From the Washington Post:



While I tend to agree with China on this one, after this statement I feel that the US has little choice but to block this now. This type of rhetoric from the US would be met with a similar Chinese response.

Questions for Debate: Should the President/Congress block China's bid for Unocal Oil? Why or why not? Is this a national security issue?

So what? Is it China that enshrines the doctrine of unrestricted free trade as the route to prosperity, or is it the United States that does that? Is China the backwards command ecomony that needs a dose of real-world capitalism, or is that America? (Actually, it's neither. Like everyone else, the USA is only interested in playing if it knows it will win.)

Questions for Debate: Should the President/Congress block China's bid for Unocal Oil? Why or why not? Is this a national security issue?

No, he shouldn't, because the practicalities of the Unocal business are that most of their dealings are in the far east anyway - they don't sell very much oil inside the USA, and so the strategic need to build oil reserves, and therefore American national security, is largely unaffected by Unocal whether they are owned in Beijing, Brussels, Birmingham or Betegeuse.

Plus, American businesses - like all others in capitalism since Ford vs Dodge and similar judgements - are not run for the benefit of the American people, for the strategic advantage of the American government, but solely for the maximum financial benefit of the owners of the stock. If the Chinese are offering the best price, why should anyone stop them paying the stockholder the best price? Isn't allowing the US government to restrict the rights of private individuals to enjoy and dispose of their own property however they see fit *gasp* unconstitutional?

But as well as the practical point, there is one of principle. America has encouraged China to engage in free trade, and with it's dominance at the World Bank and International Monetary Fund (two UN institutions that American isolationists have very little to say about because they largely follow an American agenda), it encourages pretty much everywhere else to do so too. To date, this has been code for "open up your markets to our products and businesses".

Almost everywhere on the planet has done or is doing this, except perhaps North Korea (and look how much good it's done them). Now it is getting to the point where China can begin to compete with America on America's own terms, as exemplified by the mooted Unocal deal. The thing about competition is that sometimes you're going to lose, especially if you're the other guy is better at is than you are.

But this is nothing new. Does anyone else remember the 90s paranoia that America was going to become an offshore trading block owned and run by Japan? Or the 1980s fashion for British conglomerates to buy up US engineering firms (we owned Smith & Wesson for a long time)? Did either of these things happen to the extent that America's strategic interests were affected, let alone threatened? Is America any worse off today beacuse of it?

America seems to have a political and economic need to have a bad guy out there somewhere, and this is just another example of it. I think it's a way of manifesting the idea that when you're number 1, sooner or later you can only go down the rankings.

Competition, real or inflated by paranoia, is the best way of keeping one sharp enough to stay on top as long as possible. The best way to get ossified and lose your edge is to protect America businesses from competition by trade embargos and tariffs and specious national security arguments to prevent deals like this from going through. Just like Britain used to do when it was number one and America was the up-and-coming economic powerhouse. (But then when did anyone ever learn anything from history?)

I didn't really mind much when a Chinese firm took over IBM's PC business. I'll have to admit when I first heard of the bid, I was a tad alarmed. The reporting on it made it sound like a potential security threat. Closer inspection reveals otherwise.

First, while the US is worried about China securing additional dedicated energy sources, that doesn't seem to be the case here. Robert Samuelson from Newsweek notes:

Second, we aren't losing much domestic production in this transaction and apparently CNOOC has agreed to keep what U.S. crude that is obtained in the country (same article):


I do think we have reason to worry about China's overall energy policy, just not in this case. It seems unlikely that CNOOC will win anyways.

Doc

I'm not sure I understand your questions or the point that you are trying to make with them. All trade has restrictions, whether it is environmental, labor laws, or tariffs. America is a hypocrite for not wanting China to play it's game of getting the best deal out of trade negotiations is what I think you are getting at. I'll address that below.


Unocal is 9th largest gas and oil producer in the US.

You are correct that American businesses are not run for the benefit of the American people or it's government, but for profits. Can you say the same for China though? No. You can't. A Chinese company buy is a buy for the Chinese government because they are one in the same. The Chinese government is equivalent to a monopoly, and restricting monopolies is a way the government protects society from economic abuses and is quite Constitutional.


China does not compete on America's terms. China is not practising free trade. By pegging their currency to the dollar, they keep the value artificially low so that their citizens are essentially enslaved to the rest of world. This is the problem.

