Free-Trade Firefight
A Chinese bid for American oil giant Unocal has Congress baring its protectionist fangs
Trade fury. There's no better term for the atmosphere on Capitol Hill these days. It's bipartisan, it's increasing in ardor, and it reached a frenzy last month when the House of Representatives overwhelmingly passed two measures aimed at slowing or blocking the purchase of an American oil company by the state-run Chinese National Offshore Oil Company. Ironically, the Chinese Communist Party responded last week by lecturing Congress on the value of free markets.
The current battle rages over an audacious $18.5 billion cash bid for Unocal, the ninth-largest U.S. oil company but one with rich assets in Asia. Unocal has previously accepted a $16.6 billion offer from Chevron, but shareholders will not vote on the deal until next month.
Other bills are in the works to toughen trade enforcement sanctions against China and to punish it for what some view as deliberate manipulation of its currency to gain an unfair trade advantage.
Essentially, the United States and its politicians are learning that globalization is not pain free. "Many politicians fully realize the importance of free trade to America's long-term prosperity," says Albert Keidel, a former Treasury official now with the Carnegie Endowment for International Peace. "But they have constituencies and need to balance long-term well being with the short-term pain of adjustment."
In a letter to Congress explaining CNOOC's bid, Chairman Fu Chengyu pointed out that because 70 percent of Unocal's oil and gas reserves are close to Asian markets where CNOOC operates, it "fits our business well and offers value to our shareholders." Fu earned his master's degree in petroleum engineering at the University of Southern California, just a few miles from Unocal's El Segundo headquarters.
Growing worries over globalization and the effects of free trade on American workers also threaten to scuttle the Central American Free Trade Agreement, a long-planned economic compact between the United States and six small nations in Central America and the Caribbean. "We're opening up a market with a very low-wage economy that has no tradition of worker protections. The consequence will be another exodus of American jobs," says Alabama Democratic Rep. Artur Davis. He and most party colleagues plan to vote against the trade pact, potentially dooming it.
With unease among voters about further trade liberalization--especially in states dependent on manufacturing and agriculture--as well as anger about American jobs moving to China and India, "politicians who don't appear to be vigilant toward China's rise will be much more vulnerable to being thrown out of office by competitors who play on people's fears about China," says Carnegie's Keidel. Congressional Democrats also think they finally see a chink in the Republican armor, says Claude Barfield, a former consultant to the U.S. Trade Representative, now with the American Enterprise Institute: "They sense they've got the Republicans on the defensive on this issue, and they'd love to hand Bush a defeat on CAFTA."
Small potatoes. The heated rhetoric of CAFTA's opponents belies the size of the trade pact: The combined economies of the other six signatories to the pact is less than one one-hundredth the size of the U.S. economy. Says Barfield, "It will be virtually impossible for economists to measure the effects of this agreement on the U.S. economy."
Not so when it comes to China. At its current pace of 9 percent or so annual growth, the world's seventh-largest economy is rapidly scaling the ladder of economic heavies. China is already America's third-largest trading partner and ran a $161.9 billion trade surplus with the United States last year.
When China invests solely in U.S. treasury securities--it now holds $230 billion of U.S. government debt, second only to Japan--few seem to mind. But now growing Chinese firms are flexing their muscles: This spring, Chinese computer maker Lenovo Group bought IBM's personal-computer unit for $1.75 billion, and Haier Group, the largest appliance maker in China, has a $1.28 billion bid pending for Maytag.
China watcher Donald Straszheim of Straszheim Global Advisors says Chinese firms are attempting to buy "reach," recognizable brands with existing distribution networks and customer bases. "I see much more of it coming," he says.
Acquisitions of onetime iconic brands set politicians' nerves on edge and aggravate existing unease about the Chinese currency, the country's domination of the global textile industry, and Beijing's lax enforcement of intellectual-property laws.
But it is CNOOC's bid that tipped the scales. At a time of $60-a-barrel oil and with China seeking deals with major U.S. suppliers Canada and Venezuela, "now is not the time to sell a refinery to a Communist-controlled country," says Michigan Democratic Rep. Carolyn Kilpatrick. She authored the bill to block the Treasury Department from reviewing the deal.
Over in the Senate, New York Democrat Chuck Schumer asks, "Does anybody honestly believe that the Chinese would ever let an American company take over a Chinese company?"
Schumer may not like the answer. Last year Anheuser-Busch bought Harbin Brewery Group, one of China's largest and oldest beer makers, and now has more breweries in China than in the United States, including a 27 percent stake in Tsingtao Brewery Group. Bank of America recently paid $2.5 billion for a 9 percent stake in China's biggest mortgage lender, with an option to up the stake to nearly 20 percent.
So far, China has been investing the bulk of its trade surplus in U.S. treasuries. The Unocal bid, partly subsidized by the Chinese government, shows China is interested in a better return on its money. Still, American investment in Chinese nonfinancial assets was about $4.2 billion last year, compared with Chinese investment of $181 million here. "U.S. foreign direct investment in China dwarfs their foreign investment here," says Nicholas Lardy of the Institute for International Economics, "though that might change if they buy one Unocal per year." Things being what they are in Washington, however, it looks like the Chinese may not get that chance.
This story appears in the July 18, 2005 print edition of U.S. News & World Report.