time they need to reflect on

that and come to their judgments.

Mr. COSTELLO. So what are we blankly looking at here, if it goes

to a panel? From the time that the panel receives and concludes

the arguments, receives the testimony, when are we likely to find

a ruling or determine a ruling?

Mr. ALLGEIER. If we were to walk into the WTO today and say

we want to restart the process and we want a panel formed, I think

realistically we are looking at 18 months to 2 years.

Mr. COSTELLO. Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Mr. Duncan.

Mr. DUNCAN. Thank you, Mr. Chairman; and thank you for calling this very important hearing.

Mr. Ambassador, everyone knows that the House Ways and

Means Committee is the most pro free trade committee in the en-
19

tire Congress. In fact, no one is placed on that committee unless

they are strongly in favor of free trade. Yet in the Congressional

Quarterly today’s publication has a report saying that, just yesterday, in discussion on a resolution concerning the World Trade Organization, that almost all the panel members had very critical

comments about the WTO, including Chairman Thomas, who apparently was quoted as saying at one point,quote, because we are

big, they think we can take any kind of pounding. And he said the

US has been held to unreasonable standards of proof.

We all know that the WTO has ruled against the United States

in almost every case, big or small; and I can tell you that there is

tremendous concern in this Congress about this unbelievable trade

deficit, a trade deficit so big that if any of us had predicted it would

be this size 10 years ago, or even 5 years ago, people would have

felt we were crazy. And there is tremendous concern all across this

country about jobs.

What I am getting at, everyone—all of—everyone in this country

and even companies all across the world who favor free trade had

better start doing whatever they can to encourage more fairness

from the WTO toward the United States or there is going to be a

tremendous backlash. It is already starting to develop; and even if

Members of Congress don’t want to, the American people will start

demanding that we take actions.

So what I am saying is, your legal team had better start preparing a little better case or a stronger case than what has been presented to the WTO in the past, or something a little different, I

guess, should be done.

You talked in your testimony about what you call the massive

subsidies over the 35-year history. How much have those subsidies

totaled? Have you been able to determine that?

Then, also, you mentioned that EU governments have forgiven

Airbus—had forgiven a lot of Airbus’s debt. How much debt has

been forgiven?

Can you give us a rough idea on those, the total of those subsidies and that debt forgiveness?

Mr. ALLGEIER. Thank you. Thank you, Mr. Duncan.

With respect to your first comments, indeed, Chairman Thomas

yesterday held a markup of a resolution, a joint resolution, which

the Congress examines every 5 years, as to whether the United

States should continue to participate in the WTO. There had been

a subcommittee hearing, trade subcommittee hearing a week or so

before on this subject; and, indeed, there was quite a bit of criticism by the subcommittee and some members of the committee

with the dispute settlement process at the WTO.

Now, that said, the outcome of yesterday’s markup was a unanimous vote to report that resolution out unfavorably, i.e., the resolution that we shouldn’t participate.

Mr. DUNCAN. Everybody knows that we are not going to withdraw at this point.

Mr. ALLGEIER. Right. But if I could just get to the more specific

point of the disputes and the track record there. Over the 10 years

that we have been in the WTO, the balance between the cases we

have won on the core issues and the cases we have lost on the core

issues is 54 percent win. But that excludes some three dozen cases
20

which we—either we initiated or someone else initiated against us,

where we negotiated a satisfactory settlement to the United States

during the course of the litigation. So the result of that is that, in

71 percent of the cases, we have either won on the core issues or

we have negotiated a satisfactory settlement.

I think what is even more relevant for this case here where we

would be initiating a case is our track record of wins plus satisfactory settlements in cases that the U.S. has initiated against someone else is over 90 percent.

Mr. DUNCAN. If that is the case, why do you think there was so

much criticism from the Ways and Means Committee yesterday

and statements about the fact that WTO has been ruling against

us so much—if that is true?

Mr. ALLGEIER. Well, because, I mean, there is concern with any

time that we lose a case. In a number of these cases, members

were particularly concerned because they had to do with some of

our trade remedy laws. Although the kinds of losses we have had

there have certainly not prevented us from very aggressively using

or very—conscientiously using our trade remedy laws.

With respect to your question about the magnitude of the subsidies, if you look just at the launch aid itself, that particular form

of subsidy that I mentioned, the subsidies to date by our calculation are over $15 billion; and if you add in the other forms of subsidization, it is certainly significantly higher than that.

With respect to your specific question on debt forgiveness, that

I would have to get back to you, because I don’t have that on my

fingertips at this moment. But I will be happy to provide you with

our best estimate of that.

Mr. DUNCAN. I see my red light is on, but let me ask you one

last question.

You said the most egregious example was this $3.7 billion launch

aid. Is that more than the 33 percent of the total development costs

that was negotiated in that agreement in July of 1992?

Mr. ALLGEIER. The European Union claims that that $3.7 billion

is within that 33 percent limit. That is just for that one model of

the A380.

Mr. DUNCAN. All right. Thank you.

Mr. MICA. Mr. Larsen?

Mr. LARSEN. Thank you, Mr. Chairman.

Ambassador Allgeier, I have some questions for you, but you

have answered largely most of them from questions from other

folks. So I am going to give you a little rest if you don’t mind, and

I will ask Mr. Bogosian some questions.

With regards to the report the Commerce Department did, and

I certainly want to commend the Department for not only doing

their report but, obviously, for the conclusions and the research

that went into it, and I believe the report is, indeed, part of the

record. But I wanted you, if you could, to answer some questions

for me and for the committee on the record about some fundamental conclusions on certain topic areas, if you could. Are you prepared to do that for us.

Okay. On military R&D, page 71, there is a discussion about

military R&D applied to Boeing and Airbus and general aerospace

manufacturing. Can you provide the committee verbally what the
21

fundamental conclusion about military R&D is relative to this issue

of subsidy?

Mr. BOGOSIAN. Thank you, Mr. Larsen.

This goes to the prior question by I believe Ranking Member

Costello in terms of the range of supports and Airbus’s allegations

that Boeing, in turn, receives certain types of supports, one of them

being military R&D.

One of the things to keep in mind there is that, first of all, not

all military R&D dollars go straight to the development of a Boeing

product, which appears to be the allegation here from the other

side.

The other thing to keep in mind is that even if you give them

their entire argument, just hand it to them on a silver platter,

what they are saying is that the military and space side of the Boeing company--that any R&D dollars that they receive somehow benefits the commercial side of Boeing. Well, then, you know, what is

fair for one side must be fair for the other.