You bring up very good examples about fears of Japan and Britain. There is a difference in those situations though. China is a Communist Dictatorship that is obviously skewing the playing field. Japan and the UK are and were free societies that were not only practising free trade, but fair trade as well. Were it not for this, I would be in complete agreement with you. Let the Chinese overpay and reap the rewards.



I agree. Competition is a good thing. Giving away your advantage and allowing yourself to bullied for short term gains is another way to drop from the top too. Until China stops pegging their currency and manipulating the markets with the massive might of their entire government, the US should do what every good nation does...act in it's own self interest.

Questions for Debate: Should the President/Congress block China's bid for Unocal Oil? Why or why not? Is this a national security issue?
As far as I'm concerned the market will take care of itself.

I understand that Chevron is getting in on this action, and China was apparently sincerely surprised that its actions caused this much of a stir. The Chinese government is not known for its PR acumen, so these ham-handed attempts to join the international business community may appear despotic. In my opinion, the Chinese are attempting to assert their legitimacy as a world economic power, something we've all been expecting for twenty years now. I think we'll see more purchases of erstwhile Western brands in the future.

The president can do as he likes, but China has all the cards here. China currently holds about 14% of US debt in securities -- 17% if you include Taiwan (Source). And the U.S. can only get either it's free trade rhetoric or its bizarre tariff policies thrown back in its face if it makes any objections. The only way around this situation that I can see is diplomatically, and this administration has shown that it is a diplomatic disaster area.

National Security? Eh. It's only a national security problem if this administration makes it one. I would love to see the U.S. actually pursue alternative energy policies that free us from dependence on oil -- it's the only thing that makes any long-term sense.

Yes. It is a company that manages what is inarguably a strategic resource. It is most certainly therefore a national security issue.

JLMA - I was going to address each of your rebuttals in turn and try to re-rebut them (if you get my drift), but we've both been overtaken by events. Your opposition to the Unocal deal was in large part (but not totally) predicated on the way the Riminbi/Yuan was pegged to the dollar. Now that the exhcange mechanism has changed, has your opposition softened?

Softened? Yes. Removed? No. I honestly believe that Unocal was a reason for the Chinese adjustment.

The Chinese government is still a Communist dictatorship that would have control over Unocal, and may not act in the best interest of the business but in the best interest of China. China is a more fair trading partner than before, but a 2% adjustment to their currency still does not level the playing field. If allowed to flow freely, anywhere from 25-40% currency adjustment would occur so there is still a long way to go. Feel free to re-rebut!

Hang on a minute - if the sale goes through, the communist dictatorship that is the Chinese government (no argument there) would be the sole shareholder.

What business on earth, capitalist or not, puts the interests of "the business" ahead of the interests of "the shareholders"? None in America - not since Ford vs Dodge anyway. The interests of the shareholders ARE the interests of the business - isn't that the point of buying stocks and shares?

And, going back to your previous post, the Chinese government is a monopoly, for sure - in China. You yourself said that Unocal is the 9th biggest oil & gas producer in the USA, meaning there are 8 larger ones, so the American consumer is rather less risk from Chinese ownership of a middle ranking oil firm than it is from lots of domestic businesses with rather larger market share - e.g. Clearchannel, Boeing, NewsCorp, MicroSoft, Wal-Mart.

Or is your concern for Chinese consumers, in which case, does the US Constitution now extend to the protection of the interests of foreigners? I'm sure there are some Asian guys down in Cuba who'd be interested to know if it does.

So I don't see how the Unocal deal can be sensibly opposed on monopoly grounds.

And surely, if you're so convinced that the dead hand of state control cannot compete in the long run with vibrant shiny capitalism, then the Chinese will learn that the hard way by trying to compete with their betters? State subsidies may make them cheap in the short term, but they won't adapt to market conditions, and they'll die.

Maybe your concern is more that the free market cannot compete with state control - that state control can outthink and outlast the free market. In which case, surely Chinese state ownership will be rather better for Unocal than their current situation?

I'm sorry, but it still feels to me like the core of your objections (and most other people's) is that the Chinese mustn't be allowed to win because if they do, it means that their model of state-owned capitalism might turn out to be functionally better than the USA model. Which comes back to not liking it when you lose a game you've got used to winning.

