June 30, 2005, 8:54 a.m.
Unocal Hysteria
China’s bid for the U.S. oil firm has the usual suspects in an unwarranted lather.

By John Tamny

Last week’s bid by China National Offshore Oil Corporation (CNOOC) for Unocal, the U.S. oil company, not unexpectedly was the catalyst for a great deal of hysteria. Reps. Duncan Hunter, Richard Pombo, and forty other congressmen sent the Treasury Department a letter asking for the deal to be reviewed for security concerns, while former CIA director James Woolsey told Forbes that the bid “is a conscious long-term effort to take over . . . as much of the American economy as possible.”

USA Today’s editorial page was all over the map: Out of one side of its mouth the paper bemoaned the failure of U.S. government leaders “to prepare the American economy for the tidal wave of competition presented by the rising economies of Asia,” while out of the other side it asserted that “strangers from abroad like to reinvest those dollars in the USA;” or the very same economy that’s on the verge of being crushed by the “tidal wave” of Asian competition. The Wall Street Journal’s Dennis K. Berman related the fear among lawmakers that the deal “would threaten U.S. energy goals.”

Sadly, the naïve hand wringing among the political and news elite could lead to a trade war that has the potential to bring great harm to the world economy.

People in certain quarters, those who believe in such things as “U.S. energy goals,” worry that the sale of Unocal will make us more reliant on “foreign” (Chinese oil). But there’s a great deal of history that proves this fear unfounded. In the 18th century a similar concern arose in England over the country’s ability to import gold if excluded from trade with Portugal. Adam Smith showed the folly of this kind of thinking in pointing out that “Gold, like every other commodity, is always somewhere or another to be got for its value by those who have that value to give for it.” Even if Portugal had cut off trade with England altogether, its gold would still have been “sent abroad, and though not carried away by Great Britain, would be carried away by some other nation, which would be glad to sell it again for its price.”

Future events proved the wisdom of Smith’s words. National security issues were raised during England’s Corn Law debates in the 19th century, only then they were about food. The theory among those who supported tariffs at the time was that if England’s agricultural interests were decimated by free trade, there would not be food to supply the troops or England’s citizens in times of war. The problem for those who defended the Corn Laws was that England had been at war in 1810 with nearly every European power, yet it still managed to import 1,491,000 quarters of wheat from those same European powers.

Moving to the 20th century, the U.S. still consumed Iranian oil in the 1970s and 1980s, despite the Ayatollah’s wishes. As the Cato Institute’s Jerry Taylor has regularly pointed out, U.S. efforts to keep its grain out of the Soviet Union, along with Saudi efforts to keep its oil out of the U.S., met similar failure. In short, there’s no such thing as foreign agriculture, just as there’s no such thing as foreign oil. If we are buyers, there will be sellers. The idea of U.S. “energy goals” is a false notion that as an evolved country we should not consider.

Turning to the national-security front, some fear that China’s endgame is one that includes invasion. If so, the Chinese sure have a funny way of going about it. It’s conventional wisdom that China is putting many of the billions of U.S. dollars that reach its shores back into U.S. Treasury securities, corporate bonds, and now corporations such as Unocal. Taking into account what war with us would mean for the value of its growing U.S. investment portfolio, it’s fair to say that China’s military designs on the United States are somewhat exaggerated.

If this is doubted, we need only consider China’s economic goals. A recent study by Goldman Sachs showed that while China’s economy will be larger than ours in 2040, its per capita wealth will only be one-third of ours. Furthermore, it has to be remembered that China’s economy can only continue to grow if it trades with us. The one sure way for its economy to implode would be for it to bring harm to the very nation whose consumers are lifting it out of poverty.

This isn’t to say that we should turn a blind eye to China’s growing military potential. Quite the opposite. Yet as 20th century statesman Cordell Hull once argued, “when goods cannot cross borders, armies will.” Be it finished goods or capital, the free flow of both increases prosperity for all and will lead to worldwide economic integration that makes armed conflict in the future much less likely.

Blocking CNOOC’s Unocal bid will leave unchanged the myth that is energy “independence,” but it could certainly sour the U.S.-China trade situation. CNOOC’s bid must not fail in Washington, and should fail only if Unocal’s shareholders deem a competing offer more impressive.

— John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.

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