By default, Subversion tends to regard UTF-16 files as binary. It assigns them a MIME type of application/octet-stream. As a result, when an attempt is made to merge a change from a branched version of the file, there is always a conflict that must be hand-edited.
However, there is a solution. By giving the UTF-16 files a correct MIME type, SVN is able to perform merges just like a basic text file.
