America and the European Union have had their share of trade disputes in the past, but the one looming over airplanes will raise the ante in several ways. If the two sides cannot prevent what is starting out as a trade dispute from spinning out of control, it can have an outsized impact on broader political and security relations.

The catalyst is the pre-Christmas announcement by the European consortium Airbus that it was launching its superjumbo A380 jet project. The decision has political and economic dimensions. First, the 555-seat A380, which is due to enter service in 2006. could come to dominate long-haul air travel in much the same way as the Boeing 747 did when it first carried passengers some 30 years ago.

Second and perhaps more importantly, the announcement immediately spawned a personal warning by U.S. President Bill Clinton to his EU counterparts that the proposed government financing of the project could mean big trouble for trans-Atlantic relations. The deciding factor will be whether the financing violates internationally accepted rules against subsidization.

Betting the Company

The commercial stakes are huge -- Airbus and its government backers are all but betting the company on the A380. And by deciding against building an all-new superjumbo of its own, Boeing has, in effect, taken the bet in the opposite direction.

Airbus has 50 orders in hand for the new airplane. Boeing has yet to find a customer for the updated version of its 747. The A380 is expected to cost nearly $11 billion to develop, about one-third of which would be funded by European governments. If Airbus’ estimates are right, it will sell some 600 to 700 A380s over the next 20 years, - and create some 225,000 direct and indirect jobs.

In doing so, it will break Boeing’s Virtual monopoly on the long-haul commercial-aircraft market, and deal a body blow to its highly profitable 747 program (which, not incidentally, is a major American export and a key reason why the U.S. trade deficit is not even larger).

If Airbus’s estimates are wrong, the result could be both economically devastating to the company and politically humiliating to its European government backers.

As demonstrated by President Clinton’s quick and personal response, the new Airbus project is shaping up as a fight that neither the U.S. nor Europe believes it can afford to lose. And that is why, impressive as the commercial considerations are, even more is at stake in the question of European financing of A380. Unless both sides focus on the larger stakes of trans-Atlantic unity, what ought to be no more than a trade dispute could inflict widespread political, economic, and security damage to the North Atlantic Treaty Organization. This issue not only is quantitatively different than previous EU-U.S. fights over beef and bananas-- it also is about a lot more than airplanes.

The United States has warned that the $2.5 billion in loans that European governments will be making to Airbus to help fund the development of the A380 must be priced at commercial rates. Otherwise, President Clinton told French President Jacques Chirac, the financing would constitute a subsidy that could create ‘a serious problem affecting the U.S.-EU relationship.”

For their part Europeans have followed a two-pronged strategy: first the EU denies that the proposed financing will constitute an illegal subsidy, and second Airbus reiterates charges that Boeing’s commercial-aircraft business benefits from what amounts to implicit U.S. government subsidies in the form of Pentagon and NASA contracts.

Independent observers -- and there aren’t many -- have a difficulty in parsing the issue: Neither side is being very forthcoming with facts. On Airbus’s side, neither the European Commission nor the various member states will disclose the terms of the loan agreements the member states have struck with Airbus, beyond vague assurances that they comply with international agreements. If the loans do pass muster, however, there would appear to be no good reason to keep their terms secret. As Airbus continues its transformation from shadowy conglomerate to public company, it will do well to get into the habit of disclosing its financial position and obligations. Such a disclosure now would go a long way toward relieving U.S. anxieties over illegal subsidies.

Boeing’s situation is more difficult, as it is faced chiefly with so-far unsubstantiated charges from the EU that there is “evidence” that military and government contracts are used to subsidize Boeing’s commercial Operations. If such evidence exists, the EU should lay it out, at which point Boeing would have to explain itself or change the way it does business. But hiding behind secrecy and veiled threats behooves neither party in the long run.

There can be little argument with the proposition that European government loans to Airbus should be consistent with bilateral and World Trade Organization commitments undertaken by the EU member states. At the same time the United States likewise has an obligation to demonstrate that its military and space contracts do not constitute hidden subsidies to Boeing. What must be resisted at all 6 however, is a situation in which competition between two companies turns into political acrimony between allies over commercial terms and official commitments.

Commercially Viable

Both sides then should avoid making “national champions” out of these two companies. That is, the U.S. government should no more intervene to protect Boeing from the consequences of a bad business decision than the EU should intervene to ensure the success of what otherwise would not be a commercially viable new Airbus aircraft. If the two sides do succumb to that temptation, they risk doing grave damage to trans-Atlantic relations in general, and to defense and security cooperation in particular. A trade war with such political and military implications would signal both to Europeans and to Americans that their fates are more separate than common, that commitments to free trade can trumped by parochial political considerations, and that the growing military capabilities gap between the United States and its NATO allies will not be bridged by the evolution of a trans-Atlantic defense industry.

Added to existing differences over everything from missile defense and an independent European defense identity to genetically engineered food, it would accelerate an unhealthy and unnecessary drifting apart that, at the extreme, could culminate in a serious fracturing of the NATO alliance.

There is no guarantee that a trans-Atlantic train wreck can be avoided even if both sides recognize these larger stakes and demonstrate the kind of leadership that looks beyond the present controversy. But if they fail to do so, we may all look back on the A380 as the crisis that spawned the unraveling of NATO.