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Routing 
Congress set a dangerous precedent when itinterfered with Hong Kong–based CNOOC, Ltd.’sbid for Unocal. Supporters of the interventionargued that CNOOC, a subsidiary of state-ownedChina National Offshore Oil Company, couldpose a threat to U.S. economic and national secu-rity. Yet Unocal was only a small player in the U.S.energy market and had no technology that mightpose a real threat to U.S. security. Nonetheless,congressional pressures prompted CNOOC towithdraw its $18.5 billion bid, paving the way forChevron to acquire Unocal for $17.7 billion.The increasingly confrontational approachCongress is taking toward China is leading to “creep-ing protectionism,” often in the guise of protectingU.S. national security. Although it is proper to criti-cize China for its human rights violations and its lackof a transparent legal system, we should not ignorethe substantial progress China has made since itembarked on economic liberalization in 1978. A policy of engagement—or what Hu Jintao,president of the People’s Republic of China, calls“peaceful development”—is a necessary conditionfor constructive U.S.-China relations. AlthoughChina’s competitiveness does pose a threat to cer-tain U.S. economic interests, it also benefits American consumers and exporters. Protectionismwould harm both the United States and China andwould increase the likelihood of conflict. Hardlin-ers would gain at the expense of more reasonable voices.To avert the risk of conflict, the United Statesneeds to treat China as a normal great power, notas an adversary; ensure that only those commer-cial transactions that genuinely threaten nation-al security are blocked; and recognize that by increasing economic freedom we increase per-sonal freedom. Our economic security, as well asChina’s, will depend on sound free-market poli-cies, not on destructive protectionism.
U.S.-China Relations in the Wake of CNOOC 
by James A. Dorn
_____________________________________________________________________________________________________
 James A. Dorn is a China specialist and vice president for academic affairs at the Cato Institute. He is also professor of economics at Towson University in Maryland and coeditor of 
China’s Future: Constructive Partner orEmerging Threat?
Executive Summary 
No. 553November 2, 2005
 
Introduction
In its 2005
 Annual Report to Congress on the Military Power of the People’s Republic of China
,the Pentagon described U.S.-China relationsas “cooperative, candid, and constructive.”The report stated, “The United States wel-comes the rise of a peaceful and prosperousChina” but warned that with growing wealththe PRC will be able to modernize its military and could pose a “credible threat” in East Asia and beyond.
1
One growing concern voiced both by thePentagon report and by Congress is that China’sdemand for direct ownership of oil and gas andother “strategic assets” will pose security risks,particularly if China acquires U.S. energy com-panies. In a congressional hearing on July 13,Frank Gaffney Jr., president of the Center forSecurity Policy, told the House Armed ServicesCommittee that the sale of Unocal Corp. toCNOOC, Ltd. (hereafter CNOOC), a HongKong–based subsidiary of China NationalOffshore Oil Company, “would have adverseeffects on the economic and national security interests of the United States.” He pointed to“the folly of abetting Communist China’s effortto acquire
more
of the world’s relatively finiteenergy resources” and warned of “the larger andominous Chinese strategic plan of which thispurchase is emblematic.”
2
Such fears are evident in the flurry of anti-China resolutions and bills introduced by members of Congress around the time of theCNOOC-Unocal bid. On June 30 a nonbind-ing House resolution (H.R. 344) recommend-ing presidential review of the CNOOC dealpassed by a vote of 398 to 15. In a letter toPresident Bush, House Energy and CommerceCommittee chairman Joe Barton (R-TX)declared, “We urge you to protect Americannational security by ensuring that vital U.S.energy assets are never sold to the Chinese gov-ernment.”
3
When the China hawks in Congress joined forces with the protectionists, a strong(and dangerous) coalition was formed toeffectively end any chance that CNOOCwould be successful in its bid to acquireUnocal. After Congress amended the Energy Policy Act of 2005 (H.R. 6) in late July—torequire a lengthy review of the proposedtakeover—CNOOC abandoned its $18.5 bil-lion bid for Unocal on August 2. Although Congress used national security arguments to justify the close scrutiny of theproposed CNOOC-Unocal deal, the relatively small size of Unocal convinced most expertsthat the security card was really just a ploy to tiltthe deal in favor of the other suitor—California-based Chevron. Indeed, Chevron is located inthe congressional district represented by thechairman of the House Committee onResources, Richard W. Pombo, the very personresponsible for amending H.R. 6 to require thatthe Department of Energy, along with theDepartments of Defense and Homeland Secur-ity, conduct a 120-day study on the economicand security implications of China’s growingdemand for energy. An important provision of that amendment was that the White Housecould not approve the CNOOC offer until 21days after the DOE study was completed. By adding as much as 141 days to the takeoverprocess, Congress undermined CNOOC’sincentive to continue the bidding war withChevron and convinced Unocal’s board toaccept Chevron’s cash-and-stock offer valued at$17.7 billion.
