Monday, June 27, 2005; Copyright The Washington Post
Some people fear the economic threat from China. Others fret about expensive oil. With the skill of an accomplished arsonist, China has now poured gas on the flames of these separate anxieties, turning two medium-size fires into a single inferno.
The arson takes the form of a bid by a largely state-owned Chinese oil company for California-based Unocal. Until Wednesday, Unocal was heading into the arms of Chevron, which had made a friendly takeover offer. But China National Offshore Oil Corp. is offering a premium for Unocal’s assets, triggering a fight over whether the federal government should block it on national security grounds.
The Unocal bid brings China one step closer to stirring up the sort of full-blown protectionist fury that confronted Japan two decades ago. Critics were already anxious about China’s global strength in low-end manufacturing, its allegedly manipulative currency policy and its piracy of U.S. intellectual property. Now they can also worry about China’s acquisition of U.S. companies. Last year a Chinese firm took over IBM’s personal computer business, and now another one is bidding for Maytag, which makes household machines including Hoovers. The Unocal bid, at $18.5 billion, would be the biggest Chinese deal so far.
Does it matter if China owns U.S. companies? Japan went on a corporate spending spree in the 1980s, and the chief victims were not Americans, as the protectionists predicted, but the Japanese themselves. The Japanese paid inflated prices for Hollywood studios and landmark New York buildings. The exiting American owners made off with a nice profit. The Japanese got burned.
The Unocal bid has triggered the same muddled complaining that attended those Japanese takeovers. The protectionists say the Chinese want to pay for Unocal with cheap loans from their taxpayers, just as Japanese corporations were once denounced for accessing cheap capital from servile banks. But this means that China’s taxpayers are offering sure profits to Unocal’s shareholders. Admittedly, it also means that Chevron’s shareholders stand to forgo a business opportunity, but then that opportunity may not have paid off. From the view of U.S. economic interests, this is a net plus.
Equally, the protectionists say that if the Unocal bid is allowed to go forward, the Chinese will use the power of corporate ownership to manipulate oil prices; worse, China could even blackmail America by withholding energy supply. This echoes old fears of Japanese semiconductor makers, which were said to be plotting sinister dominance of the memory-chip business in the 1980s. As the protectionists explained it, the Japanese plan was to destroy U.S. rivals by undercutting their prices, then later to ramp up their own prices and hold U.S. industry (including the defense industry) for ransom.
But the protectionist fears are based on a misunderstanding of markets, which are harder to corner or manipulate than people seem to understand. Japan’s assault on the memory-chip market never did produce the feared lock on this product. Instead, U.S. chipmakers prospered by moving upscale from plain memory chips to fancy microprocessors, and the supposedly oligopolistic Japanese memory-chip firms were soon challenged by South Korean rivals.
Does China’s advance on the oil market threaten American interests more acutely? It’s true that oil is a political commodity: Saudi Arabia and other big producers use their power over the oil price as a diplomatic lever. China, for its part, has a clear policy of buying up oil fields to boost its energy security. Since foreigners aren’t taking a free-market view of the oil business, it may seem naive for the United States to do so — especially when oil prices are around $60 a barrel.
Yet it’s hard to paint a plausible scenario in which Chinese control of Unocal would hurt us — despite loud exclamations to the contrary from Congress. For one thing, Unocal’s oil output accounts for a tiny fraction of U.S. consumption. The firm’s chief asset is undeveloped natural gas in Indonesia that’s going to take at least five years to develop — by which time the current tightness in the energy market will probably have dissipated because of the development of new oil fields.
But there’s a more fundamental objection to the protectionist anxiety. The protectionists worry that China will ship all of Unocal’s output home to its own industries, thus hogging scarce oil supplies and taking them “offline.” Even if this were possible, it wouldn’t matter: Unocal’s oil and gas would be meeting Chinese demand that would otherwise have to be met by Chinese purchases on world markets. In other words, China would be reducing both the supply and the demand for energy in the open market. Prices paid by American consumers wouldn’t budge.
What if there were a real oil crisis? A simulation conducted last week in Washington suggested that a couple of middling terrorist attacks in Saudi Arabia and Alaska would be enough to cause a global oil shortage, sending prices above $100 a barrel. Yet Chinese ownership of Unocal wouldn’t affect this picture. China could respond to the crisis by routing Unocal’s energy to its own industries. But again, oil is fungible, so this wouldn’t matter.
You can see why this is not the dominant view in Congress. China is, after all, a communist dictatorship, and we shouldn’t assume its intentions are friendly. Equally, the American oil addiction is a genuine problem, and we should strive to break our dependence on potentially unstable suppliers such as Saudi Arabia. But although the Unocal bid seems to yoke these twin problems together, the appearance is deceptive. If you look for a convincing reason to block China’s bid for Unocal, you’re not going to find one.