Emad Mekay

WASHINGTON, Jul 11 2005 (IPS) — An unsolicited bid by the Chinese National Offshore Oil Co. (CNOOC) to buy Unocal, a major U.S. oil company, has put Washington’s free market rhetoric to the test, with disappointing results, some analysts say.

The global economic rules set by the victors of World War II have generally encouraged investors, typically from rich nations, to bid for companies in other industrialised countries or in poor nations in the name of open markets and economic growth.

But the CNOOC uproar demonstrates what happens on the rare occasion when a company from the developing world bids for one in the north.

U.S. acquisitions of assets abroad were a record 855.5 billion dollars in 2004, up from 328.4 billion dollars in 2003. U.S.-owned assets abroad totalled nine trillion dollars at the end of 2004, according to the U.S. Bureau of Economic Analysis.

Even though the Chinese company has appeared to play by the rules set by Wall Street, the U.S. Congress quickly recoiled into a defensive posture, calling the bid a threat to national security and urging the George W. Bush administration to quash CNOOC’s bid.

"From a public policy point of view, the bid raises serious national security issues as energy is a national security asset under any reasonable definition," said Michael R. Wessel, a commissioner with U.S.-China Economic Security and Trade Commission, an advisory group to the U.S. Congress on relations with China.

"CNOOC is a state-controlled company. It is not a free market enterprise," he argued.

Wessel told IPS that there is a strong chance that at a time of spiraling energy demand and limited supplies, "a state-controlled entity" could purchase a company and then "restrict access to other nations and other consumers of that asset."

The Bush administration, which will have final say on the security issue, has been silent on the issue thus far.

Two weeks ago, dozens of members of Congress sent a letter to the Treasury Department requesting a review by its Committee on Foreign Investment of CNOOC’s 18.5-billion-dollar bid to buy Unocal, which topped the 16.5-billion-dollar bid by U.S. oil giant Chevron.

The congressional group, spearheaded by representatives from Texas and Louisiana, major oil-producing states, had warned that China’s "aggressive strategy" to increase its energy sources could hurt the United States because CNOOC was 70 percent owned by the Chinese government.

China responded by warning the U.S. Congress to stop "politicising economic and trade issues."

CNOOC’s chairman, Fu Chengyu, pointed out that Unocal accounts for just one percent of total U.S. oil and gas production, an amount that could not possibly pose a threat to U.S. national security. The Chinese company also pledged to sell oil produced by Unocal inside the United States.

This has not appeased critics of the deal.

"China has entered into special arrangements with Sudan, with Iran and with other nations where it wants to own oil and other energy assets at the wellhead," said Wessel.

"It is not looking long term to compete in the free market for energy assets like the U.S. and other nations. So that raises serious concerns even if one did not have a concern about the 1.75 billion barrels of oil and gas equivalent energy that Unocal has. This is a seminal transaction that sets a precedent for future debates."

But Todd Malan, executive director of the Organisation for International Investment (OFII), which represents foreign investments in the United States, said that a move by Congress to block the deal outright would send a message that U.S. rhetoric about open investment rules "is a one-way street".

This policy of openness has came to be known as the Washington Consensus, which forms the basis of the ideology governing most of the world economy and its patrons from international institutions, like the World Bank and the International Monetary Fund (IMF).

But even the World Bank, traditionally viewed in the south as an instrument of U.S. foreign policy, has gently said it was natural for China to seek to acquire foreign assets, including in the United States.

"China has reached a stage of development in which it makes sense for some of its companies to go global and invest worldwide," David Dollar, the World Bank’s country director in China, told IPS in an email message.

"As a U.S. citizen, I think it is a good thing that Chinese companies are investing in the U.S., just as U.S. companies have done in China for decades now," he said.

Dollar said that aside from the economic benefits, such cross-investment means each country has a greater interest in seeing the other’s economy do well, encouraging governments to work together to maintain an open trading system and to coordinate their macroeconomic policies.

"Integration between China and the U.S. requires some painful adjustment on each side, but this integration is in the long-term economic and political interests of each country," he said.

Some U.S. analysts, while acknowledging the right to protect national security, say that CNOOC has made it difficult for Washington to argue that the bid poses any real threat.

CNOOC, for example, has reportedly promised to divest Unocal assets or technologies, like seismic technology, deemed central to U.S. national security. This may include facilities that Unocal owns and which are part of the U.S. strategic oil reserves.

"To sort of wave your hand and say the Chinese represent a threat to the U.S. and therefore we cannot sell anything that might be scarce in the world that they could use to strengthen themselves is hard to even imagine as justifiable by economics or by the logic of national security strategy" said Albert Keidel a China expert with the Washington-based Carnegie Endowment for International Peace.

"Certainly purchase according to price has to be one of those rules that are pretty universal."