By Andrea Shalal, Philip Blenkinsop and Tim Hepher

(Reuters) – The United States and Europe are closing in on a deal to end a 17-year-old dispute over aircraft subsidies and end tariffs, while seeking an elusive consensus on how to address competition from China, people familiar with the matter said on Monday.

A deal would lift the threat of a renewed trade war between the two sides that has already spilled over to industries from farming to luxury goods and tarnished transatlantic relations.

Talks are converging towards a pair of separate but broadly aligned treaties – one between the United States and European Union, the original parties – and another between Washington and London following Britain’s exit from the EU, the people said.

U.S. Trade Representative Katherine Tai discussed the dispute in her first face-to-face meeting with EU counterpart Valdis Dombrovskis on Monday ahead of Tuesday’s U.S.-EU summit. She travels to Britain on Wednesday.

The European Commission, which oversees EU trade policy, is keen to find a solution by July 11 when a suspension of transatlantic tariffs agreed in March comes to an end.

After years of posturing by both sides, diplomats are unwilling to predict a timetable but one noted summits can develop unique momentum, and another did not rule out the outlines of a surprise deal following this week’s diplomacy.

Others were more cautious, noting multiple false starts.

The tariffs on $11.5 billion of goods were progressively imposed from 2019 after the United States and EU both won partial victories at the World Trade Organization over claims of unfair aid for planemakers Boeing and Airbus.

The dispute has dragged on since 2004 when the United States withdrew from a 1992 aircraft subsidy pact and took the EU to the WTO, claiming Airbus had managed to equal Boeing’s share of the jet market thanks in part to subsidised government loans.

The EU counter-sued over what it termed unfair R&D support and subsidised tax incentives for Boeing.

In a potentially key breakthrough, the United States has watered down opposition to the principle of future public loans for Airbus but insists they must be demonstrably market-based and notified in advance, people familiar with the talks said.

But hurdles remain over the extent to which those conditions could effectively allow the United States to approve or block European projects, they added. The EU is vehemently opposed to any U.S. veto.

Even more critical is the benchmark to be used when deciding whether the interest on any future loans is market-compatible.

Under the 1992 subsidy pact, one third of a project could be financed by direct government support such as loans and cleared indirect R&D support up to 4% of a company’s revenue.

One option is to revisit that framework with market rules replacing subsidy quotas and a new cap on indirect R&D support.

There is “horse-trading” on numbers, one source said. Negotiators also want a fast-track way of solving future disputes. None of the parties agreed to comment on the talks.

CHINA REVIEW

When the world’s largest-ever corporate trade spat first erupted in 2004, Airbus and Boeing dominated the industry and China was still four years away from launching a rival C919 jet.

But the rapid rise of China’s aerospace ambitions has fuelled Western concerns over a new publicly funded rival.

In December 2020, outgoing U.S. Trade Representative Robert Lighthizer told Reuters the United States and Europe should cooperate in opposing future aerospace subsidies used by China.

The United States wants a common review of aerospace funding in non-market economies like China, two of the people said.

Washington is reluctant to bear the burden alone of tackling a potential subsidy threat to the benefit of not just Boeing but also Airbus, which now outstrips Boeing by production volume.

“There’s no question that the rise of China’s aircraft industry is…on everybody’s proverbial radar,” U.S. Chamber of Commerce senior vice-president Marjorie Chorlins said on Monday, noting what she described as China’s “heavy subsidisation”.

“It’s recognized on both sides of the Atlantic that it’s in our interest to join together where we can in pushing back against unfair Chinese practices,” she added.

Like the United States, the EU has sparred with Beijing on trade and security this year. But its 27 member states could struggle to agree a common front on topics like aerospace.

In April, for example, Hungary blocked an EU statement criticising China’s new security law in Hong Kong, sparking a row over the right of member states to veto EU foreign policy.

The Chinese embassy in Washington had no immediate comment on government support for its nascent civil aerospace industry.

NO EARLY UK DEAL

Brexit has also complicated negotiations.

Britain and the United States came close to striking a more far-reaching aerospace agreement in December that could have forced the hand of Brussels in its own talks with Washington.

But it collapsed amid UK concerns over jobs and distractions caused by the January 6 Congress siege, several sources said. British and U.S. officials declined comment on any closed talks.

Britain’s ability to negotiate trade deals independently of the EU is central to its new “global Britain” stance. But its flexibility on Airbus is cramped to some extent by its role as one of four core Airbus nations, pre-dating its EU accession.

Airbus, which has 14,000 staff in Britain, has made plain work could shift abroad if the UK turns its back on aerospace.

Britain and the United States committed last week to settle the aircraft dispute..

A European diplomat said Britain and the EU were broadly aligned in trying to reach a deal with the United States.

“The UK and the EU are talking to the U.S. separately, but in parallel, about making one serious push to get this done. We don’t need it hanging over everybody anymore.”

(Reporting by Andrea Shalal, Philip Blenkinsop, William James, Tim Hepher; Writing by Tim Hepher; Editing by Jane Merriman)