Will Trump let the EU kill a US manufacturing deal?

While AT&T’s proposed $85 billion acquisition of TimeWarner is the merger most often in the news these days — in no small part thanks to President-elect Donald Trump’s tweet denigrating it — the president-elect’s administration will soon find itself needing to decide on an even more important merger in 2017, one that could prove critical to the future of one of his top concerns: America’s manufacturing base.

Dow Chemical and Dupont, each with a market cap around $65 billion, agreed to a merger in 2015, and they are awaiting regulatory approval. The two companies together employ about 100,000 workers, roughly half of whom are in the United States. After the merger, the companies intend to divide the new entity into three separately traded entities; one will focus on agricultural markets, the second on material science and the third will concentrate on various specialty products.

The companies’ management has concluded — after prodding from major shareholders — that such a reorganization is the best way to thrive in a fiercely competitive global marketplace.

The U.S. Justice Department is expected to give its approval sometime in 2017, but that may not be sufficient, as the European Commission (EC), the executive branch of the European Union, has the merger in its crosshairs.

{mosads}Even though Dow and Dupont are American businesses that sell only a relatively small proportion of their products in Europe, the EC can kill the merger.

It’s a disturbing possibility to consider but not unprecedented: The EC blocked a merger between General Electric and Honeywell in 2001, two other important U.S. industrial firms, and the action produced a firestorm of criticism. Charles James, who headed the Antitrust Division of the Justice Department at the time, remarked that “the analysis employed by the EC is antithetical to the goals of antitrust law enforcement.”

Europeans have already adopted what many see as an antagonistic stance towards the merger, with the EC demanding more information from the two companies and delaying its decision multiple times, most recently kicking it into 2017.

Europe’s regulators profess that they are more concerned about the accumulation of market power than is the U.S., even though in a global economy cornering a market — especially one this large — is exceedingly difficult, if not impossible.

The reality, however, is that the EC has a habit of protecting competitors from competition, rather than protecting consumers, who are the focus of U.S. law. Established European businesses would rather not have a strengthened competitor competing against them and driving down profit margins, so they look to the regulators to protect them. U.S. companies sometimes try to do the same, of course, but our government tends not to be so pliant.

The big question now is how Trump will view Europe’s attempts to prevent a merger that can be honestly painted as one that would protect U.S. manufacturing jobs and keep this country competitive in the face of growing threats from China and Europe itself. Trump has no legal power to stop the European Commission from rejecting the Dow-Dupont deal, but he has a bully pulpit, and he could easily signal that he would look on such an action with strong disfavor.

With one tweet, he could indicate that an EU rejection is an unwanted encroachment on U.S. sovereignty that will have serious repercussions.

The president-elect should be concerned, as the global chemicals industry is rapidly consolidating. Sinopec, currently the third-largest chemical company in the world, has announced it will merge with another Chinese chemical firm, ChemChina, which, in turn, is in the process of buying Syngenta, based in Switzerland, the world’s 30th-largest chemical company.

The resulting combination will challenge BASF, based in Germany, as the largest in the industry in terms of sales. Another German company, Bayer, which ranks 24th in the world, is buying out St. Louis-based Monsanto, a 115-year-old agricultural chemical company with 21,000 employees.

Only four U.S. companies remain among the 20 largest chemical companies in the world, according to Chemical & Engineering News. If the Dow-Dupont deal fails go through, a likely result would for the two U.S. companies to sell off their parts piecemeal to European and Asian buyers. The resulting benefits to Europe from such an outcome may be what the EC’s regulators have in mind if they reject the U.S. deal, since the chemical sector is one of the few where Europe is competitive. Nine of the top 20 chemical concerns hail from the EU.

With the EU at risk of coming apart at the seams and facing more pressing issues with regards to trade, financial markets, and common defense — each of which it could use help from the U.S. — it seems unlikely that Europe would pick a fight with the new president if he lays down a marker on the Dupont-Dow deal.

It would be a shame if raw politics interfered with a decision that should be made by a rational economic analysis, but it’s probably fair to ask whether that has ever been the case with regard to EU antitrust.

Ike Brannon is president of Capital Policy Analytics, a consulting firm in Washington.

The views expressed by contributors are their own and not the views of The Hill.