Why Europe Has Its Eye on the Boeing Deal

From all indications, the $13.3 billion mega-merger between the Boeing and McDonnell Douglas companies will be approved by the Federal Trade Commission (FTC) and the Department of Justice with the advice and consent and financial support of the Department of Defense. The approval of the United States government will come even though the merger of these American aerospace giants, whose combined sales are about $50 billion, will eliminate the last vestiges of competition in commercial aerospace in this country and curtail competition in the defense sector.

Ironically, the only official voice raised against the creation of this aerospace colossus, which would employ about 225,000 people, has come from abroad. In mid-March, the European Commission, the executive body that governs the European Union (EU), announced that it would examine the impact of the proposed merger on competition in Europe's commercial aircraft market.

The EU's position has raised a host of important questions. Specifically, does the EU have any legal authority to interfere with the merger of two US companies? Why is Europe more concerned about competition than the US? What would be the impact on the new Boeing if the EU does not approve the merger? Finally, what recourse would Boeing have if the EU does not approve?

The EU has both a domestic and an international legal basis for reviewing the merger. Its domestic justification is based on the Merger Control Regulations of the Commission, which gives it the power to reject acquisitions or mergers that create a dominant position in the European market (a European Sherman Anti-Trust Act). The threshold for international deals that the Commission reviews are worldwide sales of $5.7 billion and European-wide sales of at least $290 million, a threshold easily exceeded by the new Boeing.

The European Commission can also rely on a 1992 Airbus subsidy agreement between the EU and the US, which limits aircraft development subsidies the EU can provide to that European manufacturing consortium. The EU's competition czar, Karel Van Miert, has indicated that he is worried that a combined Boeing/McDonnell Douglas would receive indirect subsidies from the federal government through McDonnell's defense contracts and that these subsidies will give Boeing an additional advantage over Airbus.

If it rejects the acquisition, the Commission could impose fines on the new Boeing of up to 10 percent of its worldwide sales or impose penalties on EU domestic carriers that purchase Boeing's planes. Since these fines could total as much as $5 billion a year, this gives the EU tremendous leverage on the deal if Boeing wishes to sell its planes in the European market.

The Clinton administration is likely to approve the merger because it feels it is good for the US both at home and abroad. The commercial aircraft part of McDonnell Douglas currently accounts for barely 4 percent of the world market and, in the words of its CEO, is going down the ski slope in terms of sales and will soon begin laying off workers. The merger gives Boeing the McDonnell production facilities that will enable it to meet its production goal of 40 planes per month and thus keep the McDonnell workers employed. Moreover, by consolidating the overhead and the defense components of the two companies, the new Boeing will be more competitive abroad. On the other hand, the EU feels that the new Boeing, which already accounts for 60 percent of the European commercial market, will be able to cut into the 40 percent still controlled by Airbus.

If the EU does not approve the merger after it is sanctioned by the FTC and Justice, Boeing will have to rely on the US government for redress. In fact, this is not a dispute between American companies and a foreign government, but between governments, and it reflects the emerging reality that companies are truly global while governments are at best regional. Simply put, political geography has not kept up with economic geography.

If the EU should level fines on Boeing, it will most likely provoke retaliation from the US. Moreover, since many European airlines will wish to continue purchasing Boeing aircraft, their executives (many of whom, like the CEO of Lufthansa, are Americans) are likely to protest as well. Since neither the US nor the EU wants a trade war or domestic political problems, they are likely to reach a face-saving accommodation that will result in the EU approving the merger in return for the US agreeing to modify the 1992 Airbus subsidy agreement. Indeed, this has probably been the EU's goal all along. The EU had already announced that it would ignore the 1992 agreement unless the US agreed to changes. The Boeing merger gives the Commission the leverage to provide more generous government support to Airbus.

Resolution of the Boeing-EU dispute will only be a temporary solution. Given the nature of the marketplace, the world needs an "office of global competition" in the World Trade Organization to look at all future mergers if the world's consumers are to be protected from unfair competition.

* Lawrence J. Korb, a senior fellow at the Brookings Institution in Washington, was assistant secretary of defense in the Reagan administration.