The World Trade Organization (WTO) which is expected to announce formally its ruling against EADS (EADS:P) for receiving illegal subsidies to support Airbus airliners and is also considering a complaint against the U.S. and Boeing (BA) announced that it does not intervene in military contracts and cannot be involved in the KC-X dispute between the U.S. and Europe.

The chance of France or the E.U. filing a complaint over the terms of the proposal which are seen as limiting EADS chances to bid seems remote. Certainly President Sarkozy of France has raised the issue with President Obama. The Air Force has extended the deadline for proposal submission sixty days to allow EADS to submit a proposal if they want.

The Secretary of Defense, Robert Gates, testified today to Congress that he felt the leaked World Trade Organization (WTO) ruling on the legality of loans and subsidies to EADS by European nations would not have an effect on the KC-X contest. Of course supporters of Boeing will draw a different conclusion saying the ruling means an unfair advantage for EADS that will affect the pricing of the contract proposal.

Of course right now EADS has not committed to making a bid although there are rumors that the Pentagon would consider a delay of up to ninety days to allow the company to put together a proposal either as the prime or with another partner. If EADS does ultimately end up bidding the WTO ruling will certainly play a role in the politics of the issue if not the actual source selection and contract process.

The Lexington Institute published an op-ed today by Loren B. Thompson that made clear in hid interpretation the launch assist loans clearly were illegal. The A330, he wrote, “was developed using practices that would be prohibited today”.

This could mean that the EADS proposal when it is submitted could be adjusted to reflect the financial advantage received by such aid. This would significantly shift the price difference between EADS, Boeing and any other bidder.

If EADS does bid on the contract the WTO dispute will play a role, that is guaranteed.

Jason Lean, the Executive Director of the Labor Council for Latin American Advancement (LCLAA) has sent a letter to the Tallahasee Democrat opposing the award of the KC-X contract to Airbus on the grounds that “taxpayers shouldn’t pay for foreign jobs.” The letter reads:

“Nearly all Americans know how dire the unemployment picture is today. Unfortunately, the recent job loss numbers show that even harder times are on the horizon (“Jobless rate inches higher statewide but drops slightly in Leon County,” news article, Jan. 23).

But what most Americans don’t know is that the Department of Defense is considering awarding to the Europeans a major defense contract that outsources an additional 50,000 jobs abroad.

Even worse, the European defense contractor in question — EADS/Airbus — is a pariah company that was just found by the World Trade Organization to have thieved tens of thousands of American jobs in an illegal subsidy scheme that allowed it to steal market share from the U.S. aerospace company, Boeing.

There may be controversy about whether we need another federal stimulus plan to create American jobs. But there should be no controversy over the view that American taxpayers should not fund a European jobs stimulus plan for an outlaw company.”

You can read the letter at Tallahasee Democrate.

Recently 125 members of Congress wrote a letter that was sent to President Obama and released publicly to try and get the U.S government to take punitive actions against EADS and Airbus for receiving illegal subsidies. The World Trade Organization (WTO) supposedly has ruled on that a few months ago. The case is still ongoing with counter charges and reviews. Many in Congress who support Boeing feel that this should be taken into a account when the KC-X bids are reviewed. Although Northrop Grumman and EADS have threatened not to participate.

Boeing releases a statement about the letter and their appreciation for the Congress Members actions:

“Boeing is encouraged to see such strong bipartisan congressional support for U.S. action to end the illegal subsidies that European governments have for decades provided to Airbus at the expense of American industry and its workers.

“Despite an imminent final WTO ruling on illegal subsidies, Airbus appears poised to extend and continue the practice of using illegal subsidies for its new aircraft, the A350. This new plane directly targets America’s aerospace industry and the tens of thousands of workers who design and build aircraft in the United States.

“As stated in the congressional letter to the president, our government policies should not reward foreign governments or companies that benefit from illegal subsidies. We look forward to working with Congress to ensure this matter of principle and of important policy is enforced.”

EADS and others have made claims that Boeing through its military contracts over the last sixty years has received the equivalent of these subsidies themselves. That case is still pending at the WTO.

Of course the Defense Department needs two bids to efficiently carry out the competition so all this back-and-forth may ultimately have no effect.

Several Representatives and Senators from states where Boeing (BA) would do much of the work if they won the KC-X tanker contract are pushing the Air Force to either exclude outright EADS (EADS.P) or place a cost factor on their bid. This is all due to the World Trade Organization (WTO) draft ruling that the company received illegal subsidies from several European governments. Supporters of the Northrop Grumman (NG) and EADS say that the ruling is draft and not finalized and should not apply in this competition.

If there was such a move by the Air Force it would significantly reduce the competition in the contract process. It would make the Air Force award the contract to Boeing as the other bid would not be competitive. Of course this is what the legislators want, but a sole source award to Boeing probably would not be palatable to others in Congress or the Department of Defense. There should be at least two bids for each contract and this one is limited to Boeing, EADS and possibly the Russian company Ilyushin. Chances are that a Russian aircraft would not be chosen no matter how cost effective it is. This leaves the U.S. in a very limited position with the KC-X.

This kind of fighting can be expected to go on for the next several months to after the contract award and resolution of any protest.