Mandelson in the hot seat

A long-running dispute between the US and EU over airline production subsidies seems about to come to a boil, with Bush threatening to refer the issue to the WTO. Mandelson will be the commissioner responsible for handling the EU end of the case, which will put him in the hot seat perhaps faster than he thought.

At the heart of the dispute is cheap state loans given to Airbus Industries - now the world's biggest civil airline manufacturer (in terms of numbers). The US regards these as "unfair", believing they disadvantages its own aircraft maker, Boeing, which has recently had to shed 40,000 jobs.

So far, an uneasy truce has prevailed, as both sides work to a trans-Atlantic civil aviation accord agreed in 1992. This prohibits production subsidies and limits government loans for developing new models to 33 percent of the total cost.

Boeing charges that Airbus gets the loans at below-market rates - something the EU denies - and notes Airbus has not paid back loans on unprofitable models, thus skewing competition.

However, EU authorities claim that Boeing also gets state aid, benefiting from indirect subsidies through research funds granted for defence projects and work for NASA. Boeing, on the other hand, charges that although Airbus' parent firms, EADS and BAE Systems, do similar work and gain similar benefit.

With no agreement forthcoming, and job cuts becoming an election issue, Bush has therefore instructed his trade representative, Bob Zoellick, formally to notify EU officials at a scheduled September meeting that the Airbus subsidies are unfair. The EU has responded in an entirely predictable manner, with officials saying they are willing to consider "disciplining" government support - but only if the US does the same for Boeing.

In what it likely to be a high profile fight where, probably, neither side has clean hands, Mandelson may be forced to concede cuts in support to Airbus just at a time when the UK general election is due, putting jobs at risk in BAE sytems. We will wait with interest to see how Mandy handles this little local difficulty.