US protectionist fangs bare in Unocal bid
By Matthew Benjamin (usnews.com)
Updated: 2005-07-10 22:04

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 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.