Liam Fox: global interests point to a BAE and EADS merger For the UK to retain a national defence industry, BAE must diversify and expand into new markets. Falling defence budgets in the heavily indebted West means that consolidation in the industry is inevitable. The status quo is not a viable option for the longer term, whatever sentiment might wish. Of course, a merger with EADS isn't the only option. Like many people, my instinctive preference would be for an American partner. Unfortunately there is not such an offer on the table. An alternative tie-up with a US company would safeguard access to the American marketplace and technologies. However, it might bring its own difficulties, too. A deal involving a US alternative, such as Boeing, would more likely be a simple takeover that would risk the distinctive British nature of BAE. So I believe the EADS merger should be assessed objectively. BAE's military business is well complemented by EADS' strength in civil aerospace. With hindsight, many have seen BAE's decision in 2006 to sell their stake in Airbus as a strategic error. Re-establishing this link has a strong commercial logic. Much of the press comment I have read on the merger assumes that EADS would benefit the most, perhaps even exclusively, from a merger. It is true they have much to gain. BAE is a world leader in the defence business, with enviable access to the US market and strong export relationships with the Middle East. But BAE also has much to gain. I see three principal industrial advantages. First, association with Airbus opens up new possibilities in the civil air and military freight sectors. It would help safeguard jobs across the country and potentially attract further investment. Second, through Astrium, BAE could expand the UK's involvement in space. This again opens up potential new areas for investment in high-tech industries. Third, through Eurocopter, BAE would be part of the second largest helicopter manufacturer in the world. For both companies, alliance strengthens them in competing with the enormous resources available to the major US players, such as Boeing and Lockheed Martin, and, frankly, BAE would benefit too from EADS' greater financial strength and potential for funding new investment. One complicating factor would be the future of Agusta Westland, the politics of which are not lost on Conservative politicians. This operation has always been at the margins for Finmeccanica, the Italian owners. It should be entirely possible to include this in any merged company in order to preserve not only the jobs associated with it but to keep the skills in the UK which are currently used to support projects such as Lynx, Future Lynx, Merlin and Apache. We should be robust in tackling any competition issues raised by the European Union on this subject. Of course, there are risks to a merger. The most significant is undue political influence from France and Germany. BAE are aware of this risk, as are EADS - indeed, it is one of the key drivers for them to use the merger to reduce this unwelcome interference. A merger should only be agreed if it can be curtailed. Without clear mechanisms to preclude foreign interference, the British Government should not support the proposals. There must also be a national security agreement to enable each country involved to protect assets of national importance, such as the nuclear deterrent for both us and the French. And we must protect the UK's intellectual property rights - vital to the US, given our unique relationship. It should be perfectly possible to do so: such an agreement has been operating successfully in the complex weapons manufacturer MBDA. Clearly, BAE and EADS must handle the proposed merger carefully - as must our Government. There are those in the US who may seek to use the merger to reverse BAE's recent successes there. It is important, therefore, that handling in Washington is sensitive and discreet with the issue being seen from the perspective of consolidation in a declining market rather than one of strategic choices and preferences. Today, the UK has one of the best defence companies in the world in BAE but we must be frank that, unless it finds a suitable strategic partner with both cash and a good business fit, the task of the management would be one of slow, managed decline rather than forming the wealth-creating and technology-stimulating company that it can be. An alliance of BAE and EADS does not mean that we are marching further towards a common European defence policy - there are many of us who would resist this by every means possible - but without a merger, we risk losing our influence and the great benefits that we have in BAE. Currently the EADS proposal is the only viable offer on the table. If we have the necessary guarantees - transparent and enforceable - on governance, intellectual property and national security then we may have the makings of a deal that is not just acceptable but offers great opportunities not only for BAE but also for all the small subcontractors whose future would be secured. We do not know what, if any, other deals may land on the table but we should not underestimate the potential that a BAE-EADS tie-up might produce. It is time for rational appraisal not knee-jerk reactions. If it is done well, then it might certainly be in our interest. Dr Liam Fox is MP for North Somerset and is a former Secretary of State for Defence