Chinese bid for Unocal is being iced

President Bush last week barely snatched CAFTA – the Central America Free Trade Agreement – from defeat at the hands of sugar growers and others who sniff an economic bomb in every container of imported goods. How sad that the change of one vote would have created a tie, and the impression the United States cowers before the mighty economies of El Salvador, Guatemala, Nicaragua, Honduras, Costa Rica and the Dominican Republic.

Meanwhile, the long-awaited Energy Bill includes a provision added at the last minute that would slow federal review of a proposed purchase of Unocal Corp. by a Chinese company, CNOOC Ltd. Chevron Corp. and CNOOC have dueled since June for Unocal, the eighth-largest oil company in the U.S., but one that owns extremely attractive oil and gas properties in Asia. Unocal also excels in deep-water exploration and drilling, expertise that would be very valuable to CNOOC.

CNOOC’s last bid for Unocal, about $18 billion, tops Chevron’s by about $1.2 billion. CNOOC’s offer is all cash, Chevron’s is a combination of cash and stock. If dollars and cents were all there was to this deal, the signatures would already be dry, with that of CNOOC Chief Executive Fu Chengyu on top.

But, as with CAFTA, the Unocal acquisition has become an excuse for political theater playing to fear among Americans about our place in a world economy where U.S. supremacy is no longer assured. China is no Guatemala.

And oil is not textiles, or fruit, or any of the other imports Americans consume by the pallet-full. Economics have no more fundamental need than energy. The U.S. is already perilously dependent on imports. A CNOOC purchase of Unocal would suggest the U.S. cannot even hold on to what domestic reserves it has.

So the Unocal takeover battle almost perfectly encapsulates the issues that challenge U.S. attitudes and interests as the nation looks to find its stride in the 21st century. Remember that bridge former President Clinton used to talk about? It’s still under construction.

But back to CNOOC versus Chevron.

The issue seized on by many looking for a way to fence out CNOOC is the company’s relationship with the Chinese government. CNOOC stock trades publicly on the Hong Kong Stock Exchange, but 70 percent of the shares are held by the China National Offshore Oil Corp., which is owned by the Chinese government. Much of the financing for a Unocal acquisition would come from low- or no-interest loans from the parent company or the government itself. Chevron, of course, has no such recourse.

Just how much of a subsidy do CNOOC’s financial arrangements represent? The company says about $815 million. Chevron counters with an estimate six times that. Last week’s Newsweek put the figure at more than $4 billion.

Folks, it doesn’t matter. Dwarfing all those estimates is the $750 billion in reserves of U.S. currency and securities held in China thanks to Americans’ inexhaustible appetite for Chinese-made goods.

“That seems to me to be the bigger threat,” says Joseph Borich, executive director of the Washington State China Relations Council.

Many Chinese companies will be looking for investment opportunities in the U.S., he says. The CNOOC bid for Unocal just happens to be of a scale that has caught Americans unaware. Purchase of IBM’s personal computer business by Hong Kong-based Lenovo caused some stir last year, but the deal went through. Chinese appliance maker Haier, in conjunction with U.S. financiers, this spring considered a hookup with Maytag.

“I don’t see the risk of Chinese investment in the U.S.,” Borich says. “We ought to get them inside the tent.”

The Chinese, who flagrantly disregard international convention in matters such as intellectual property, can better learn to play by the rules working within the U.S. economy than they might at home. The U.S.-educated Fu – University of Southern California – has tried to do just that, Bosich says.

He dismisses concerns that CNOOC was somehow converting American oil assets for Chinese purposes, although at week’s end there were reports the company might sell Unocal assets in the Gulf of Mexico in an effort to silence just those arguments.

And Borich noted the hypocrisy of noisemaking about Chinese government meddling in business affairs by a Congress doing exactly the same thing with the Energy Bill provision, which would subject the CNOOC bid to an extended review by the Committee on Foreign Investments in the United States even if shareholders give their consent.

Delay, for investors, means risk. Congress’ intent is clearly to ice CNOOC.

The blowup over Unocal suggests lawmakers believe the flow of U.S. dollars should be one way – toward China – a downright silly position and one unworthy of a country whose historic approach to trade with China has been that of the Open Door. Apparently, the U.S. position now is “Don’t bother knocking.”