WTO dispute may offer US critics lever in EADS-BAE merger review
* EADS-BAE deal needs approval by U.S. security panel
* Boeing tried to block EADS tanker bid on WTO grounds
* Security panel has not blocked deals over WTO matters
By Tim Hepher
Sept 24 (Reuters) - A huge transatlantic clash over trade subsidies could sour efforts to get a $45 billion merger of Europe's EADS and BAE Systems Plc approved in the United States, former U.S. officials said.
After seven years at the World Trade Organization, the subsidy dispute pitting U.S. aircraft maker Boeing Co against EADS unit Airbus, is edging towards the possible imposition of sanctions just as Britain's BAE Systems prepares to seek crucial U.S. support for the merger.
With a big local U.S. presence, BAE must prove that U.S. national security interests would be protected if it ties up with EADS, which is controlled by two nations - France and Germany - whose relations with Washington are less cosy than Britain's.
All eyes are on rivals such as Boeing and other U.S.-based suppliers to see if they try to water down the deal to create the world's largest defence company, based in Europe.
Boeing tried without success to inject dissatisfaction with European aid to Airbus into a bitter contest with EADS for a $35 billion contract to build U.S. aerial tankers. The contract finally went to Boeing last year.
The EADS-BAE merger faces a different review from the Committee on Foreign Investment in the United States (CFIUS), a group drawn from agencies across government, but the process could revive attention on the WTO case.
"The dynamic of the WTO case is relevant to the EADS-BAE situation in that Europe has failed in the U.S. view to comply with WTO rulings," said a U.S. source familiar both with the WTO case and federal government approval procedures.
"If the WTO case were about hormones or gambling it would not be relevant. But it is about aircraft subsidies that can be leveraged to do economic harm to U.S. interests and could be leveraged further into the defence markets."
The WTO dispute, which already runs to thousands of pages and is estimated to have cost well over $100 million, flared up on Monday after the U.S. said it had complied with the WTO and declared itself clean of subsidies to Boeing.
The EU says it has obeyed WTO rulings by eliminating the harmful effect of government loans to Airbus, but Washington disagrees and is threatening up to $10 billion in sanctions. The EU said it would study the latest U.S. compliance annnouncement.
A senior Boeing executive said last week the EADS-BAE deal raised both national security and industrial questions, and should be reviewed carefully. The company has yet to say how it intends to respond.
CFIUS (pronounced "siffius") was set up by President Gerald Ford in 1975 to consider the security implications of foreign acquitions of sensitive U.S. companies, or "such other factors" as the president or panel see fit.
"It is a very rigorous and broad review," said a former U.S. official with knowledge of the oversight procedures.
Aerospace analysts say critics of the move could once again be tempted to use the WTO as a lever by stressing the overlap between military and civil technology. But while that could create a certain amount of political noise, getting the panel to dive into the WTO case alongside its core national security mission may not be easy.
Trade specialists say the panel has not rejected investment into the United States on WTO-related grounds.
"I am sure that there would be legitimate security issues to be examined, but it is hard to see how subsidization of commercial aircraft could be dragged into a national security-focused merger review," said John Magnus, president at TradeWins LLC, an international trade consultancy based in Washington, DC.
"If they did conclude that a combination of EADS and BAE was threatening on national security grounds, I am confident it would be based on military operations and not on subsidies that Airbus received."
Unlike Canada, which vets investments to ensure they provide a net benefit to the economy, the United States has separated the screening of deals on competition and security grounds.
Two defense industry executives said the Obama administration would have to carefully weigh the possible security risks against the probable backlash from Britain, Germany and France if Washington tried to block the deal.
"The political ramifications would be huge," said one, who was not authorized to speak on the record.
Foreign interest groups argue CFIUS has already taken a tougher stand on takeovers, especially in the cyber field, and are likely to campaign against any decision to widen its role. Also, one of the industry executives said the number of cases that were blocked by CFIUS was historically quite small.
"Foreign investment is a big source of U.S. economic growth employing 5 million Americans, so it is critically important the committee does remain focused on national security," said Nancy McLernon, head of the Organization for International Investment, a Washington-based lobby group for the units of non-U.S. firms.
"You need to stop there or the U.S. economy overall can be a victim to shenanigans by competitors."
Boeing and Airbus declined to comment on the review process.
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