Europe and America on flight path for trade war

Neither Boeing nor Airbus will back down in their dogfight over state subsidies

The European Union and the US will this week move closer to a full-scale trans-Atlantic trade war. Only this time, it won't be about bananas but aeroplanes.

Europe's Airbus and the America's Boeing both argue that the other has benefited unfairly from tens of billions of dollars and euros in state subsidies. Both have solicited government support for their case and neither shows any intention of backing down. They admit the possibility of the hostilities developing into a full-scale trade battle.

On Wednesday, the World Trade Organisation (WTO) will hold its first dispute-settlement hearing on the European Commission's aircraft subsidies case against Boeing. The EC alleges that Boeing receives government subsidies in the form of US federal, state and local programmes that could total $23.7bn (£12bn). Brussels argues that these give Boeing an unfair competitive advantage.

The US government previously presented a similar case to the WTO relating to Boeing's complaint that the France-based Airbus has benefited the most from state subsidies in the form of at least $15bn in "launch aid" – an amount that grows to $205bn when compound interest is taken into account. This weekend, both sides were squaring up to go the distance.

Bob Novick, legal counsel for Boeing, said: "The losing government has to decide what to do. If it fails to come up with compliance, the next step from the winning government would be retaliation with the imposition of duties."

But the EC is not afraid to fight its corner. A spokes- man Peter Mandelson, the European Trade Commissioner, told The Independent on Sunday: "Given the strength of our case against Boeing subsidies, we believe the EC could also impose sanctions. Any sanctions imposed by the US ... will be met euro for dollar by the EU."

Both sides are accusing the other of supplying inaccurate information. Boeing says that the $23.7bn figure cited by the EC is well wide of the mark. "The $10.4bn that the EC claims Boeing received from Nasa bears no relation to reality. The real figure is about $750m," said Mr Novick.

But this is disputed. A source at the EC said: "Although Boeing is claiming a figure of $750m, it is not backing up that number by showing us any actual contracts and is simply asking us to take its figure without question. That is not a credible rebuttal."

The EC also claims that Boeing received $2.4bn in subsidies from the US Defense Department. Mr Novick says that figure is inaccurate as the contracts are not open to public scrutiny and that, in any case, research work carried out on jet fighters is of little practical relevance to a company that specialises in civilian aircraft.

According to Boeing, Airbus also benefits hugely from indirect subsidies in the form of support from state-funded infrastructure projects. It claims that the city of Hamburg, for example, has provided more than €750m (£525m) for the extension of Airbus production facilities and that the A380 production site in Toulouse gains from infrastructure loans and grants totalling more than €180m.

Despite an official line from both sides of the Atlantic that a tit-for-tat trade war would be in no one's interests, both sides are becoming entrenched.

"We would prefer to reach a mutually acceptable solution than engage in a trade war," said Mr Mandelson's spokesman. "This is why, for two to three years, we tried to negotiate with the US government to establish a new framework for support to large civil aircraft manufacturers. However, it has not been possible to agree on realistic and balanced terms for such a negotiation."

With a judgment from the WTO not expected until well into next year, and with an appeal likely, both sides are starting to dig in for a long winter campaign.