Buying America, Chinese-style —Orville Schell

Daily Times ^ | 07.13.05 | Dr. Orville Schell

[Dr. Marten]

Buying America, Chinese-style —Orville Schell

Just as Bank of America’s current bid for a stake in the China Construction Bank raises no objections among US politicians, China, too must be permitted to invest abroad freely. What is fare for the US goose must be fare for the Chinese gander

America’s relations with China have a disturbing tendency to oscillate between embrace and rejection, and that manic ambivalence is now on open display, as China’s relentlessly mounting economic power has finally resulted in the inevitable: Chinese firms are starting to buy up American companies.

The United States received its first shock — followed by complaints from the US Congress — when the Chinese computer company Lenovo Group purchasing IBM’s personal computer division. Never mind that by 2000 China had invested less than $400 million in the US, while Britain had invested over $230 billion and Japan $159 billion. IBM is one of America’s most iconic brands, and many US politicians were taken aback by China’s economic incursion.

That almost automatic reaction was reminiscent of the 1980s, when America woke up to find Japanese companies like Sony buying Columbia Pictures, Mitsubishi Estates buying Rockefeller Center, and even the famous Pebble Beach golf course on the California coast being snapped up by Japanese investors. “People were afraid the Rockettes would have to wear Kimonos,” wrote Susan Tolchin, of George Mason University, the author of “Buying Into America.”

Next, it was announced that the large Qingdao-based Chinese appliance maker, Hai’er, was interested in picking up home-appliance maker Maytag, another iconic all-American brand.

In this context, the recent offer by the state-controlled China National Offshore Oil Co, China’s number three oil producer, to pay $18.5 billion US petroleum producer Unocal — trumping a $16.5 billion bid by America’s own Chevron — was only the most jolting wake-up call. Moreover, the news came on the heels of Chinese oil deals with Iran and other ex-officio members of the “evil empire,” such as Sudan, Venezuela, and Myanmar (Burma). One could almost hear the collective gnashing of teeth in the US, especially in the Congress.

China is second only to Japan in its holdings of US Treasury bills. But Americans appear to be psychologically unprepared for China’s effort to use some of its vast dollar reserves to become a global stakeholder in America.

It is difficult to judge whether it is the symbolism of such deals, concerns about national security, or the slowly dawning recognition that America’s position of assumed economic preeminence is being challenged that upsets Americans most. Whatever the case, Chinese are well acquainted with Americans’ feelings of indignation mixed with powerlessness.

But, what makes this string of symbolic Chinese beachheads in the American economic heartland an especially volatile issue at this moment is discussion in the US Senate of protective tariffs against Chinese imports, together with a forthcoming US Defence Department assessment that is reported to describe China as a potentially adversarial power. Among other things, the Pentagon’s assessment is said to criticise China’s leaders for expanding their country’s military in the absence of any discernible external threat, and for various other “known unkowns,” such as opaqueness concerning the real size of China’s military budget.

Recognizing that the report comes at a sensitive time in Sino-US relations, Pentagon officials are said to be editing the report with an eye towards softening any appearances of anti-Chinese bias.

Given the combination of factors that now conspire to throw bilateral relations off course, it is useful to remember that the responsibility of a superpower like the US is not simply to react in a visceral or self-interested manner to the world, but to lead with maturity and moderation.

True, China remains a Marxist-Leninist state and could still become overtly hostile, especially where conflicts like the one surrounding Taiwan’s future are concerned. But the more hopeful scenario is that China, through piecemeal evolution, will continue to shed its historical sense of victimisation and its old, bankrupt ideology of revolution to emerge as a more self-confident, democratic, and constructive world player.

This outcome is hardly a foregone conclusion. If it is to be achieved, US officials must restrain themselves from exacerbating old fears by viewing China as a threat. China must be both encouraged and allowed to play by the global rules, even when the symbolism of its progress may be painful to endure.

To date, the Bush administration has not done badly with its policy of “tough love” toward China. But, just as Bank of America’s current $2.5 billion bid for a stake in the China Construction Bank raises no objections among US politicians, China, too must be permitted to invest abroad freely.

To paraphrase an old adage, what is fare for the US goose must be fare for the Chinese gander, even if the goose believes that the gander is becoming a little uppity. —DT-PS

Orville Schell, one of the world’s foremost experts on China, is Dean at the University of California at Berkeley

[Dr. Marten]

The Horse's Mouth

[Sam the Sham]

He asks the American goose to celebrate Christmas. With roast goose.

[Dr. Marten]

Ping.

[DTogo]

Allowing the Chicoms to buy Maytag is one thing, they may be made in China anyway. But Unocal and it's vast oil/gas reserves (even if technically the reserves are in foreign countries that Unocal simply has "rights" to) should NOT allowed to be sold to our economic and geopolitical "competitor" (an understatement). It should be a no-brainer in this day and age of high oil/gas prices and still no enacted U.S. energy policy.

Buy some shares in Unocal and get a dividend, fine. Buy a majority stake in Unocal or the company outright? NO WAY!!

[snowsislander]

I just somehow knew that something like "University of California at Berkeley" would show up at the end of this piece. ;-)

[Dr. Marten]

How about some reasons to support your concerns?