You look at Airbus; and Airbus’s military side is its parents,

EADS and BAE Systems. And if you look at EADS and BAE Systems just in 2003—we don’t have the 2004 figures yet—in 2003,

they received in military contracts $2.3 billion more than Boeing

did.

So, by their own argument, they received $2.3 billion more indirect support—and I hate that term because it is just a smokescreen—so they receive more support, even if you give them their

argument. But the bottom line is you can’t give them their argument, because the argument has a fallacy right from the beginning.

Not all military R&D dollars go to the development of the 737 or

the 787 or whatever new model that Boeing puts out.

Mr. LARSEN. In fact, on page 73 of your report, it is noted, most

defense R&D funding is mission-specific and earmarked for a higher level of development, testing and evaluation.

Mr. BOGOSIAN. One other thing to keep in mind is that Boeing

is just one of the many U.S. Military contractors. EADS and BAE

Systems are the top two largest European defense contractors. So

you have got the two biggest, the two heavyweights making more

money than just one of the many defense contractors in the U.S.

Mr. LARSEN. Moving on in that report, can you provide the committee verbally the fundamental conclusion with regards to civil

R&D?

Mr. BOGOSIAN. Sure. There, again, it is yet another smokescreen.

The problem is that you can’t just look at NASA’s and FAA’s aeronautical R&D budgets and say, well, there you go, that somehow

a truck is pulling up to NASA and FAA and then delivering the

money from NASA and FAA to Boeing, and Boeing is using that

money to build a new aircraft. That is just simply not the case. It

is a ludicrous argument.

First of all, not all of NASA’s and FAA’s aeronautical R&D has

a direct correlation to the development of a commercial product. So

one thing you have got to do is take off the top anything that is

an R&D expenditure that does not have a commercial application.

You are left with a smaller sum.

From that, what you look at is which of those programs did Boeing participate in? And, which of those programs had a commercial
22

benefit? And of those—and this is key—there is a very crucial difference between how we give out R&Dmonies and how the Europeans do.

A lot of our R&D dollars are for the public good, which means

that once you are at the end of the R&D process, you give out the

results of that research for the public good. They are all shared. So

Airbus gets it, Boeing gets it, and whoever else wants it gets it,

and has access to it.

In Europe, however, those types of R&D dollars are very specific.

They are much more aligned to a commercial objective. They are

dedicated to a specific national champion, an industry that they

pick and the technology that they pick that they want to advance.

They are much more closely aligned to a commercial objective; and

U.S. companies cannot participate in European R&D contracts the

way that Europeans can participate in ours.

Mr. LARSEN. Mr. Chairman, if I may, just another question.

Can you provide the fundamental conclusion on infrastructure

programs on page 79, 80? Provide the committee verbally your fundamental conclusion on infrastructure programs.

Mr. BOGOSIAN. Sure. Basically, the way you can look at this is

that there is a real blurring of the line between where the European Government treasuries end and where Airbus’s operating or

research budget begins. So you can just tack on the infrastructure

assistance as well on top of all the other things we have talked

about.

I can list a few examples. The City of Hamburg, Germany, provided 751 million Euros, which is a sizable amount of money, to fill

in a swamp.

There was an NGO group that opposed this environmental damage. They lost. So the 751 million Euros went ahead, and they

filled in a swamp so that A380 could have a production facility in

what was once the swamp.

French governments, federal, regional and municipal, have provided 182 million Euros to create the aeroconstellation site, which

is another Airbus facility for the assembly of the A380. So, again,

you just keep tacking on. You have the royalty based loans as

launch aid, you have the debt forgiveness, you have the infusions

of capital, the direct checks that are written, and then you have the

infrastructure assistance. So it is just one thing after another after

another, and for them to say that they are competing fairly against

us is just a very difficult argument to accept.

Mr. LARSEN. Thank you; and, Mr. Chairman, thank you for an

opportunity to ask some questions.

Again, this report that the U.S. Department of Commerce has

put out through the International Trade Administration really does

provide an effective background for all of us on the committee to

get fully up to speed on the kind of case that we need to be making

in the international arena when it comes to subsidies, and especially with this issue of launch aid which, again, I will emphasize,

launch aid has to end. It has to end to create a fair and level playing field in the commercial manufacturing arena.

Mr. MICA. I thank the gentleman.

Mr. DeFazio.

Mr. DEFAZIO. Thank you, Mr. Chairman.
23

I have a concern in that, you know, we are hearing persistent reports that members of the EU intend to go ahead with launch aid

on the 350. The way you outlined the dispute resolution mechanism, Ambassador, it seems to me that if tomorrow they announced

launch aid and Airbus went ahead with development, they would

be selling planes before it is likely that we would get a judgment,

and then that would have already created yet another problem for

Boeing.

So, I am curious what—and, obviously, you are not going to let

out your strategy here, but if we have such an open-or-shut case,

which the two of you say in terms of Boeing isn’t subsidized—they

are. It is pretty clear that this launch aid is a subsidy. Then why

have we lost precious time? We had a 90-day agreement for delay,

and we are past that now, and we haven’t filed.

Isn’t there—there is a prospect here that we could see yet another plane launched with subsidies that would hurt Boeing—and

Boeing has chosen a different strategy and a different market with

the 787, and we will find out in the end who is right. The EU has

created the plane Godzilla, and now everybody who wants to have

it land has to put out huge amounts of public funds just to reinforce runways, widen runways and create the facilities for it. So I

am concerned about Boeing losing its competitive edge in this

strategy that they have chosen in this interim period.

Mr. ALLGEIER. Certainly, we work very closely with Boeing and

other U.S. interests here to determine what is most advantageous

in terms of what is the best route to solve this problem, between

the litigation, where you have a lengthy period, but we feel a very

high probability of getting an important win.

By the way, I want to emphasize that if we move forward with

this litigation that we would not just be seeking the elimination of

launch aid going forward, we would be seeking the repayment of

the launch aid that had been provided, whether for the A350 or the

A380.

That said, we certainly don’t want to be dithering about which

course to take in a way that is going to be commercially disadvantageous to U.S. interests.

So when the new U.S. Trade Representative came into office,

Ambassador Rob Portman—he was sworn in on a Friday. That Saturday night, he got on a plane to Europe; and that Monday, he met

with Trade Commissioner Mandelson; and the first subject they

discussed was this aircraft dispute. So he has gotten involved immediately to assess, in consultation with U.S. industry, what is the

best way to proceed. He has had a number of discussions with

Trade Commissioner Mandelson since then.

