Europeans Cry Foul Over a Defense Contract

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Frontline Communications / EPA

A KC-767 refueling tanker flies over Wichita, Kans.

The announcement by French aerodefense group EADS that it was pulling out of the bidding process for a $35 billion contract to supply midair refueling planes to the Pentagon sent shock waves across Europe this week. EADS, which was partnering in the bid with the U.S. company Northrop Grumman, based its decision on its claim that the competition had been rigged in favor of archrival Boeing — an accusation that spurred charges of unabashed American protectionism in Europe. Now, with both sides digging in their heels, what began as a transatlantic flap over the refueling-aircraft business is starting to sound like a full-blown trade war.

"I think the attitude of the American government on the refueling-aircraft issue is a grave infraction of the rules of fair competition between our economies," French Prime Minister François Fillon said Wednesday, March 10, during a visit to Berlin, where members of the German government echoed his belief that the Pentagon was going to award the contract to Boeing no matter which company had the better bid. "The American government, I'll say here and now, forced EADS to quit the competition."

French European Affairs Minister Pierre Lellouche, whose strong pro-American positions had long made him something of a rarity in France, was also fuming. "It's absolutely incompatible with the rules and laws," he declared. "But we're going to react. There will be consequences." And what might those be? For one thing, government spokesman Luc Chatel said Wednesday that French President Nicolas Sarkozy, who was also reportedly furious about the turn of events, will raise the issue with President Barack Obama during his visit to the U.S. at the end of March.

Why the cries of foul from the French? EADS initially lost the refueling-aircraft bid in 2003 — only to see the decision overturned on evidence that Boeing hadn't played fairly in winning it. Then in 2005, EADS sought to improve its chances of success by allying itself with American partner Northrop Grumman in a new pitch. The pair won the next round of bidding, but that decision sparked a chorus of complaints from U.S. legislators about American contracts (and tax dollars) going to a European business — and it was later overturned in an appeal filed by Boeing. The Pentagon reopened the bidding for a third time earlier this year. But this time, EADS said, the terms of the process "clearly favored" Boeing, prompting its decision to bow out on Monday.

Now there are fears that Europe could retaliate. The European Commission has warned that it would react sternly to any evidence of American protectionism favoring Boeing in the Pentagon bidding process. And British Business Secretary Peter Mandelson hinted that "the open market to U.S. producers we have in Europe" could be affected if the European Union felt that Americans were refusing to extend similar freedoms to their companies in return. Even some American observers groused that the EADS offer was clearly superior to Boeing's revised bid. U.S. Senator Richard Shelby, a Republican from Alabama, said that "the Air Force had a chance to deliver the most capable tanker possible to our war fighters and blew it" by meddling with the process "to produce the best outcome [for Boeing]."

U.S. defense officials have defended their contract specifications, saying that the bidding process aimed to get the best aircraft at the lowest price. However, Commander Darryn James, a Pentagon spokesman, told Reuters, "We are disappointed that Northrop is not competing." He added that neither the decision by EADS and Northrop Grumman to drop out of the competition nor the fallout from it changes "the Defense Department's commitment to transatlantic defense ties."

Despite the vehement statements of those denouncing the deal — and the veiled threats of retaliation — most observers say the chances of the spat jumping from the defense sector to wider commercial deals are small at most. Military contracts have historically been so vulnerable to protectionism and national preferences that they aren't covered by World Trade Organization rules. For that reason, says Nicole Bacharan, a specialist on U.S.-European affairs at Stanford University, "the way this contract was handled wasn't any different from how it would be handled in any other country — especially one whose defense industry is as big but fragile as America's."

Indeed, one French executive of an international group, who asked not to be named because he formerly worked as a French diplomat, says the main problem with the refueling-plane bidding process was the Pentagon's pretense that the work was up for grabs in the first place. "All nations — France included — make bilateral procurement deals without tendering bids, so what's really annoying about this case is that EADS was led to think it had a chance when the work was going to go to Boeing no matter what happened," the executive says.

He and Bacharan both believe that the fracas will add to the rising disappointment in Europe with the Obama Administration — but not much more than that. "Everyone would lose if this were to spread to commercial trade, and there also isn't much political gain pushing this much further than it has now," Bacharan says. "The anger is good theater to a domestic audience, but it would travel very poorly across the Atlantic."

All of which means that this U.S.-E.U. catfight over protectionism is probably going to end as abruptly as the EADS-Boeing dogfight that sparked it.