Oct 22 - A possible merger between Elon Musk's rocket company SpaceX and carmaker Tesla may face bigger obstacles from politics than from regulation, drawing scrutiny in Beijing and potentially igniting a battle between US President Donald Trump and the Democrats.

Musk revived speculation about a tie-up this week, calling a combination "a good idea" and confirming that committees at both companies were reviewing a potential deal, a step toward what could become the largest merger in history and create a company worth about $3.5 trillion.

But a merger would also unite one of the US government's most important aerospace and defense contractors with one of the most China-exposed major American manufacturers — a combination likely to raise questions about national security risks both in Washington and in Beijing.

Those concerns are unlikely to derail a deal, analysts said, but they would likely leave the combined company exposed to years of political wrangling and pressure from both sides of the Pacific. Tesla's China operations, they said, could become a source of leverage for Beijing in any future dispute with Washington, while a Democratic takeover of the US House of Representatives in next month's midterm elections could subject the deal to congressional investigations and political maneuvering.

Democrats immediately raised concerns about the deal's implications, signaling their intent to turn the merger into a political flashpoint ahead of the November 3 midterms.

“If Elon Musk moves forward with the merger of Tesla and SpaceX, the deal would carry real risks that antitrust enforcers across the world would scrutinize," said US Senator Cory Booker, a New Jersey Democrat who sits on both the Judiciary and Foreign Relations committees.

He added that he was prepared to conduct oversight of any deal: "When one person controls the infrastructure that governments and militaries depend on, his business decisions become national security decisions, too." Musk could seek to address concerns by limiting how closely the two companies are integrated.

The greater threat to the deal may come later, however, if a future administration takes a harder line on the relationship between Tesla and a company increasingly tied to US national security, analysts said.

"A merger agreement would involve pledges of limits to the connections between SpaceX and Tesla," said Derek Scissors, a senior fellow at the American Enterprise Institute.

"I don't think the Trump administration would enforce these limits. However, the next administration could certainly begin to scrutinize a merged entity. This may be the biggest risk to a deal - that it could get unwound in 2029." For Beijing, a merger would effectively place Tesla's sprawling Shanghai manufacturing hub under the same corporate umbrella as SpaceX, a company that has become deeply embedded in US military and national security activities through its Pentagon work and through Starlink's role in conflicts, including Ukraine.

"A formal merger would make it harder for Chinese authorities to treat Tesla as a purely commercial actor, raising risks for future factory expansions, data approvals, or market access," said Alicia Garcia-Herrero, a senior research fellow at the Brussels-based Bruegel think tank.

Tesla's reliance on production from Shanghai already gives China considerable leverage over Musk's business empire. A merger could extend that control to a broader corporate group encompassing strategically important assets such as satellite communications, launch services and military-related technologies.

The deal would also have to navigate a maze of reviews around the world as competition authorities assess its impact on industries ranging from automobiles and satellite communications to artificial intelligence and semiconductors.

Musk's close relationship with Trump would likely dispel concerns about potential US regulatory roadblocks to a transaction, analysts said, while antitrust experts see limited competition concerns because the companies operate largely in separate markets.

Outside the United States, however, foreign regulators are likely to scrutinize whether a combined company would gain an unfair advantage by integrating technologies spanning automobiles, artificial intelligence and aerospace.

Antitrust experts said authorities in markets with powerful domestic auto industries, such as China and South Korea, could examine whether Tesla's access to SpaceX technologies would give it an advantage that rivals cannot replicate, creating barriers for competitors and potentially undermining domestic manufacturers.

Regulators could respond by requiring the company to license key technologies to competitors as part of any approval, said Ioannis Kokkoris, a law professor at Queen Mary University of London.

A South Korean antitrust official told Reuters that the merger, if pursued, could require an in-depth review of its potential impact on that country's industries.

"Korean antitrust officials will be wary of the merger. They will take the merger very seriously," said Lee Hwang, a law professor at Korea University and former Korea Fair Trade Commission official.

"The stakes are very high in Korea because it regards both the automotive and aerospace sectors as strategically important industries."