Let me just say that we are assessing this issue on basically a

daily basis to determine what is the best way forward; and we will,

as I said earlier, not dither at all about moving forward. And if

that requires litigation or if that requires negotiation, we will take

the course that we, our advisors in the industry think best.

Mr. DEFAZIO. Now, Boeing and its employees in the U.S. are potentially the principal injured party here, but obviously when I

raised these issues more than a decade ago, the cross currents I got

were, oh, my God, our customers buy Airbus and they buy Boeing.
24

Are you getting pushback from any of the U.S. Airlines, domestic

interests that are involved with Airbus saying, you know, we don’t

want this? Is there any question that we are dedicated to resolving

this issue of subsidies and particularly preventing subsidies for the

A350? Is there any question at all?

Mr. ALLGEIER. There is no question at all about that, and I can

certainly say personally I have not been even approached by interests such as airlines or others suggesting that we should take any

other course.

Mr. DEFAZIO. That is good to hear.

Mr. Bogosian, there is an issue you touched on briefly—about the

FAA significant resource challenges and the potential for losing

sort of our regulatory and certification advantage. I guess, since

you are with the Commerce Department and you are expressing

that, do we have a little kind of cognitive dissonance within the administration where they are recommending these cuts which could

be to the disadvantage of U.S. Industry and U.S. Carriers?

I have already heard previously from some of the smaller plane

manufacturers that the European system is not equivalent to ours.

That is, theoretically, we have equivalents. We provide documents

showing that our planes have met our standards, which have historically been considered the gold standard; and you would think

the EU would accept them. Well, they don’t. They go through a

lengthy review process to advantage their manufacturers, particularly if they have a model coming up that may compete. I heard

this in particular from one small jet manufacturer. We are already

kind of at a disadvantage because we play the game straight up.

They send over the paperwork. We say, yup, you did it right.

Okay, you can start selling in the U.S.

We send it over there; and they say, oh, no, we might take a year

or two to look at this.

So I am concerned that further delays or disadvantaging our domestic process is going to put our manufacturers at even more disadvantage. What plan do we have to deal with that?

Mr. BOGOSIAN. Thank you, Congressman DeFazio.

When we say this is a Commerce Department report, it was

printed by us, and we managed the process. The FAA was a very

key contributor and author in this report. Their views are fully represented, and this stands as a comprehensive document. It is a collaboration between Commerce and NASA and FAA and DOT and

State and USTR and DHS, and you name them, they are all here.

All their views are here for the Congress.

From our perspective, what we look at is the competitive side of

these issues. We look at how the FAA handled their matters, the

USTR handled their matters, and we do our job, which is to report

to them. We give them data that relates to how industry is being

unfairly disadvantaged and discriminated against, as well as an assessment of the industry’s damage.

So when we look at the certification issues, we look at things like

the hushkits example, a case where an environmental certification,

which should just be done on a scientific basis, was actually done

in a way that they looked at the specifications of a Rolls Royce engine and the specifications of a Pratt and Whitney hushkitted en-
25

gine, and they built their certification rules on the specs, not on the

noise that was coming out of the engine.

Mr. DEFAZIO. Which would be WTO violative, as far as I know,

the least restrictive way to comply.

Mr. BOGOSIAN. The harsh part there was, the fact that they did

that led to people not buying the Pratt and Whitney hushkitted engines. So by the time they withdrew that regulation and said, oh,

sorry our fault, Pratt and Whitney had already suffered the loss.

The same applies to safety certification. We don’t want to see

games being played. You can take an example where a 737 had to

fly with four empty seats in France, and France only. And you ask

yourself, well, if the 737 next generation can get a safety certification everywhere in the world but France, what is it about the

French rules that don’t allow the 737 to fly with those four people?

The coincidence there is that, without those four seats, the Boeing 737 next-generation model was much more compatible with its

Airbus counterpart.

So those are the types of things that we look at. We look at it

from the competitiveness side.

Mr. DEFAZIO. You are raising some excellent points. I would hope

in the future that what we could do simply is just retaliate. If they

want to do things like that, that is fine. Well, gee, the Airbus can’t

fly over Illinois with those seats occupied. You know, there is some

reciprocity here.

Years ago, I remember Lee Iacocca saying, if we started to treat

the Japanese, when they were moving into the van market, their

vans, the same way, hold them on the docks for 3 to 6 months, like

they did his, then pretty quickly his vans wouldn’t sit on the docks

for 3 to 6 months.

Somehow, you know, we play the game straight; they don’t. We

take it year after year.

There are two questions. What is our strategy to deal with that?

And secondly, I was asking a question more specifically about

budget cuts at the FAA which are going to further disadvantage

U.S. manufacturers who want to get certified on the safety basis

when the FAA will accept the EU safety certifications by just looking at the paperwork and saying, fine with us.

Since all those parts of the administration were involved, and

you mentioned specifically the potential problems with FAA, with

these budget cuts, again, I didn’t get an answer to that. I realize

maybe your minders are listening downtown, and you can’t say

that we need more money. So I will say it. We need more money.

So I will answer that question.

But maybe you can go back to the first one. Are we looking at

a retaliative strategy in the future, to say, okay, fine, if you want

to do something like that, well, we are just going to do it over here,

too, until you stop doing it, instead of letting them drive us out of

the market like they did Pratt and Whitney?

Mr. BOGOSIAN. On the FAA question, I will get you an answer.

I can’t answer that myself. I will get you an answer from the FAA

on the retaliation.

[The information follows:]
26
27

Mr. BOGOSIAN. Peter, if you want to take that.

Mr. ALLGEIER. We certainly look to insist that we are treated

fairly and in accordance with the obligations that the other country

has. I think it is true that in the past, on these issues and on other

issues, we have declined to play the same game when the game involves playing outside the rules.

I think we need to look at each case carefully—and we will—to

determine what is the most effective way to get the other side’s attention and to get the problem solved. So I appreciate your

thoughts on this.

Mr. DEFAZIO. Mr. Rumsfeld might call it asymmetrical warfare.

Thank you.

Mr. MICA. I thank the gentleman.

Does anyone have additional questions? If we have no additional

questions now, we may have some additional questions we will submit from the subcommittee to you to respond to. We would appreciate that. I want to thank both of our witnesses in this panel for

participating.

We have two votes right now. We will probably reconvene about

12:10, maybe 12:15 at the latest; and we will hear from our last

and second panel of witnesses.

