Chinese Checkers

Federal Reserve Chairman Alan Greenspan teamed up with Treasury Secretary John Snow to urge calm. Once again, politicians and policy wonks are up in arms about a foreign takeover of an American company, in this case the attempted acquisition of Unocal by China's National Offshore Oil Corporation (CNOOC). To those who remember the hysteria that greeted Japan's purchase of Rockefeller Center, the jewel in the crown of New York real estate, in the late 1980s, "It's déja vu all over again," to borrow from the Yankee sage Yogi Berra.

Still, the current Chinese takeover movement is different from the earlier buying spree by Japanese companies. Japan was not a rival for influence in Asia, or in the world; China is. Japan was not a major competitor for scarce resources such as oil; China is. Japanese companies were privately owned; China's acquirers are state-run entities. Japan is a democratic country, and by and large an American ally; China most definitely is not. Japan did not engage in the wholesale theft of intellectual property, China does. Japan did not buy strategic assets: ownership of New York real estate has no implication for national security; ownership of oil resources does.

CNOOC's $20 billion, all-cash bid for Unocal is only one of several being made by the Chinese regime, eager to expand the international influence of its state-owned companies. Last week, China's Haier offered $1.3 billion for Maytag, the troubled manufacturer of home appliances, with 20,000 employees. That followed by a few months IBM's sale of its PC business to Lenovo, a Chinese computer maker, for $1.75 billion.

At this writing it is impossible to predict whether the CNOOC bid will succeed. It does top Chevron's offer by about $2 billion, but the American oil company, much larger than CNOOC, is quite capable of raising its already-generous offer. Or Unocal's board might decide that the several relevant regulatory authorities are so likely to veto the CNOOC bid as a threat to American security, that it would be wise to accept the lower Chevron offer.

But whatever the outcome of CNOOC's decision to bid for a major American oil company, it has raised the temperature of the already red-hot dispute over trade policy. The authorities are starting to realize that U.S. companies are not operating in a free market as that term is generally understood. The battle for Chevron is not a bidding war between two privately owned companies, both responsible for maximizing shareholder value. CNOOC is 70% state-owned, expected to act in support of the regime's geopolitical objectives. That makes a mockery of the Chinese authorities' warning to the Bush administration not to politicize the CNOOC takeover bid. China has decided on the conversion of its major companies into important multinationals as part of an aggressive policy of projecting Chinese power on a global basis.

That policy is most noticeable in oil markets. China's acquisition of Unocal's substantial Asian assets will increase its political influence in that part of the world. China has also purchased 40% of Sinopec's Northern Light oil sands project in Canada, at an ultimate cost of $2 billion; taken a 10% stake in an Azerbaijan field and pipeline; and invested in Venezuela's oil industry in return for President Chávez's promise to divert some of his nation's crude from the US to fuel-hungry Chinese factories.

All of this comes against the background of mounting congressional support for action against China. Even before the recent surge in apparel imports forced the president to impose quotas, the senate expressed approval of a bill to impose a 27.5% tariff on all made-in-China products. Its sponsors, among them New York's Chuck Schumer, claim such a levy would offset the low exchange value at which China artificially maintains its currency.

Faced with the senators' hostility, the famously inarticulate Snow could not defend the administration's refusal to respond effectively to what the senators see as an unfair trading environment, acquisitions that threaten national security, and China's systematic refusal to end its theft of American intellectual property, estimated to cost just six of our industries $25-$30 billion annually -- and that doesn't include losses due to knock-offs (Dell computers copied and sold as Nell), patent violations, and straight out counterfeiting (cheap "Nikes" anyone?). Congress is frustrated by the administration's refusal to back its years-long importunings to China with action "within the rule of law," as Senator Charles Grassley, the Iowa Republican who chairs the senate finance committee, put it.

The administration's critics won the war of words with Snow, but are overlooking serious problems with the positions they are urging on the president. For one thing, the flood of low-cost Chinese imports has kept retail prices down. The resulting absence of significant inflation has helped to keep long-term interest rates low enough to allow the boom in the housing industry to roll on.

For another, China's labor-cost advantage is so great that its goods will find their way to Wal-Mart's shelves even if the authorities allow the yuan to rise. But a more valuable yuan will make it cheaper for China to acquire dollar assets, an unintended consequence that China-critics are overlooking.

Meanwhile, not everyone is unhappy with China's acquisition spree. China's entry into equity markets will have a favorable effect on share prices. Investment bankers see a new source of merger fees. And firms with assets of interest to China see buyers who might be emulating Japan's acquirers in the 1980s. Just as the Rockefellers and other American property owners sold to the Japanese at the peak of a commercial office rental boom, Unocal might sell to the Chinese at the peak of an oil price boom, and Maytag might dump its assets on them when the firm is in irreversible decline. If opponents do kill the CNOOC deal, they might unwittingly spare China the fate of those earlier Japanese lusters-after dollar assets. Having bought high, the Japanese eventually sold low. After a default and at a substantial loss, Japan's investors restored Rockefeller Center to American ownership.

A version of this article appeared in the Sunday Times (London).