The challenge by the European Commission (EC) to the merger of the world's largest and third-largest manufacturers of large commercial aircraft, the U.S. firms Boeing and McDonnell Douglas, illustrates the growing trend of transnational regulation.

Although the U.S. Federal Trade Commission (FTC) cleared the deal in 1997, the European Commission threatened to oppose it, despite a 416-2 vote in the U.S. House of Representatives warning the Europeans against "an unwarranted and unprecedented interference in a U.S. business transaction." The EC said the merger would allow Boeing to increase its share of the world market for large commercial jet aircraft from 64 percent to 70 percent. European Union merger laws can be applied to any business transaction that "constitutes a strengthening of a dominant position," the EC said in a July 1997 statement.

The EC authorized the deal in July 1997 only after extracting concessions from Boeing to increase competition. The EC had no jurisdiction over the merger of the two U.S. aircraft makers, but it was in a position to level crippling fees on sales of Boeing aircraft to European airlines. According to the EC, European airlines are forecast to account for almost one-third of future demand for new aircraft orders until 2007, and Boeing and McDonnell Douglas are positioned to capture two-thirds of the business, in the European market.

Boeing's purchase of McDonnell Douglas has left the four-nation European consortium Airbus Industrie the lone rival to Boeing in an industry that virtually excludes new participants because of the enormous start-up costs.

In order to gain the EC's approval for the merger, Boeing had to address a number of European concerns. The EC contended that:

The merger would give Boeing enhanced opportunity to enter into long-term exclusive supply deals, similar to the 20-year arrangements Boeing had with American, Delta, and Continental airlines.

The merger would broaden Boeing's customer base from 60 percent to 84 percent, allowing it to sell its products to McDonnell Douglas clients.

Boeing's acquisition of McDonnell Douglas, the world's number two defense manufacturer and leading maker of military aircraft, would enhance Boeing's access to publicly funded research and development and intellectual property.

Boeing's acquisition of McDonnell Douglas's patent portfolio would be a further element strengthening Boeing's dominant position.

The combination of the civil, defense, and space activities of the two companies would increase Boeing's bargaining power with suppliers.

Boeing convinced the EC to declare the merger compatible with the common market after making concessions that were not demanded by the FTC:

Boeing committed to keep the Douglas Aircraft Company, the civil aircraft division of McDonnell Douglas, a separate company for 10 years, until 2007, and to supply the EC with reports on the company's performance.

Boeing committed not to link the sale of Boeing aircraft to its access to the Douglas fleet in service.

Boeing canceled its exclusive supplier contracts with American, Delta, and Continental and promised to refrain from entering into such deals until 2007.

Boeing offered its competitors nonexclusive licenses for patents arising from publicly financed research and development.

Boeing gave assurances that it would not use its relationships with suppliers to obtain preferential treatment.

Boeing agreed to provide the EC with annual reports for 10 years on its nonclassified aeronautical projects that receive public funding. The EC said the reports were needed to clarify the links between Boeing's civil and military activities.

With this package of concessions, the EC signed off on the merger, saying its competition concerns had been adequately addressed.