August 04, 2005
Thursday

WASHINGTON - Fear of China's emerging challenge to U.S. industrial might came to a head in Congress with oil giant China National's takeover bid for a third-tier oil company that analysts said would have zero effect on U.S. security or commerce.

Had the would-be buyer been just about anyone but a government-controlled Chinese company, the deal hardly would have caused a ripple. Instead, Tuesday's announcement that the Chinese company was dropping its bid holds enormous - and volatile - political and economic consequences for the United States and China.

"What do we do with a country that's becoming more and more powerful, whose economy is growing and taking on new roles, but which also has a national security strategy angle to it?" asked Edward Gresser, director of trade policy at the centrist Democratic Progressive Policy Institute. "It's an unusually explosive thing."

For weeks, Republicans and Democrats in Congress have denounced China National Offshore Oil Corp.'s bid for Unocal as an effort by China's communist regime to acquire U.S.-controlled oil reserves. The concern crested with passage of a measure that would have delayed the transaction pending a national security review.

It would be "unconscionable to allow China's communist government to take over any of America's oil interests," Rep. Jim Saxton, R-N.J., said last month, a sentiment widely shared by both parties. The oil deal followed several years of increasing ire in Washington over China's flood of exports, the valuation of its currency, its alleged trading violations and outsourcing by U. S. companies of jobs to Asia.

China National called the reaction in Congress regrettable and unjustified, saying it had dropped its effort to win Unocal although its objectives had been purely commercial. In light of the reaction, the Chinese see the United States as two-faced - demanding limits on Chinese investment in the United States while insisting that China open its doors to U.S. ownership of Chinese assets.

Where that mutual anger goes now is a big question mark in Washington and Beijing.

"You're not looking at a tiny country here," said Charlene Barshevsky, the U.S. trade representative under former President Bill Clinton who negotiated trade agreements reached with China during the 1990s, including China's entry to the World Trade Organization. "You're looking at one-fifth of the world's population ... And if China is not engaged and integrating with the world on the basis of Western economic norms, then what on earth are we accomplishing?"

What Congress should be doing, she said, is focusing on U.S. competitiveness in an increasingly competitive world, better educating its students and welcoming rather than discouraging foreign students and scientists to immigrate.

Washington politicians should start by being "honest about the trends that are emerging in Asia and around the world," Barshevsky said. "Because until you appreciate the nature and scope of the trends in international trade, one can't possibly fashion a meaningful response. Episodic attacks may be cathartic, but they certainly don't advance the ball one iota."

Others disagree sharply. They contend it is well past time to push back at China after five years of inaction against what they call a raft of unfair trade practices by a despotic nation manipulating its currency to accumulate vast financial reserves, build a military and cozy up to outlaw regimes.

"The policy of opening to China in hopes that it would reform is failing, " said Peter Morici, chief economist of the U.S. International Trade Commission during the 1990s, now a professor at the University of Maryland. "The bottom line is we can't believe the Chinese when we sign an agreement with them."

Chinese piracy of U.S. products - from auto parts to movies to software - is rampant and has been a sore point in trade relations for years.

"I can remember in the early '90s they told us they couldn't locate the factories" making the pirated goods, Morici said. "So we presented them with a list of the addresses of factories down to the suite numbers, and we would have escorted them there. ... But it turns out that relatives of Chinese army generals owned some of the factories, which made it difficult for the government to shut them down."

Morici predicted that, "China is going to have more difficulties with the Americans, not because of the Bush administration, which is inclined to appease them, but because in Congress on both sides of the aisle there is growing unease."

The China National bid triggered pent-up concerns that far outweigh the substance of the deal itself. Unocal is "a third-tier, tiny company that makes no difference whatsoever to our energy situation for any time you want to look at," said Nicholas Lardy, a senior fellow at the Institute for International Economics.

China is the largest single magnet for foreign investment, the largest export destination for Japan, Singapore, Taiwan and Hong Kong, and the fastest growing export market for Russia, India, the Philippines and Indonesia. Its demand for raw materials is driving growth in Brazil and Chile. It is a major consumer of oil from the Middle East. It is developing a web of economic relationships in sub-Saharan Africa. And it is expanding its reach in the Western Hemisphere.

"These are seismic changes in trading patterns and investment flows," Barshevsky said. "And on balance, this is a good thing, that is to say, a stronger, more confident China, a more prosperous China, is a more stable China.

"We have fought three wars in the Pacific in 60 years, largely because of disintegration in Asia, rather than what's happening now, and that is integration in Asia."

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