Play tough, avoid the trade war

investmenttool.com Opinion

As we noted last week the European Union is threatening to nix the merger of General Electric and Honeywell, two American companies. They can do this because GE does around $25 Billion in business in Europe. They hope to do more, teaming Honeywell's aircraft avionics business with their engines trade. The European Union has insisted GE divest the avionics business, the very thing GE is willing to pay $43 Billion for.

The actual reasoning behind this the protection of local suppliers of engines and aircraft avionics. The United States is far from powerless in this game of global corporate brinksmanship. There are several pending mergers of European aerospace firms with American ones. A bipartisan coalition in the US Congress has begun to call for retaliation.

The head of the EU's anti trust authority essentially but a finger in President Bush's face when he rudely brushed off Mr. Bush's concerns, stated on his controversial trip to Europe earlier this month. This was an unnecessary act that will give many in Congress an excuse to squeeze the Europeans.

The threat has been laid down and needs to be made through back channels. There is nothing anti competitive in this merger and the EU had better approve it with a reasonable set of conditions. If they do not, the prospect of a tit for tat battle breaking out across the Atlantic is something investors should concern themselves.

The Bush administration needs to make this case forcefully and quietly. Public statements are not needed and would probably be counterproductive. Quietly the consequences of rigid negotiating positions need to be made clear to both sides. The EU needs to show some flexibility, and GE needs to give up on some issues that are not the core of the merger.

A decision from the EU is due on Monday. If this decision is deferred, that is a sign that the quiet diplomacy has worked. If the merger is rejected, look for relations with Europe to sour and merger combinations to cool.

This is a good test of the Bush Administration's diplomatic skills. It is also a test of whether the EU is going to take a protectionist or a realistic stance in mergers. It should be interesting to watch it play out next week.

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Shmuel Protter
investmenttool.com

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