So, again, I want to thank both of our witnesses for being with

us on this first panel. I excuse you at this time.

We will stand in recess until approximately 12:10, 12:15.

Mr. HAYES. Mr. Chairman.

Chairman MICA. Yes. I am sorry.

Mr. HAYES. With your permission, can I jump over this panel

and speak to the other one? I am not sure how I am going to get

back.

Mr. MICA. They are not up yet. If you wanted to make some comment or leave something on the record that we could try to get

them to respond to, I would welcome that.

Mr. HAYES. Thank you, sir. I do appreciate that.

I appreciate the gentleman’s testimony. Like Mr. DeFazio said,

we have to stick it to them, as they have been sticking it to us. It

is not called retaliation. It is called sticking up for our people and

products.

I appreciate you all being here. We need to be tough, aggressive,

competitive. We have got the best products. The market needs their

products; and I hope the FAA, Mr. Chairman, will be as aggressive

in the certification process making sure that our products get certified. Yeah, we will do the budget process and have the people

there. But I want our FAA people to aggressively, insightfully pursue the opportunity to get our products to the marketplace.

Thank you again for the hearing.

Mr. MICA. I thank the gentleman and appreciate your comment.

Again, we appreciate your participation.

We will stand in recess and then hear the second panel.

Mr. ALLGEIER. Thank you, Mr. Chairman.

[Recess.]

Mr. MICA. The next order of business is our second panel today,

and this panel consists of three witnesses.

The first witness is Bryan T. Moss, who is President of Gulfstream Aerospace Corporation; Mr. John W. Douglass, President
28

and CEO of Aerospace Industries Association of America; and the

third witness is Dr. Marc L. Busch, Associate Professor of Queen’s

College School of Business in Kingston, Ontario, Canada.

I would like to welcome our witnesses.

TESTIMONY OF BRYAN T. MOSS, PRESIDENT, GULFSTREAM

AEROSPACE CORPORATION; JOHN W. DOUGLASS, PRESIDENT AND CEO, AEROSPACE INDUSTRIES ASSOCIATION OF

AMERICA; MARC L. BUSCH, ASSOCIATE PROFESSOR,

QUEEN’S COLE GE SCHOOL OF BUSINESS, KINGSTON, ONTARIO, CANADA

Mr. MICA. I will first recognize Bryan T. Moss, president of Gulfstream Aerospace Corporation.

Welcome, sir. And you are recognized.

Mr. MOSS. Thank you, Mr. Chairman. Thank you, sir.

Mr. Chairman, it is indeed an honor for me to be here today on

behalf of Gulfstream’s more than 7,000 employees.

Mr. Chairman, you have my opening statement, which has been

submitted to the subcommittee; and with your permission, sir, in

the best interests of preserving time, I wish to summerize this

opening statement.—

Mr. MICA. Without objection, your entire statement will be made

part of the record. Please proceed.

Mr. MOSS. Thank you, sir.

Before I proceed, sir, let me, for the record, express my personal

thanks and appreciation for the hard work you and the subcommittee have done on behalf of our industry, in particular for the efforts

on the Reagan Airport issue.

To summarize the items in my opening statement, sir, first, we

need FAA certification services that will allow us to bring new

products into service in an increasingly competitive market.

Secondly, we are not supportive of user fees and increased excise

taxes to cover the shortfall created by a declining general fund contribution.

Thirdly, further reductions in NASA’s aeronautics research budget pose a direct threat to this country’s ability to sustain a leadership position in aviation, with significant, negative impact on national security, safety and our economy.

Fourthly, and importantly, government subsidies to foreign aircraft manufacturers provide them significant competitive advantages and enable them to bring more new products to the market

sooner at aggressive pricing and with little or no financial risk.

In short, Mr. Chairman, we cannot compete with national treasuries.

Finally, sir, in view of these issues and our concerns, I respectfully suggest we consider broadening the application of a new bilateral agreement and large civil aircraft to include all aircraft.

Thank you, sir, for the opportunity to be here to present these

views. It is a privilege for us. And that concludes my remarks, sir.

Mr. MICA. Thank you.

Thank you. And we will now hear from Mr. John Douglas, President and CEO of Aerospace Industries Association. Welcome, and

you are recognized sir.
29

Mr. DOUGLASS. Thank you, Mr. Chairman, and Mr. Costello and

other members for the opportunity to join you here today in this

important hearing today.

Sir, with your permission, I ask that my full statement be—

Mr. MICA. Without objection, so ordered. And please continue.

Mr. DOUGLASS. Mr. Chairman, my summary of my statement

will focus on two critical areas of concern, launch aid provided to

Airbus by European governments, and government-funded research

and development on both sides of the Atlantic.

For fair trade to take place, Mr. Chairman, the jet transport industry must be an industry without government-provided launch

aid, aid that is in direct violation of the WTO subsidy codes. With

this in mind, AIA commends the U.S. Government on its decision

to withdraw from the 1992 bilateral agreement on large civil aircraft. The 1992 agreement allowed for European governments to

provide launch aid for large commercial aircraft as long as the total

launch aid was equal to or less than 33 percent of the overall cost

of development. Launch aid shields companies like Airbus from assuming complete commercial risk and allows producers to pursue

more aggressive pricing and financing practices.

Since its inception in 1970, Airbus has benefited from a total of $15 billion in launch aid, including recently a $3 billion-plus loan

for the new A-380. This was discussed in the first panel today.

U.S. Industry estimates that over the years this launch aid has allowed Airbus to keep a total of approximately $35 billion in debt

off its books. Despite the ongoing negotiations outlined by the first

panel, the problems involving Airbus and launch aid continue with

Airbus’ recent request for launch aid for its planned new A-350 aircraft.

I must say, Mr. Chairman, that with the granting of any launch

aid for the A-350, AIA would support further WTO action by the

administration.

For too long, European treasurers have shielded Airbus from the

same market risks that American commercial competitors face. At

the time of the 1992 agreement’s implementation, Airbus was a

company with four product lines, 38,000 employees, and 8.8 billion

in annual revenue. Today, Airbus has 12 product lines, 51,000 employees and more than $25 billion in annual revenue.

By 2004, Airbus was delivering more aircraft per year, producing

more products and had a higher revenue than its main competitor,

Boeing Commercial Airplanes.

Industry’s position on these issues has remained consistent. We

want to avoid a trade war, we want to see a negotiated settlement

with EU as soon as possible, and we want to ensure a level playing

field for the civil aircraft market, not one encumbered by European

launch aid.

