WP: Editorial: China's Latest 'Threat'

[Ignatius J.]

http://www.washingtonpost.com/wp-dyn/content/article/2005/06/26/AR2005062601033.html

China's Latest 'Threat'

By Sebastian Mallaby

Post

Monday, June 27, 2005; A15

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.

mallabys@washpost.com

[Kilmer17]

Good read.

[luckydevil]

Originally posted by Kilmer17

Good read.

ditto

[Ghost of]

It's too bad the US (aside from some corporate subsidies and the like) has freely operating companies and China's are heavily tied up with state ownership.

The Chinese companies are direct arms(in most cases) of the Chinese government. Many people, especially protectionists, WISH that AMerican companies displayed the same 'loyalty.'

[Ignatius J.]

I'm unsure what your connotations are. What is bad? that the US is free? Or that china is not?

Many people do wish that the government was more involved in the economy, but as this article points out, protectiosim is often misguided.

[Ghost of]

Originally posted by Ignatius J.

I'm unsure what your connotations are. What is bad? that the US is free? Or that china is not?

Many people do wish that the government was more involved in the economy, but as this article points out, protectiosim is often misguided.

No, I'm no fan of protectionism, but it strengthens the case of the 'national security' crowd when the prospective buyers are state-owned/directed companies of a hostile foreign power of a fascist and ultra-nationalist government.

People were worried about Japan in the 80s, but Japan's government was never a concern, nor were their ultimate objectives.

It's good that the US is free, my point is that while commerce may undue the ChiCom government, it might also strengthen it a la Nazi Germany. And while China doesn't have the same desire for actual expansion, it DOES have the same desire for global power.

[Ignatius J.]

As China continues to expand militarily, I think it is important that we take our lessons from history well. The underlying economy is the root of military power. Despite China's record breaking growth rates, it remains a less capable economy than ours.

It is importnat then that we continue to strengthen our economy. Again history has lessons for us. Free enterprise is the only sure route to economic prosperity. Even if it means dealing with rogue regimes, the net sum of our intraction will ALWAYS be more beneficial to us than them because our freer economy will allow us to make better use of comparative advantage.

You are right that this deal (and the multitude of others like it) will in all likelihood increase the strength of china. On average though, deals like this wil benefit us more, and help us to continue with our prosperity.

[DjTj]

Originally posted by Ignatius J.

You are right that this deal (and the multitude of others like it) will in all likelihood increase the strength of china. On average though, deals like this wil benefit us more, and help us to continue with our prosperity.

You don't need to hedge and say things like "on average" and "deals like this"...

The deals on the table now will benefit the U.S., almost without question. The Chinese will overpay significantly for any one of these companies. Americans will pocket the profits.

Americans aren't the ones taking a risk here - we're getting straight cash. The greater uncertainty, as the article points out with the Japanese investments in Firestone and Rockefeller Center, is whether or not China will be able to capitalize on these investments.

[Ignatius J.]

the deals like this phrase is actually a generalization, so it makes the statement stronger, not weaker.

And the on average is also neccesary. If it turns out that the company has some capital that it didn't realize, then china will gain. It's just highly unlikely.

[DjTj]

Originally posted by Ignatius J.

the deals like this phrase is actually a generalization, so it makes the statement stronger, not weaker.

And the on average is also neccesary. If it turns out that the company has some capital that it didn't realize, then china will gain. It's just highly unlikely.

Alright, fine ... I just remembered that before I decided to attack your wishy-washy language, what I had actually wanted to post was:

It's actually very possible for both sides to gain. The crazy thing about business is that both sides of a deal can win, and they often do. It's almost a guarantee that the Americans will make money on these deals. If the Chinese make money too, that doesn't mean we lose - it means we both win.