China's Oil Bid Riles Congress
Attempt to Take Over U.S. Firm Spurs Calls for Retaliation

By Jonathan Weisman and Peter S. Goodman
Washington Post Staff Writers
Friday, June 24, 2005

Political fears of China's economic might intensified yesterday following China's unsolicited bid to take over a U.S. oil company, with lawmakers from both political parties warning that Congress will take retaliatory action against Chinese trade practices if the Bush administration fails to respond.

Under a barrage of questions, Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow warned the Senate Finance Committee against punitive legislation that could trigger a trade war and ultimately harm the U.S. economy.

"Resorting to isolationist trade policies would be ineffective, disruptive to markets and damaging to America's special role as the world's leading advocate for open markets," Snow said.

But the $18.5 billion bid Wednesday by China's third-largest oil producer to buy California-based Unocal Corp. put such sentiments on weaker ground. Already, lawmakers from both parties had stockpiled bills to punish China, and President Bush's ongoing effort to ratify the Central American Free Trade Agreement had stirred up political forces against further trade liberalization. Lingering discontents about the economy had poli-

ticians looking for a new outlet to voice their concerns. The bid by a state-run Chinese oil company to swallow a U.S. competitor "threw gas on the fire," said Sen. Lindsey O. Graham (R-S.C.), who has coauthored legislation that would impose a 27.5 percent tariff on Chinese imports unless China allows its currency to rise in value.

"Fighting back is not protectionism," Graham told Greenspan and Snow. "No more saber-rattling. We want results."

The takeover bid by China's state-controlled CNOOC Ltd. may have been the clearest sign yet of an emerging economic power's global ambitions, but it came at an inopportune time.

The Senate is set to vote July 27 on the currency tariff bill, coauthored by Graham and Sen. Charles E. Schumer (D-N.Y.). Momentum is building on legislation, written by Sens. Susan Collins (R-Maine) and Evan Bayh (D-Ind.), to allow the Commerce Department to respond to allegedly illegal Chinese export subsidies. And new legislation is being drafted to penalize China for intellectual property violations.

China maintains it is being used in Washington as a scapegoat for the inevitable decline of U.S. manufacturing as jobs continue to slip to lower-cost countries. Nevertheless, anti-China sentiment has infected virtually every trade issue in Washington, leaving Bush with an uphill battle to secure passage even of the relatively minor CAFTA.

"CAFTA is more than a trade agreement," Bush pleaded yesterday in a speech in Washington. "It is a signal of our nation's commitment to democracy and prosperity for the entire Western Hemisphere."

Now, China has added national security concerns to economic anxieties, with lawmakers expressing fear that China is aggressively seeking to corner a strategic asset, oil, and create its own captive supply. House and Senate members demanded an administration review of the bid, required under the Defense Production Act, to determine potential economic and security risks. Treasury officials indicated they would agree to the request if Unocal accepts CNOOC's offer.

"If you don't review this one, that law is meaningless," Sen. Ron Wyden (D-Ore.) told Snow, adding, "I don't think being a free trader is synonymous with being a sucker and a patsy."

For a world still absorbing the emerging force of a newly capitalist China, CNOOC's bid is the clearest sign yet of how China's appetite for resources is reshaping global commerce.

The bid sets up a once-unthinkable spectacle: a potential takeover battle between an American oil giant, Chevron Corp., and a Chinese firm still controlled by the Communist Party government. Unocal's board had already accepted Chevron's $16.5 billion offer in April. CNOOC's move underscores the urgency of China's drive to secure new stocks of energy at a time when its rapid growth and embrace of the automobile are pressuring global stocks, generating new tensions in the already complex geopolitics of oil.

More broadly, CNOOC's bid for Unocal reinforced the mission of China's largest and best-financed state companies to look beyond domestic confines and invest abroad in what has become known as Beijing's "Go Out Strategy." CNOOC's move came days after a consortium led by China's largest home-appliance maker, Haier Group, launched a pursuit of Maytag Corp., hoping to secure one of America's most recognizable household brands.

Last year China's largest computer maker, Lenovo Group Ltd., agreed to pay $1.75 billion to take control of International Business Machines Corp.'s home computer business, capturing a corporate icon synonymous with American technological prowess. China's largest television maker, TCL Corp., bought the TV business of France's Thomson SA, and with it the rights to the venerable name of RCA.

All of these deals point to China's increasingly lofty ambitions as it relinquishes a past defined by Marx and Mao for a future governed by free enterprise. In the quarter-century since China began experimenting with market reforms, the country's economic ascendance has been propelled by low-wage factories that churn out mass-produced goods distinguished by their low prices. The recent foreign takeovers signal that China's largest companies are intent on establishing themselves as globally recognized brands that can gain a premium for their products.

That, in turn, has stoked anxieties in the United States. Many small manufacturers feel threatened by China's low labor costs and willingness to bend the rules of international trade. Now they fear a broader Chinese takeover.

Many analysts are dubious of China's new economic course, noting that China has shown great skill at copying existing products and figuring out how to make them cheaply but demonstrated little inclination for innovation, which is critical to the success of a brand.

Most of the Chinese companies buying foreign operations are heading abroad out of weakness: Fierce competition at home -- the result of too much credit nurturing too many factories producing too many goods -- has driven prices so low that few can profit.

"Chinese companies cannot make any money at home so they are going abroad to try to make money there," said Arthur Kroeber, managing editor of the China Economic Quarterly.

Decades ago, few imagined that companies such as Sony and Samsung could become global brands, sprung as they were from Japan and Korea, the low-cost producers of the age. But those countries protected their markets against imports, ensuring fat profit that homegrown companies could fold into global expansion campaigns. China's markets are comparatively open, depriving Haier and Lenovo and the rest a similar home field advantage. The foreign takeover wave appears to signal that China's companies have learned this lesson: The only way they are going to become major brands is to buy them.

CNOOC's acquisition of Unocal would be the largest ever purchase of a foreign company by a Chinese firm. Analysts say it is being pressed by Beijing to secure energy supplies at a time when China is rationing electricity in industrial areas to cope with shortages. Now the world's second-largest consumer of oil, China depends on imports for one-third of its needs, according to government statistics.

"The Chinese government is urging Chinese companies to go overseas because China needs more oil," said Chen Fengying, a senior fellow at the China Institute of Contemporary International Relations in Beijing, a research institution linked to state policymakers. "CNOOC will benefit, and China will benefit."

That is precisely why the purchase has become so politicized in Washington, with lawmakers from both parties searching for political advantage. Democrats yesterday accused the Bush administration of complacency in the face of a foreign threat, while Republicans pushed for more oil production in the United States.

"I believe strongly in a free global marketplace. However, we cannot determine whether CNOOC would be doing the bidding of the free market or the Chinese government as it views its energy, economic and security interests," warned Rep. Richard W. Pombo (R-Calif.), who had sent a letter to Bush last Friday, requesting a review of the bid even before it was announced.

But some Chinese analysts said American opposition could backfire. "The reaction from the United States will affect Chinese companies' confidence in the American advocacy of free trade principles," said Han Xiaoping, an analyst at China Energy Net in Beijing.

Goodman reported from Istanbul. Special correspondents Jason Cai and Eva Woo contributed from Shanghai.

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