Mr. Chairman, the Boeing-Airbus dispute is not the only cause

for concern to our industry. The European Union, through its plan,

′′A Vision for 2020,′′ has clearly stated their intention to dominate

the world aviation market. As a means to that end, the Europeans

have begun to invest heavily in a coordinated and targeted aeronautics research and development program. From the start of $45

million in 1990, the EU has dramatically ramped up funding for

aeronautics to more than 1.52 billion on aeronautics research be-
30

tween 2002 and 2006. It is safe to say that the state of aeronautic

research in the U.S. Is not as well off as it is in Europe.

Over the last 10 years, funding for NASA’s aeronautics research

has been cut nearly in half. NASA’s recent lack of attention to

basic seed corn research will impair the U.S. Industry’s future ability to compete in the global aerospace market.

The U.S. Must renew its commitment to aeronautics research, establish a national policy for aeronautics, and provide the necessary

funding to undertake needed research.

In summary, Mr. Chairman, it is in neither the interest of the

United States nor the European Union to have a trade war that

would damage the global aerospace industry and undermine economies across the globe. Officials on both sides of the Atlantic should

build a consensus on replacing the 1992 bilateral agreement in a

way that makes the civil aircraft market more competitive and

averts a potentially long and acrimonious dispute in the WTO.

A newly negotiated agreement must level a competitive playing

field before large aircraft manufacturers—indeed, aircraft manufacturers in general—and should include a prohibition against government launch aid subsidies in accordance with the subsidy code of

the WTO.

In 2004, Boeing delivered 285 aircraft, Airbus delivered 320. In

the same year, Boeing announced 272 orders, as compared with

Airbus’ 370 orders. Boeing’s backlog is now nearly 30 percent less

than Airbus’. The playing field is essentially level in every possible

measure, with the exception of government aid. Airbus should not

be allowed to flourish under the protective cloak and open treasuries of European governments. The time to end this launch aid is

now.

And Mr. Chairman, I look forward to answering any questions

you may have, sir.

Mr. MICA. Thank you.

And I will hold the questions until we have heard from Dr. Marc

Busch, Associate Professor of Queens University, School of Business, Kingston, Ontario, Canada. Welcome, sir, and you are recognized.

Mr. BUSCH. Thank you, Chairman Mica, Ranking Member,

Costello, thank you for this invitation to appear before this subcommittee to discuss global market factors affecting the U.S. Jet

transport industry. I applaud the subcommittee’s leadership in examining this important topic.

In the late 1980s, when the Boeing-Airbus dispute was splashing

across headlines, then-USTR Ambassador Michael Smith warned

the House subcommittee that, ′′decisions about launch aid and

things like that should not be taken lightly, either by the governments involved or the industries involved.′′ Today, on the eve of WTO litigation, his words are no less relevant. Indeed, launch aid ′′and things like that′′ continue to be a

considerable source of tension in the industry, specifically with the

787 destined to go head-to-head with Airbus’ A-350.

As was true in the late 1980s, the U.S. charges that Europe receives direct subsidies, and Europe countercharges that the United

States offers indirect subsidies to its national champion. Is this, as

Yogi Berra might have put it, ′′like deja vu all over again?′′
31

Some things about this commercial rivalry have not changed.

The industry is still a catalyst of economic growth and competitiveness, not only because of the vast number of high-paying jobs, but

because of the technological spillovers exhibited by this industry for

those who benefit from them upstream, in particular. It is also, of

course, as has already been pointed out this morning, an industry

with remarkable export prowess.

Other things about this commercial rivalry, however, have

changed. There are two notable differences between today and the

tensions that gave rise to the 1992 bilateral: first, the rise of the

regional jet market; and second, the advent of the World Trade Organization.

First, the regional jet market, which is dominated by Canada’s

Bombardier and Brazil’s Embraer, is increasingly vying for orders

with both Boeing and Airbus. As the Department of Commerce’s

study explains, Embraer is, ′′starting to blur the traditional line between large civil aircraft and regional jets,′′ going above 100 seats

in particular, a move Bombardier is now seeking to match.

Thus, while a lot of attention has been paid to the flight test of

the enormous A-380, the fact is that the smaller airplanes that are

being launched by these two vendors are increasingly putting both

Airbus and Boeing to the test, a point made very clear in Boeing’s

Current Market Outlook 2004.

More worrisome, though, is the fact that at times, through the

past couple of decades, these two competitors have been subsidized,

posing a new competitor threat to both Airbus and Boeing. In

short, subsidized competition in civil aircraft is a much more widespread problem today than it was on the eve of the 1992 bilateral.

Second, and related to this, the WTO for its part is a much more

viable forum in which to litigate this dispute this time around. This

is because, as has already been pointed out this morning, the

WTO’s subsidies code is much more vigorous and the dispute settlement mechanism is much more robust. In the early 1990s, when

the U.S. and the European Union readied to go to the GATT to

fight this dispute, the fact was that the relevant disciplines and the

dispute settling mechanism were not up to the task. That is no

longer true. Particularly, there is no longer any potential for a losing side to block the adoption of a panel report, or for that matter,

to stand in the way of authorization to retaliate, one of the brandnew features of the WTO mechanism. Taken together, the regional

jet market and the WTO, it is perhaps time now to finally litigate

this dispute and to do so with a little more determination.

The WTO has historically worked, as the Ambassador pointed

out this morning, by inducing early settlement. That means that,

by and large, both parties to a dispute settle before the case is even

paneled, never mind before a panel issues a ruling. To date, that

has not happened in the civil aircraft dispute; consultations were

not successful, nor has the cease-fire been. That is okay, because

perhaps it is really important for us to get this one litigated once

and for all, and to do so with a couple of factors in mind.

First, there are some things to learn from the Canada-Brazil disputes that have gone to the WTO. To date, both sides have challenged each other’s subsidy schemes, and both sides have chalked

up some victories. And these victories have served to do two things.
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They brought clarity to the law, in that they have helped us understand what the WTO finds legal and not, and in fact, they have

had bottom-line outcomes. For example, Bombardier has witnessed

two subsidy schemes, that Brazil has benefited from, essentially

eliminated; and a third, called PROEX III, essentially handicapped.

For its part, Brazil has one big notable victory against Canada and

a couple of failures.

