June 26, 2005

Chinese Strength, U.S. Weakness

If China's attempt to buy an American oil company does nothing else, it should, at long last, force the United States to decide how it plans to protect its economy, husband its resources and grow in a world where it is no longer the only economic powerhouse.

With China on a buying binge for raw materials to feed its ever-expanding economy, it was inevitable that it would eventually go beyond the more modest corporate purchases it has already begun and make a grab for something the United States really cares about. Last week, history's biggest Communist country made the ultimate capitalist play: an $18.5 billion all-cash takeover bid by the state-controlled China National Offshore Oil Corporation for the American oil company Unocal.

The bid landed with the impact of an unexploded missile in Washington, where anti-China sentiment has been running high. From both sides of the aisle, members of Congress sounded the alarm that China was threatening to gobble up world energy resources. There is politics in that: Congress has an election next year and gasoline prices are already high. But whatever happens to the deal, Americans should be glad China reminded them that it is time to examine this country's economic strategy.

China's New Power

The chairman and chief executive of the Chinese company, Fu Chengyu, insisted that American national security was not an issue and called the unsolicited bid friendly. "This transaction is purely a commercial transaction," he told reporters. That's a bit disingenuous considering the money he is using is mostly from the Chinese government and his company owes its first allegiance to Beijing authorities, not world markets. And it raises the interesting question of whether the China National Offshore Oil Corporation can have it both ways: playing by Chinese rules at home while taking advantage of American rules abroad to buy an American business. After all, this is a government-owned company operating in an authoritarian state that limits the ability of foreign companies to take their profits out of China.

"Does anybody honestly believe that the Chinese would ever let an American company take over a Chinese company?" asked Senator Charles Schumer, Democrat of New York. Actually, they have, although on a scale that hardly raised national security issues. Last year, Anheuser-Busch won a takeover battle for the Harbin Brewery Group.

The CNOOC bid is of a much higher order and deserves examination above and beyond the regulatory scrutiny normally given to corporate mergers and acquisitions. But Mr. Schumer's question ignores the way American companies have been buying up stakes in Chinese companies. Bank of America just agreed to pay $2.5 billion for a 9 percent stake in the state-run China Construction Bank. According to The Wall Street Journal, even Chevron, the rival bidder for Unocal, has a stake in a chemical plant in China and is exploring for oil in China.

So in some ways, the opposition to the CNOOC bid is the latest installment in the anti-China fervor already gripping

Washington. There are a half-dozen proposals in Congress for across-the-board tariffs against Chinese imports, spurred in part by American manufacturers who complain that China's currency, the yuan, is undervalued, which results in cheaper Chinese goods coming into America and hurting American jobs. This comes on top of moves by the administration - urged on by Congress and a huge trade deficit - to forcibly stem the importing of Chinese textiles this year.

Beating up on the Chinese is fine for sound bites to convince voters that politicians care. But the real problem has less to do with China's current strength than America's current weakness. A far more rational approach to China's economic ascendancy would be to consider what steps the United States should be taking to protect itself and to grow.

America's Energy Policies

The national security of the United States is already at risk because the nation depends on imported oil for nearly 60 percent of its daily needs. That will only grow as demand increases and domestic supplies dwindle. Much of that oil comes from volatile countries in the Persian Gulf region, and the American money flowing there does nothing to encourage either more-balanced economic development or democracy. The rest comes from other parts of the world - often the most unstable parts. In any case, it all contributes to America's monstrous trade deficit and worries about what would happen to the economy if some international crisis disrupted the supply.

The antidotes are simple. Americans need to use far less oil than they do now, which means requiring more fuel-efficient vehicles and finding an alternative to refined oil to power cars and trucks.

Beijing's desire for Unocal is fueled in part by the company's natural gas reserves, most of which are in Asia. The United States cannot claim much of a national security threat from that. North American gas supplies are still fairly robust if you count Canada, and the United States can always fall back on coal to keep the lights on. Coal now provides more than half of the country's electricity anyway.

But none of that should lead to complacency. The United States needs open, accessible markets. And no fuel source is free from the effects of rising demand around the world. Natural gas prices are rising rapidly, and Americans need more-efficient power plants and more-efficient appliances to reduce demand, just as we need to develop more-efficient transportation to reduce dependency on oil.

Trade, Currencies and Debt

Congress's fixation with devaluing China's yuan to help cut American job losses is another example of blaming China for what the United States is not doing. There is no reason to think that revaluing the yuan would lead to American job growth. Indeed, Alan Greenspan said Thursday that he saw no credible evidence that a stronger yuan would increase American manufacturing activity and jobs.

Instead of bashing China, Congress and the Bush administration should be putting money into bolstering retraining programs to help American workers whose jobs migrate overseas. American school systems, American parents and American students are going to have to focus on the fact that young people with mediocre educations are not going to be able to compete with energetic, educated young people in places like China.

The United States also cannot blame the Chinese government for the weak position that its own policies have created. The Bush administration's damaging practice of combining profligate deficit spending with huge tax cuts for the rich feeds the need for Washington to borrow hundreds of billions of dollars a year just to keep things going.

China has become a major buyer of the Treasury bonds that finance that debt, and because of that, the American economy depends more and more on the willingness of our Chinese underwriters to buy and hold our Treasuries. A sudden decision by China to invest elsewhere would very likely have a far more devastating effect on the country than a withdrawal of Unocal's resources.

But the solution is not to blame China. It is to institute more sensible economic policies, including revoking the unnecessary gifts that President Bush has given to very wealthy Americans at tax time.

Despite Mr. Fu's claim about China's friendly bid, it is a contested one, coming two months after Unocal agreed to be sold to Chevron for $16.4 billion. There are many shots that remain to be fired in the trench warfare of this corporate takeover battle. China may or may not come out on top. But even if China loses this skirmish, it is part of a longer struggle, and those charged with leading America would do well to spend this time strengthening America from within. No matter how big and powerful China becomes, it is no match for the United States when this country is at its best.