The EU and US agreed to end a 17-year dispute over aircraft subsidies, lifting the threat of billions of dollars in punitive tariffs on their economies in a boost to transatlantic relations.

Two days of intensive negotiations in Brussels led to a draft deal on how to handle subsidies for Airbus and Boeing, with the breakthrough finalised on Tuesday at US president Joe Biden’s first EU-US summit meeting in Brussels.

“With this agreement, we are grounding the Airbus-Boeing dispute,” said EU trade commissioner Valdis Dombrovskis. “We now have time and space to find a lasting solution . . . while saving billions of euros in duties for importers on both sides of the Atlantic.”

The deal takes the form of a five-year accord to suspend punitive tariffs linked to the original disagreement. Coupled with that is the creation of a minister-level working group to discuss subsidy limits and overcome any issues that may arise between the two sides.

The intention is that disagreement never re-emerges, including for new aircraft models. The deal commits the EU and US to making sure R&D funding to aircraft makers will not “harm the other side”. The two sides also pledged to work together in “addressing non-market practices of third parties” — something officials said was a nod to concerns regarding China.

“Both sides agree that it is wiser to put our disputes to rest and see how we [can] actually co-operate in this area, and how we work on ensuring a global level paying field,” Dombrovskis told the Financial Times.

The EU trade commissioner said he was “confident that at the end of the day we will be able to put this dispute to rest completely”. He added: “It is already a very big step in that direction.”

The deal was confirmed after being reviewed by Airbus’s three host countries in the EU — Germany, France and Spain. The French government said in a statement: “We can now focus on putting these disagreements behind us, and on defining the conditions of fair competition at the global level for state support to the aeronautic sector.”

The breakthrough lifts a cloud of uncertainty hanging over the airline sector, and removes the threat that $11.5bn of EU and US consumer goods could again be hit with punitive tariffs.

Those duties — on products ranging from French wine to US sugarcane molasses — were suspended after the EU and US agreed in March to lift them for four months and start negotiations on a solution.

Airbus welcomed the agreement, saying it would provide “the basis to create a level-playing field”. The company added that the deal “will also avoid lose-lose tariffs that are only adding to the many challenges that our industry faces”.

The Airbus-Boeing dispute is one of the longest-running battles in the history of the World Trade Organization, and one both sides have acknowledged they can increasingly ill-afford as they seek closer co-operation to deal with China’s model of state capitalism.

Dombrovskis held talks with US trade representative Katherine Tai and commerce secretary Gina Raimondo leading up to the summit, as both sides worked to get an agreement over the line.

Companies on both sides of the Atlantic have long called for a solution. The matter took on greater urgency after the US targeted European exports worth $7.5bn with extra tariffs in October 2019, while the EU imposed additional duties on $4bn of US exports last year.

Both sets of measures were in line with WTO rulings that favoured each side. But both the US and EU have also been found over the years to have failed to implement properly the WTO panel rulings on illegal subsidies for their aircraft manufacturing champions.

One sticking point was that the nature of subsidies on each side of the Atlantic is very different, with EU officials pointing to sizeable US defence contracts as one example.

Although the end of the dispute removes an important irritant in trade relations, others remain.

Brussels last month held back from increasing tariffs on US goods as a goodwill gesture to help end Trump-era tariffs on European steel and aluminium.

The two economies are also yet to fully bury their differences over digital taxes, with the issue now tied up with broader international talks.