We can learn a lot from these disputes. And these disputes remind us that while the WTO is itself not an answer in all cases,

in civil aircraft it may be very viable not only because of the legal

clarity that we will get but because, as in the case of Canada and

Brazil, it has forced both sides to return to the negotiating table

to find a long-term robust solution for this dispute.

Let me conclude by suggesting that WTO litigation in the current

Boeing-Airbus dispute will serve three purposes. First, as I have

said, it will bring legal clarity to what has become a very politically

charged and heated dispute. It is time for the WTO to render verdicts on these charges and countercharges and to help us move forward.

Second, the litigation will not only implicate the United States

and the European Union, it will implicate Canada and Brazil as

well. With the regional jet market now essentially melding into the

large civil aircraft market, it is time to bring disciplines to subsidies across the board and to level the entire playing field.

And third, as I mentioned, WTO litigation will likely prod both

the United States and Europe, with greater legal clarity, to return

to the negotiating table, but this time we must return to the negotiating table with all four parties: the U.S. and Europe, Canada

and Brazil. It is time to bring sanity to this industry across the

board.

To its credit, the 1992 bilateral agreement foresaw the need to

multilateralize these provisions. It foresaw the time when it would

be crucial to multilateralize subsidy disciplines in civil aircraft.

Today it is no longer visionary to say that; it is simply a fact.

It is time to get this industry on a level playing field, but to realize

the industry has changed. Thank you very much.

Mr. MICA. Well, thank you.

And I thank all of our witnesses and this panel for their testimony. I have a few questions.

Mr. Moss, you just heard Dr. Busch talk about RJ Production

producing smaller aircraft that compete with some of the product

that you have; is this a problem?

Mr. MOSS. Sir, it is not so much the RJ as it is the rest of the

Bombardier product line. Across the entire product line, they benefit from exactly the type of assistance and subsidy that Dr. Busch

is referring to. We do not at this point in time compete directly

with the RJ or with the RJ derivatives, but it is a huge issue for

us simply on a day-in/day-out basis, facing these aircraft in the

marketplace.

Mr. MICA. We have produced no RJs in the United States at this

time, right? I guess you have produced probably the largest passenger aircraft of a smaller size?

Mr. MOSS. Yes, sir. The largest business and corporate aircraft

of its kind.
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Mr. MICA. I have read recently where—I think it was Bombardier just announced that they are going to provide some subsidies

for production of smaller aircraft and competing aircraft. Anyone

aware of—I read that most recently.

Dr. Busch.

Mr. BUSCH. Yes. Bombardier has sought to secure assistance

both from the Federal Government of Canada as well as from the

Province of Quebec.

Mr. MICA. And was some of that in the form of loans for development product?

Mr. BUSCH. Yes, I believe it is.

Mr. MICA. How much Federal subsidization of financing are you

getting, Mr. Moss? Come clean.

Mr. MOSS. That is easy, sir. None.

Mr. MICA. Oh, okay. All right. Thank you.

You advocated also a new international agreement to include all

aircraft. Certainly we would want to put some pretty tight restrictions on any type of aid or assistance. How would you craft that?

And I think we also heard Dr. Busch say that we need to include

other participants, such as Brazil and Canada. Would you agree

with that, and how would you craft it, Mr. Moss?

Mr. MOSS. Well, my experience, sir, we see daily the impact of

the subsidy issue in the marketplace. Dr. Busch and I have not discussed that issue, but I must agree with the premise that he has

put forward that any opportunity for a meaningful, long-lasting

resolution of that issue must involve those parties who are involved

on an everyday basis, so those would be U.S., Europe, Canada, and

Brazil.

Mr. MICA. As we lose more market share, Mr. Douglass, what is

the effect you are seeing on overall viability of America’s aerospace

industry?

Mr. DOUGLASS. Well, clearly the commercial aviation market is

about 50 percent of our sales, Mr. Chairman. And so when we lose

global market share, it has an impact across the board in terms of

the number of people that are engaged in the industry, our ability

to fill new products, and our overall viability as an industry.

Mr. MICA. I have watched us lose a number of industries in the

United States in commercial activities. You get sort of this belief

that some product is added in the United States or some product

is added to a foreign product where it is assembled someplace else,

and that is a reason to back off. What do you think about that, Mr.

Moss, Mr. Douglas, Dr. Busch?

Mr. MOSS. Well, sir, may I? In a former life I worked with an

offshore—or a foreign company. I am very familiar with the

thought processes that lead to trying to determine whether or not

you are a product from north of the border or south of the border.

And I plead guilty to a certain personal view, sir, but I believe that

the country of origin of manufacture is what is critical, not so much

where the components come from that are in that aircraft.

Mr. MICA. Mr. Douglass.

Mr. DOUGLASS. Well, sir, as you know, this is what makes this

problem so complicated. In regards to the issues between us and

Europe, for example, we are Europe’s biggest customer and Europe

is our biggest customer. Most of the European products have some-
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where between 30 and 50 percent of the American content. Many

of the other airplanes manufactured in Brazil and Canada also

have high degrees of American content. So when you get into one

of these complicated issues like we are discussing this morning,

you have business interests here in the United States essentially

on both sides of that issue, and that does complicate the issue.

I think what is really important is what was said by the first

panel, and that is that when a case gets to the point where both

the government and the industry agree that the international situation warrants taking a case to the WTO, you have reached a point

where it has become super-critical. And we support what the administration is doing in the case of the Boeing-Airbus dispute, despite the fact that we obviously sell a lot of product to Airbus.

Mr. MICA. Dr. Busch.

Mr. BUSCH. Well, I concur with Mr. Douglass’ points. The crucial

issue is really when you begin to lose some of the more complicated

high value-added manufacturing, notably the systems integration

work and the like, which not only employs, as has been pointed

out, people at high wages, but moreover teaches us through learning-by-doing, to go on and truly enjoy market share in other upstream industries by virtue of having mastered those technologies.

Mr. MICA. I thank you all for your responses. Let me turn to Mr.

Costello.

Mr. COSTELLO. Mr. Chairman, thank you.

Mr. Moss, let me ask you first, and then Mr. Douglas and Dr.

Busch as well.

I serve on the Science Committee as well, and we have been attempting to convince the administration to increase, not cut, the

R&D budget of NASA as far as the aerospace industry is concerned. And I wondered, if just for the record, if each of you, beginning with Mr. Moss, if you would comment on the effects of the declining research budget for NASA. I made a reference to the figures

in my opening statement from a high in 1994, I believe it was, fiscal year 1994, almost 1.6 billion, down to now about half of that

for fiscal year 2006 is what the President is proposing. And I wondered if you might comment on what the declining R&D has done

and will continue to do if we continue to see a reduction in NASA’s

R&D budget.

