Trade war looms as Brussels vetos Boeing merger

The prospect of a trade war between the US and Europe increased sharply yesterday after the European Commission indicated it would block the planned $14bn (pounds 8.3bn) merger between Boeing and McDonnell Douglas on competition grounds.

Experts from the committee on mergers which advises Karel Van Miert, Competition Commissioner, are understood to have unanimously rejected as insufficient concessions offered by Boeing on Monday, which were intended to smooth the deal's regulatory passage.

The decision emerged just three days after the US regulator, the Federal Trade Commission, gave the merger its approval without conditions. The FTC argued that McDonnell Douglas had already effectively ended competitive involvement in the international airline market, now dominated by Boeing and Airbus, the European consortium.

Boeing is understood to have offered to remove the controversial clause in recently signed exclusive contracts with three US airlines, American, Continental and Delta, which gave the Seattle giant the sole right to supply them for 20 years. The clause, which the FTC had described as "potentially troubling," formed one of three main concerns raised by Mr Van Miert.

The commissioner is likely to argue that removing the wording of the contract would simply be a sop to Airbus. "It wouldn't mean anything for Airbus because the three airlines would simply carry on buying exclusively from Boeing," said one analyst yesterday. "But for them it's an economic nonsense not to do that."

The EC also worried about the sheer scale of the merged company, which would have sales of $48bn worldwide and more than two-thirds of the global airline market. Another serious worry was that Boeing would receive indirect state aid from McDonnell's defence contracts. The spill-over between US- government defence programmes and commercial activities would be virtually impossible to police.

An EC official would not give details of the advisory panel's decision before the official ruling on the deal is made public on 23 July. But the source said: "If adequate remedies are not offered the proposed concentration should be prohibited." Mr Van Miert has said he has the power to fine the two companies up to $5bn.

Boeing last night insisted it had not received word of any final ruling and said discussions would continue. "We haven't been notified. If what is being said is true we are obviously disappointed at the decision. But it is only a draft decision and we understand the door is still open."

Industry experts warned that if the EC did try to block the merger it could damage existing Airbus supply deals with US carriers, including a recent order for a further 50 planes from North West Airlines. United Airlines, the world's largest carrier, is another big Airbus customer while US Airways, the former USAir, is also considering a huge order.

Chris Avery, aerospace analyst with the French banking group Paribas, predicted the row would only be resolved by intergovernmental talks. "Don't underestimate the depth of official support for Boeing in the US. If the EU throws out the deal because the company hasn't been sufficiently conciliatory there is the real prospect of a trade war."

In a move which enraged the US, Mr Van Miert asserted his role in vetting the merger despite the fact that both the companies are US based. He claimed the power on the grounds that Boeing-McDonnell would have such a big share of the European market.