Believe me, I know about that - much of post-war British history has been the same story, getting used to the idea that we're not top dog any more. Not liking it and trying to change the rules doesn't help. Coming to terms with it and learning to play by the new rules is the only sensible way not to live in the past (to the extent the Brits have managed to do that at all!).

As is usually the case when discussing the oil industry, there seems to be a misperception here of what Unocal is. Most oil companies are not oil producers anymore, they are refiners and distributors. In short, they don't own much oil, they just process it. From Unocal's website (under 'Who We Are'):



Compare these to OPEC's output ceiling of 25 million bpd, and Saudi Arabia's net proved reserves of 260 billion bbls, and you can see that Unocal's oil production and proven reserves are miniscule. This leaves refining and distribution. It's not like China can take the refineries away, and distribution is already mainly to the Far East. So, I really don't see what the security threat would be at all. Exactly how would China owning these assets create a security threat? I don't see it....




You mean just like the US would be doing if they blocked the sale? Not sure what your point here is--CNOOC is offering $2 billion more than Chevron. Therefore, it is definitely in the shareholder's interest to take the offer from them, isn't it?



That's just it...they don't own or manage the resource much at all. They're just middlemen in the process. Other companies have control over the resource. I guess one of the unaswered questions is whether the politicians weighing in on this are aware of the distinction, but manipulating the situation for political reasons, or completely ignorant of what it is they're talking about. Neither one is really a pretty picture, is it?

Julian, while I appreciate the Freudian analysis of my American psyche, very little of the many words that you have tried to put into my mouth are an accurate description of my grounds for blocking this buy.

Point taken on China being the owner of the business, but businesses are to make a profit correct? Would Unocal act in the interest of profit or the overall Chinese economy if China purchased it? If there is a shortage in oil or refining capacity and the US offers more money for the energy, would China not get the sale first? Were Microsoft, Walmart, or Boeing to succumb to this sort of collusion, there would be consequences. Once Unocal is bought by China, the manipulation of markets cannot be stopped. True monopoly or not, the critically important energy market will be subject to Chinese manipulation if the US allows this buy. The same applies to the size of the reserves as well Hobbes. Allowing any capacity or reserves to be subject to Chinese manipulation is dangerous.

The bottom line is that China still manipulates its currency. The US has every right to block, sanction, or tariff the Chinese until that market manipulation is removed. China is also a dictatorship that threatens to expand through military force. Allowing them control over an asset as important as energy would be both short-sighted and naïve of the US.

Pragmatism must enter in at some point. If a Chinese person were to by a local 7-11, is that cause for national concern? It provides some control over capacity and reserves, albeit completely insignificant in national terms. Should the US government step in and block such a sale? Probably not. So, the question then, at what point does it become a concern? I'm not sure. However, given the figures I have shown previously, I think you will find it quite difficult to demonstrate that this purchase gives China any capability to manipulate the market. There are probably single sites in Saudi Arabia that exceed Unocal's entire global production capacity and reserves. This is not about control over the resource at all--Unocal doesn't have enough of that to matter.

Where it does become more important is in refining/distribution capacity. However, those assets are not transferable, and must compete for the resource just like everyone else. I fail to see where this is an issue, either. Currently, these refineries are locked up contractually with Far East distributors already. So, there's nothing there to lose. If refining capacity is a national security issue...then why on earth aren't we building more refineries?

You have definitely put the importance into perspective Hobbes. My question is should the US just sit back and allow another country to manipulate it's currency so that an artificial trade deficit occurs? If the Chinese government is going to manipulate it's dealings with the US by putting up artifical barriers, why can't the US do the same?

Actually I feel there is a piece of this picture regarding this sale that hasn't been mentioned or brought to the attention of this debate. Yes sure America's energy security is of importance to us all..but I feel we must also consider Asia's energy security too and how it all relates.

I don't personally have any opposition to the sale based on any economic reasoning..currency ties, monopolies, etc.. I doubt CFIUS will find anything in this sale worth considering as a national security issue ..but I do think this could in fact set the stage for some concerns on security...just not directly to our nation.

It is interesting to note where the oil reserves and facilities owned by Unocal are located..mostly in the Pacific of course. It should also be noted that China and her neighbors have been less than friendly with one another in regards to territorial claims...some of which have recently resurfaced. All of which I feel are resource based..particulary oil based.