Mr. MOSS. Yes, sir. I think from a broad standpoint it is a threat

to the leadership that this country has enjoyed for a long period of

time. The areas that are of interest to us—there are areas that involve safety, security, productivity, et cetera. And by and large they

are areas that we could not afford to pursue on our own.

The ability to have NASA involved in that type of project is extremely important to us, as much as an industry benefit as just a

Gulfstream benefit, because in many cases the results of efforts in

that area are available to a wide spectrum of constituents.

Mr. MICA. Mr. Douglass.

Mr. DOUGLASS. Yes, sir. That is a great question, sir. I guess the

place to begin is to say that the erosion that you spoke about in

your statement is going to be a problem for us for years to come

because you can’t just overcome this overnight. We have got to

start overcoming it today. The basic seed corn that NASA puts into

aeronautic funding supports a whole broad area of not only support
35

to our commercial aviation and business aviation market, but also

to our national security.

I think I have testified before this committee on other occasions

and the personal experiences I have had where NASA’s aeronautics

research pulled the bacon out from me when I was Assistant Secretary of the Navy when we had problems on the F-18.

So there is no quick fix to this. I am heightened by the fact that

Representative Wolf has agreed that we are not going to accept the

administration’s cut this year, and at least we are going to restore

the budget back to where it was last year. It is going to take us

some time to rebuild this; there is a lot of rebuilding to do. Some

of the areas where we have to immediately begin to pay some attention to is turbine engine technology and rotorcraft technology.

I took a briefing yesterday, and that briefing will be given to my

board meeting tomorrow down in Williamsburg about the number

of rotorcraft that we have lost in the war on terror. It is an alarmingly high number. And when you look at the root cause for that,

it ultimately takes you back to the fact that we haven’t made much

investment into rotorcraft research and development over the last

15 years. NASA has backed away from their joint program with the

Department of Defense. So, sir, we are in complete agreement with

you that this is a national strategy and national policy that needs

to be put in place and needs to be rebuilt if we are going to maintain the $30 billion-plus positive trade surplus that our economy

enjoys from this aerospace marketplace.

Mr. COSTELLO. Dr. Busch, do you care to comment?

Mr. BUSCH. Only to note that to increase NASA subsidies is not

necessarily to run afoul of trade rules. The remarkable thing about

NASA subsidies through the years is that, for example, the Japanese are largely argued to have learned composite materials from

NASA R&D. And for that matter, Airbus has tested a lot of designs

in NASA facilities. So it is important to not be deterred by virtue

of certain of the allegations made in the current dispute, that anything through NASA is necessarily an illegal subsidy.

Mr. COSTELLO. Mr. Chairman, I have no further questions, but

I do want to encourage our—first of all, thank the panelists for

being here. And secondly, encourage you to weigh into the administration as to the importance of trying to increase the R&D budget

for NASA. Thank you.

Mr. MICA. The gentleman is recognized, Mr. Larsen.

Mr. LARSEN. Thank you, Mr. Chairman.

Mr. Douglass, both Dr. Busch and Mr. Moss talked about including Canada and Brazil in a new type of agreement. What does the

organization have to say about that proposal?

Mr. DOUGLASS. You know, when you listen to the first panel and

you listen to our Trade Rep talk, he went into some length to explain that the key ingredient of bringing forward a trade case was

liaison between administration; in this case the Trade Representative and certain segments of the industry.

Right now the focus of the Trade Rep’s attention has been placed

on the large aircraft arena. We have heard testimony this morning

from Mr. Moss and others that the other parts of the civil aviation

marketplace feel that their sector of the market is also disadvan-
36

taged by these European subsidies, and indeed, by subsidies that

you mention from Canada and Brazil.

The next step in the process would be for those portions of our

industry to engage with our Trade Rep to make the determination

whether or not it is in our national interest to enter into an additional dispute that goes beyond the Boeing-Airbus dispute today.

But until that full liaison step has been taken, I would be reluctant, sir, to bring that into this current dispute. I think for now we

need to solve the large aircraft dispute, but I certainly believe that

if the rest of our industry feels that they are at a disadvantage, too,

our Trade Reps need to listen to them and then determine what

that next step would be.

Mr. LARSEN. Thank you. Could you comment a little bit on your

testimony, Mr. Douglass, about the International Civil Aviation Organization and its role in—its role in some of these proceedings on

competitive advantage on the lap of a U.S. Appointment?

Mr. DOUGLASS. Yes, sir. Mr. Chairman, what the Congressman

is referring to is the fact that up in the International Civil Aviation

Organization, the United States gets one vote, the European individual countries each get a vote, and they always vote as a bloc.

So on any particular issue that might involve trade or something

where we might have a national interest, they might have a national interest, we are outgunned, I don’t know, 25 or 30 to 1 before

we even open the subject. That is a structural problem that needs

to be resolved.

Secondly, the current U.S. Ambassadorship to ICAO is vacant.

The industry has endorsed a candidate. We would strongly encourage the administration to move forward on that position and appoint that candidate as the U.S. Ambassador to ICAO.

Mr. LARSEN. Thank you.

Dr. Busch, you talk about a multilateral approach, but let’s focus

on the bilateral approach right now.

We heard testimony earlier about what steps would have to take

place. What steps do you recommend the USTR take from this

point forward? Just keep in mind the bilateral approach.

Mr. BUSCH. Well, just to comment on Mr. Douglass’ point, I am

not suggesting that Canada and Brazil be directly targeted through

WTO litigation on this point. Rather, I am talking about what Ambassador Allgeier points out earlier, which is that when we finally

turn to try to negotiate a robust resolution, it must include two additional seats at the table. That can happen after a WTO verdict

is rendered in the bilateral dispute, or it can happen before a ruling is issued in this dispute. Either way, what will happen now is

the United States is likely to pull the trigger on a panel request.

Interestingly enough, it is quite common at the WTO for two parties to settle essentially out of court at the panel stage but before

ruling is issued. If the case ultimately is ruled one way or another,

obviously it is a little bit more difficult to begin to negotiate, but

hopefully after we have cleared some hurdles. And Ambassador

Allgeier points out that there are a couple of additional steps in the

dispute settlement process. For example, a U.S. Victory would invariably be appealed. Once appealed, the United States and Europe

may find themselves before a compliance panel, which would be the

original panel asked to see whether Europe had done anything to
37

bring its measures into accordance with WTO obligations. If in fact

nothing had been done, the United States could then proceed to ask

for authorization to retaliate. This case could, as Ambassador

Allgeier pointed out, go on easily for 2 years beyond the panel request.

