U.S.-China Relations after CNOOC

By Dorn, James A. | Freeman, December 2005 | Go to article overview

U.S.-China Relations after CNOOC


Dorn, James A., Freeman


When the China hawks in Congress joined forces last summer with protectionists, a strong (and dangerous) coalition formed to effectively end any hopes that CNOOC Ltd., a subsidiary of the state-owned China National Offshore Oil Company, would succeed in its bid to acquire Unocal. Indeed, after Congress amended the energy bill to require a lengthy review of the proposed takeover, China's third-largest oil company withdrew its $18.5 billion offer.

In a congressional hearing last July, Frank Gaffney Jr., president of the Center for security Policy, told the House Armed Services Committee that the sale of Unocal to CNOOC "would have adverse effects on the economic and national security interests of the United States." He pointed to "the folly of abetting Communist China's effort to acquire more of the world's relatively finite energy resources," and warned of "the larger and ominous Chinese strategic plan of which this purchase is emblematic."

Such fears are evident in the flurry of anti-China resolutions and bills introduced by members of Congress. In June a nonbinding House resolution recommending presidential review of the CNOOC-Unocal deal passed by a wide margin. In a letter to President Bush, House Energy and Commerce Committee Chairman Joe Barton of Texas declared, "We urge you to protect American national security by ensuring that vital U.S. energy assets are never sold to the Chinese government."

Even without a legal prohibition on a deal, Congress can intimidate a foreign company such as CNOOC by imposing considerable costs on the takeover process and using the secretive Committee on Foreign Investment in the United States (CFIUS) to breed uncertainty. That is not to say foreign companies should have totally free access to the assets of U.S. companies. In some cases, especially in the area of sensitive technology with military applications, foreign investment might pose a legitimate risk to U.S. security. A government vetting process would then be warranted. In the CNOOC-Unocal case, however, it is difficult to find a credible threat. As energy economist Phillip Verleger said, "There's no national security issue here-zero. Unocal doesn't even have technology that needs to be kept secret."

There was no need for Congress to get involved in the CNOOC-Unocal transaction, or to amend the energy bill to require a separate investigation. If a legitimate security risk existed, then CFIUS-a multi-agency panel chaired by the secretary of the Treasury and empowered by the Exon-Florio amendment to the Omnibus Trade and Competitiveness Act of 1988-could have addressed that issue and recommended presidential blockage. It is doubtful that the President would have agreed.

According to the June 24 Wall Street Journal, only 12 cases have reached the President's desk, and of those only one foreign acquisition was denied on national security grounds. With the bulk of Unocal's oil and natural-gas operations in Asia and with its U.S. production accounting for less than 1 percent of American consumption, it is difficult to see how the committee could have found credible evidence that the proposed takeover posed a threat to U.S. security.

Congress's latest attack on private property has come at the expense of Unocal shareholders, who lost at least $1 billion because of CNOOC's decision to drop its bid. In a letter to Unocal's board, Peter Schoenfeld of P. Schoenfeld Asset Management, which controls a block of the oil company's shares, wrote, "It is your duty to maximize value for stockholders." Indeed it is. But Congress inserted itself into what should have been primarily a market transaction-and in so doing became an overseer rather than a protector of shareholder rights. If Beijing wanted to provide cheap credit by using part of its massive foreign exchange reserves to help CNOOC purchase Unocal, that would have been a gift to American shareholders-not a concern for Congress or U.S. energy security. …

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