The US has been for some time now one of the stabilizing factors is Asia..between China and Taiwan, China and Japan, India and China, India and Pakistan, North Korea and South Korea. I think we can't look at this issue and truly remove ourselves and deny that we could face a higher risk to our security because it will all be taking place in Asia. I think the very nature of our involvement and role in this region of the world demands for us to take not only an active role but we must acknowledge this is not something we are only concerned with because of our own nation's energy security.

Do I think this is reason enough to stop the sale..no as I do believe it is the inevitable but we should be readying ourselves for it.

I also don't find the method of exclusion one that will better provide us energy security in Asia either. We can't just keep them away from the means in which to provide for their people..that will only make them more desperate which will lead to more insecurity for us all.

I have to admit tho..since this bid has been announced it seems like China has been trying everything possible to break the deal and give legitimacy to those in opposition of it.

For example the nuclear warning from the top Chinese General..huh?

Then they got all schmoozey with Mugabe (Zimbabwe) after the ..hmmm..I am unsure of the right word to use here but I will say more progressive governments on the UNSC forced the UN report on Zimbabwe to be heard and officially discussed. So what does China do in response to hearing that even the UN's SG is willing to acknowledge what is happening is Zimbabwe is "catastrophic injustice"...China offers Mugabe a nice little holiday from all his backbreaking work of slaughtering the poor and apparently more money so he can get on with his little campaign. It makes even me wish that they will give the CNOOC deal a hard time.

This recent issue with Zimbabwe really bothers me and I think this is a new trend we are likely to see more of in regards to China and her needs for energy security. When you have a government that has no qualms in repressing their own people it is highly unlikely they will question any other's and find any opposition to doing with business with guys like Mugabe. Just as the West has finally began to realize her mistakes and clean up her messes we now have China to contend with.

A very good question, which I do think gets at the heart of what the debate is really about at the level of those actual forming policy. It's not really about national security at all...its leverage to try and change other policy. I am of two minds on this. My first instinct is that all such barriers established by other countries eventually backfire, in that they create market inefficiences. Any benefit China derives from their currency manipulation has a cost. That cost will eventually cause the barrier to be removed. Further, it will create increased desire for efficiencies on our part, as companies here seek to get access to the China market regardless of this barrier, making our companies even more competetive once that barrier is removed. Essentially, my belief is that market forces eventually triumph, and those erecting artificial barriers eventually suffer because of them.

However, I also see where such a lassez-faire outlook probably isn't politically palatable, and also where encouraging the removal of such barriers is beneficial. So, I don't have a problem with attempts to move the process along a little faster. This is how international diplomacy and foreign policy works...you use the tools you have available to try and achieve the ends you see as desirable.

I would like to address bucket's assertion, as I think it has merit. Just as we view access to oil as strategically imperative...so does China. Restrict their access to it too much, and you'll degrade the very security you might be trying to create. World Wars have started over this very issue, in exactly this region.

I realize that I am committing topic drift, but I'd like to point out that currency manipulation is a two-edged sword. Right now there's a train of ships stretching across the Pacific, carrying huge quantities of Chinese products that the Chinese have worked very hard to produce for us. All their hard work goes to provide our consumers with better, cheaper goods -- and their government is subsidizing our consumers! Even crazier, we're complaining about it!

Remember, artificially holding a currency down is the same thing as artificially inflating the value of another country's currency. That makes the other country, in effect, richer than it "deserves" to be. The USA loses on exports from producers in this deal, but gains on imports for consumers. The net effect is zero. But since the producers (business) have such control over the hearts and minds of the dumb American citizens (and venal American politicians), we have decided that the cost to business is more important than the exactly equal benefit to consumers.

What a crazy country!

CNOOC withdraws Unocal bid



Well, it looks like the political noise generated in the USA over this proposed deal has put off CNOOC.*

*For now - do some reading on the wily manouvring of the Chinese in the sale/no sale/sale of British carmaker Rover, and maybe this is not the end of the story just yet.

Whether the national security argument was the deciding factor remains to be seen, but it now looks like the lower bid from Chevron (a good all-American concern) will be the one that clincehs the deal, so everyone's happy. (Except the Chinese. And Unocal stockholders?)