Those are the steps that will happen most likely. This dispute

has very few of the markings of a case that would settle early. And

as I tried to suggest in my testimony, we may be at a point where

it would be tremendously valuable to have this go the legal distance, to again have the WTO actually come down one way or the

other on the charges and countercharges that, as I said, we have

been listening to now for well over a decade.

Mr. LARSEN. I want to be specific about this question. I am not

asking what you hope or we hope, but what would you expect

would be a result? And what would you expect to be accomplished

from further pursuit through this current process?

When I say that, I know what I hope the answer would be, but

I am asking you, as somebody who spent some time thinking about

these issues, what would you expect to be accomplished?

Mr. BUSCH. I would like to see the WTO render a verdict, as I

said, on the charges and countercharges. My deep suspicion is that

ultimately no legal verdict will bring an end to the dispute in total,

that ultimately we will have to have negotiations. There the question will be: Is there anything shy of zero launch aid that is tolerable on the U.S. Side? The question bears asking by virtue of the

fact that the 1992 bilateral set an informal benchmark against

which any future deal might be assessed, both by those in political

office and by those in the media. It is a salient focal point; it is a

salient focal point for future negotiations.

Undoubtedly, there will be a request that whatever compromise

be had on launch aid, the Europeans will undoubtedly think that

number should be shy of zero. If the United States is not of a similar mind, then I think we have a problem. Which is why, again,

going to the WTO and having decisions rendered on certain of

these charges and countercharges will help clear the air and get us

to start thinking about where the comprises are, and ultimately

what our reservation point for, as Ambassador Allgeier pointed out,

a good deal, not just any deal.

Mr. LARSEN. Sure. Mr. Douglass and Mr. Moss, any comments?

Mr. DOUGLASS. The only thing that I would say is we expect the

outcome to be a prohibition against launch aid in total. And you

may recall, sir, that—I don’t remember whether this was mentioned in the first panel or not, but if you go back to the original

1992 agreement, the agreement spoke of a gradual phasing out of

launch aid and taking it down to zero. That is one of the reasons

why our Nation withdrew from the agreement, because they felt

the Europeans stayed at 33 percent and wouldn’t move towards

zero. So the national goal is clearly to move towards zero.

Mr. LARSEN. You may recall from my opening statement that

launch aid was one of the themes.

Mr. MOSS. From our perspective, any delay in dealing with the

issue will have an impact on us. Time is not on our side, it is on

the side of others, so it simply means we will have to continue to
38

deal with this imperfectmarket and the benefits they get through

subsidies through some period of time, sir.

Mr. LARSEN. Thank you.

Thank you, Mr. Chairman.

Mr. MICA. Thank you. Are there additional questions?

Just a couple of points here.

Mr. Douglass, if you underwrite the research and development of

a new aviation product or commercial aircraft, then you underwrite

the financing, and then you underwrite some of the promotion, and

then—well, I won’t get into the bribes part we heard about, but

what are the chances for our American manufacturers to compete?

Mr. DOUGLASS. Sir, it really only leaves us one area to compete

in, and that is technology. And as you know, we have heard—all

of the witnesses agree that the difference in the way we deal with

unclassified technology here in the United States is we do most of

our civil aviation technology through NASA, and then it becomes

available to all concerned. Whereas over in Europe, their research

and development is very targeted, and it is restricted to the companies involved in the research and development.

So, for example, we will be doing open research on flight controls

or fluid dynamics or combustion at extremely high speeds. This is

very basic research which helps you build products. On the European side, they have a tendency more to actually help a company

take their product all the way to the marketplace.

And so even in our final area where we have had a traditional

advantage, which is a higher level of technology in general in our

aerospace market, it will become increasingly difficult for us to

compete unless we see a national willingness to invest in aeronautics research.

Mr. MICA. I am wondering, maybe your Association could provide

us for the record some information on—some hard information on—

I guess during the build-up of this, America’s space industry—and

also the build-up of the military, I guess, during the Reagan administration—you had both defense and NASA being very heavily

involved in R&D, and also developing systems or technology improvements that might be of benefit to the industry.

However, since basically the downfall of the Soviet Union in the

early 1990s, you have seen us dismantling our efforts to really aid

our defense industry in R&D and the dramatic fashion we saw previously. And then you have seen a decline in interest in activity,

in us promoting R&D in space technology. If you have any figures

of that pattern, I would like to submit them for the record. And

then also, any evidence of increase from the European Union.

And I guess their national defense budget is just a few percent

points of their entire national budgets. We ended up picking up

most of the tab for defense, but I would be interested to see how

they compare an increasing—and if you could target the dollars as

you have seen going towards R&D, I would like to have that for

the record if you could supply it to the subcommittee.

Mr. DOUGLASS. Yes, sir. We would be glad to do that. There are

some interesting trends.

There is another trend that I would remind you of, sir, and that

is a couple of years ago I was one of President Bush’s commissioners on a commission that looked at the future of the industry.
39

And one of the things that became very clear to us—and this was

a bipartisan commission, it was half of the members came from

Congress and half from the administration—was that military research and commercial aviation research in recent years have

sharply taken different courses. Military has spent most of its

money moving away from platforms towards network centric warfare. The few things that they have done on platforms, like stealth,

have very little application in the commercial marketplace.

And we have also seen institutional barriers arise that essentially prove that this argument that Boeing gets some great windfall from its defense contract is just not true, because technology

is not flowing across those boundaries. Indeed, under your leadership, Mr. Chairman, we have established the Joint Development

and Planning Office for our next air traffic control system because

we would like to go back and get some of that DoD technology, not

to help Boeing, but to help the FAA develop the new air traffic control system in the future. So we do have some statistics, sir, and

we will try to respond to your request.

Mr. MICA. Well, I think that concludes my questions. We may

have additional questions we will submit to you for response and

inclusion in the final record of this hearing.

So we do thank each of you for your participation, for your patience in staying, even though your panel was delayed by votes,

and look forward to working with you as we look to resolve some

of the problems that have been highlighted by this hearing.

There being no further business before the Aviation Subcommittee, this hearing is adjourned. Thank you.

[Whereupon, at 1:00 p.m., the subcommittee was adjourned.]
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