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Trade ruling adds fuel to aerial-tanker contract fight

WASHINGTON — A long-awaited ruling in an international trade dispute could become the latest flash point in the competition for a $35 billion contract to start replacing the aging fleet of Air Force aerial refueling tankers.

The Pentagon is expected to release a draft request for bids on the tanker contract this week.

Boeing supporters in Congress have made it clear that they won't tolerate a competition that doesn't take into account a preliminary ruling earlier this month from the World Trade Organization that Airbus has received billions of dollars in illegal subsidies from four European governments.

"It would cause a meltdown on Capitol Hill," said Rep. Rick Larsen, D-Wash., whose district includes the plant where a Boeing tanker would be built.

Airbus supporters shot back that Larsen and others are engaging in "vigilante justice" and advocating "irresponsible congressional intervention."

Behind the red-hot rhetoric, however, is a fundamental question about whether the Pentagon, in the midst of a recession, should buy a tanker from a European company that used illegal "launch aid" to drive two U.S. companies out of the commercial aircraft business and overcame a substantial lead by Boeing to become the world's largest producer of passenger jets.

The WTO ruling remains confidential, though the Office of the U.S. Trade Representative has seen it and briefed the Pentagon and members of Congress. A final ruling is expected next year, but it can be appealed. Meanwhile, the WTO is expected to rule in the next six months on a complaint by the European Union alleging that Boeing has received illegal subsidies through its military and NASA contracts and from Washington and other states.

Lawmakers who've been briefed said the WTO found that Airbus received illegal launch aid for many of the aircraft it produces and it caused "material harm" to Boeing. Neither Boeing nor Airbus has commented.

Even though the ruling officially remains secret, it's become a focal point in the eight-year effort to replace the nation's 600 or so Cold War-era tankers. The contract eventually could be worth $100 billion.

Controversy has swirled around the tanker competition. Early on, a top Air Force contracting official and a top Boeing official were sentenced to jail after a procurement scandal involving the tanker. In the wake of the scandal, the head of Boeing resigned.

The Air Force then launched a new competition and awarded the contract to a team of Northrop Grumman and the European Aeronautic Defense and Space Co., the parent of Airbus, that would use an Airbus A330 airframe. Boeing appealed the award, and congressional auditors overturned it. The Air Force now is set to solicit new bids.

Boeing offered a tanker version of its venerable 767 wide-body jet, built in Everett, Wash. The 767s would be converted into tankers at a Boeing facility in Wichita, Kan.

The Northrop-EADS tanker initially would be built in Airbus' factory in Toulouse, France, though Northrop-EADS has said it eventually would open a new facility in Mobile, Ala. Construction on the Mobile facility hasn't started.

As the Air Force prepared its earlier request for bids, it considered adding language that would've taken the subsidies into account in evaluating the bids. Northrop-EADS threatened to pull out of the competition, however, and the Pentagon faced pressure to drop the issue from Sen. John McCain, R-Ariz., who at the time was in line to become the chairman of the Senate Armed Services Committee.

This time, the Pentagon is aware of the WTO litigation and is monitoring the case, said Air Force Lt. Col. Karen Platt. Air Force Secretary Michael Donley said last week, however, that "at this time we see no needs to make adjustments" in the draft request for bids.

To Boeing backers, that's unacceptable.

"The Department of Defense is well aware of how I feel," said Sen. Patty Murray, D-Wash., who first raised the Airbus subsidy issue in 1994. "Everyone knows the seriousness of the impact of this. Pentagon leadership has said they plan to conduct a fair and open competition, but a truly fair and open competition needs to start with competitors who play by the rules."

Murray isn't the only lawmaker who's written or spoken with Defense Secretary Robert Gates and other Pentagon officials.

The Airbus A330, said Rep. Norm Dicks, D-Wash., received $5 billion worth of government subsidies.

"No wonder they can bid lower," Dicks said. "The Department of Defense is looking the other way. We hope Boeing wins, but there will be ramifications if it doesn't."

Larsen, along with Rep. Todd Tiahrt, R-Kan., sent a letter to President Barack Obama signed by 45 other members of the House of Representatives saying that if Northrop-EADS won the competition, the Pentagon would be rewarding the Europeans with a Defense Department contract at the same time that U.S. officials are trying to punish the Europeans for flouting international law.

"If the Pentagon proceeds without taking subsidies into account, it would provide a return to European taxpayers' investment using U.S. tax dollars," Larsen said.

"It would be an injustice," Tiahrt said. "We won't just sit by. There will be an outcry from the House."

Larsen is a member of the House Armed Services Committee, and Tiahrt and Dicks are members of the House Appropriations' defense subcommittee.

Sen. Sam Brownback, R-Kan., said Congress could always cut off funding for new tankers if the subsidy issue weren't addressed.

"This is a huge burr under my saddle," Brownback said. "If they don't do it (consider the subsidy), I will use all the tools available to make them."

Airbus supporters said the WTO dispute was a diversion that was interfering with the effort to replace the aging tankers.

"We must insist that the process work without irresponsible congressional intervention," Sen. Richard Shelby, R-Ala., said in a letter to Gates. "Vigilante justice by members of Congress simply must not be tolerated."

Northrop-EADS said in a statement that the Air Force recognized previously that the subsidy dispute couldn't be settled through the tanker competition, and it shouldn't be pressured into changing its mind this time.

"Those who try to inject the WTO issue into the tanker competition are doing our war fighters a major disservice," Northrop-EADS said.

Boeing, in a statement, countered that the subsidy issue should be a factor.

"Whether it's in commercial or military markets, including the U.S. tanker program, what we seek is fair competition on a level playing field where everyone is held to the same standards and transparencies," Boeing said.

Outside analysts said that even if the Air Force decided to add some type of penalty to the Northrop-EADS bid, it might not affect the outcome.

"Cost is only one of several factors," said Loren Thompson, an analyst with the Lexington Institute, a Virginia-based research center that focuses on defense and national security issues. "Even if additional costs were imposed, it won't substantially diminish their (Northrop-EADS) ability to compete."

Thompson and other analysts said the real issue was whether the WTO decision would prompt a new fight on Capitol Hill over the tanker contract.

Richard Aboulafia, an analyst with the Teal Group, said the WTO ruling had given ammunition to Boeing supporters in Congress.

"They are giving a loaded revolver to some very angry men and women," Aboulafia said. "If they sense any hostility from the Europeans they will fire back, and the easiest target could be tankers."

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