4
In scrapping its bid, CNOOC managementsaid that “unprecedented political opposi-tion” made it impossible to successfully com-pete with Chevron by “creating a level of uncertainty that presents an unacceptable riskto our ability to secure this transaction.”
5
Thatcomplaint reflected an earlier statement by theChinese foreign ministry: “We demand thatthe U.S. Congress correct its mistaken ways of politicizing economic and trade issues, andstop interfering in the normal commercialexchanges.”
6
 Although Chevron is the clear winner, con-gressional interference in what should havebeen primarily a market transaction sets a dan-gerous precedent and could jeopardize U.S.-China relations. The firestorm on Capitol Hillsurrounding the CNOOC bid for Unocal ismerely one case in the rising anti-China trend.
2
When theChina hawks inCongress joinedforces with theprotectionists, astrong (anddangerous)coalition wasformed.
 
Indeed, as Albert Keidel, a senior associate atthe Carnegie Endowment for InternationalPeace, writes, “Those who would build a GreatWall of America to fend off China’s influencecould end up jeopardizing everyone’s long-term peace and prosperity while doing little toimprove prospects for political change inChina.”
7
By politicizing the takeover marketand weakening the private property rights of Unocal’s shareholders, Congress violated the very free-market principles it is supposed touphold.
The Politicization of CNOOC’s Unocal Bid
Congress is right to criticize China for itshuman rights violations, its failure to protectintellectual property rights, and its lack of a genuine rule of law. Nevertheless, in morethan two decades of economic reform, China has made significant progress in reducingpoverty and opening to the outside world.Capitalists are now free to join the ChineseCommunist Party, people can own privateproperty, and the PRC Constitution has beenamended to better protect the private sector. Article 13 of the constitution now reads,“Citizens’ lawful private property is invio-lable.”
8
In contrast, “under Mao, large publicnotices everywhere had urged people to ‘Strikehard against the slightest sign of private own-ership.’”
9
China has a long way to go before it is a full-fledged market economy and a free soci-ety, but preventing China from entering U.S.markets, whether for capital or for goods andservices, will not ensure “peaceful develop-ment”—the professed goal of President Hu Jintao of the PRC.
10
Washington’s interfer-ence with the CNOOC-Unocal deal mighthave been warranted if there had been a legit-imate threat to national security, but in thiscase that possibility seems remote. As energy economist Phillip Verleger said: “There’s nonational security issue here—zero. Unocaldoesn’t have technology that needs to be keptsecret.”
11
What may concern Congress more thanthe so-called security threat, which was neverclearly defined in the case of CNOOC, is theidea that China may gain control of energy sources, crowd out American buyers, and usethe “oil weapon” to undermine U.S. influ-ence in East Asia and elsewhere. The logic, asstated in House Resolution 344, is simple:1. Oil and natural gas are “strategic assetscritical to national security and theNation’s economic prosperity.”2. China is an authoritarian regime “strong-ly committed to national one-party ruleby the Communist Party” and ownsabout 70 percent of CNOOC’s stock.3. Subsidized loans will be used to helpfinance the proposed takeover.4. CNOOC may ship oil and natural gasdirectly to China rather than sell it inworld energy markets, which “wouldresult in the strategic assets of UnocalCorporation being preferentially allocat-ed to China by the Chinese government.”That “would weaken the ability of theUnited States to influence the oil and gassupplies of the Nation through compa-nies that must adhere to United Stateslaws.”5. The acquisition “could provide accessto Unocal Corporation’s sensitive dual-use technologies that the United Stateswould otherwise restrict for export toChina.”6. The CNOOC deal therefore threatens“to impair the national security,” and“the President should initiate immedi-ately a thorough review of the proposedacquisition, merger, or takeover.”
12
In fact, the Congressional Research Servicereports that Unocal is an insignificant playerin the U.S. energy market, accounting for only 0.8 percent of U.S. production of crude oil,condensate, and natural gas liquids. Unocal’sU.S. production of petroleum is a miniscule0.3 percent of U.S. consumption. The CRSreport also notes that “because oil is a fungiblecommodity in a world market, it can be
3
The firestorm onCapitol HillsurroundingCNOOC ismerely one casein the risinganti-China trend.
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