Aside from the fact that China is perceived as a potential adversary, I don't see any reason why they shouldn't be allowed to purchase Unocal. IBM and several other companies went to China.

As Schell stated, this is almost a mirrored reaction to the Japanese buyouts in the 1970's and 80's.

[snowsislander]

True, China remains a Marxist-Leninist state and could still become overtly hostile, especially where conflicts like the one surrounding Taiwan’s future are concerned. But the more hopeful scenario is that China, through piecemeal evolution, will continue to shed its historical sense of victimisation and its old, bankrupt ideology of revolution to emerge as a more self-confident, democratic, and constructive world player.

We can be "hopeful" that China will one day magically turn from its sullen demeanor of the last 150+ years to new sunny, democratic ways? Do we want to bet our children's future on such panglossian dreams?

[Dr. Marten]

With all due respect, your comment was the typical knee-jerk reaction I was expecting from FR.

Berkeley has nothing to do with this. Dr. Orville Schell is one of the most renowned authorities on China and his analyzes are highly respected among many China watchers. In fact, his book (The China Reader) was required reading for my Chinese Foreign Policy class which that just so happened to be taught by a Taiwanese professor.

You should learn something about the man before you criticize him.

[Sam the Sham]

Oil is a strategic commodity. It isn't like Columbia Pictures or real estate.

And China does not practice free market capitalism. It is state capitalism fattenned by state subsidies directed not for profit but the strategic interest of the Chinese state.

No, this is not just another business deal.

[snowsislander]

With all due respect, your comment was the typical knee-jerk reaction I was expecting from FR.

Hmmm. In the sense that I am not generally familiar with Dr. Schell, then indeed it was a knee-jerk judgment. But to the degree that one could judge from happy-think such as " True, China remains a Marxist-Leninist state and could still become overtly hostile, especially where conflicts like the one surrounding Taiwan’s future are concerned. But the more hopeful scenario is that China, through piecemeal evolution, will continue to shed its historical sense of victimisation and its old, bankrupt ideology of revolution to emerge as a more self-confident, democratic, and constructive world player. [para] This outcome is hardly a foregone conclusion. If it is to be achieved, US officials must restrain themselves from exacerbating old fears by viewing China as a threat. China must be both encouraged and allowed to play by the global rules, even when the symbolism of its progress may be painful to endure. ", then I will stay with my position that this is indeed entirely what I would expect from someone from Berkeley, no matter what his academic credentials.

On the other hand, if (1) he had acknowledged how dangerous the game we are currently playing is if our hopes fail, (2) that one possible outcome is the rosy scenario he paints, but there are much worse ones, (3) that China's history does not support any such rosy democratic happenings in its past, then I would have been very surprised indeed to find "Berkeley" at the end of the piece.

[tallhappy]

As Schell stated, this is almost a mirrored reaction to the Japanese buyouts in the 1970's and 80's.

Japan in those years was not a fascist one party dicatorship.

That is an important, perhaps overriding, consideration.

The comparison is not apt due to the significant differences in the political structures and governments of the two nations.

[DTogo]

Dr. M, I agree with SI's post #10 and StS's post #9. I'm no China expert (certain FReepers may say I'm no Japan expert either!), but I'm also not a free-trade-matter-what type person either. We can't have an unlimited number of immigrants flooding the country to do jobs we won't do because employers want to pay as little as they can get away with, and we can't give away a corporation to a near-enemy that involves such a strategic commodity (especially in this day and age) as oil/gas.

Japan's buy-up of eye-catching items in the '80s was more of a shock to America's ego that certain cultural icons were sold. Oil, as StS said, has very strategic geopolitical and economy implications, and to white-wash these in the name of free trade is short-sighted during a global war on terror where a large portion of the world's oil comes from the Muslim Middle East, and China continues to rattle it's sabers over Taiwan and soft-peddle with North Korea. And they recently signed an agreement to receive Russian oil and gas instead of Japan. How much tighter of a corner should we paint ourselves into before we wake up and realize that a commercial decision like this is not purely about commerce, especially to the Chinese?

[Dr. Marten]

Tallhappy, the link I posted under this article will lead you to my own comments and bascially I stated the same thing as what you just did.

[DTogo]

Trophy-hunting is what Japan engaged in during the '80s when buying Rockefeller Plaza, Pebble Beach, etc. (then selling much of them back later at a big loss). I am of the opinion that China views its acquisitions as far more than trophies to stroke its ego and tweak ours, and is very much considering the long-term implications - both commercial and geopolitical. IMHO

[tallhappy]

I think DTogo's points also are very appropriate. It's two things: China's government and what they are buying.

[Dr. Marten]

I don't consider the Chinese aquisitions to be any different those of the Japanese in the 80's.

To quote Simon (http://simonworld.mu.nu):

"Unocal controls less than 1% of the world's oil reserves. Of that a large percentage of its interests are in Asia, primarily in natural gas, not oil. There are no national security implications in CNOOC's overpaying for Unocal. Oil is a fungible commodity, easily traded and purchased on the open market. Even if China did suspend the delivery of Unocal's oil to the US for nefarious purposes, there is 99% of the world's capacity still available.

Indeed it could be argued that the purchase is in the US's national interest. Not only does it tie China closer to America economically, it is an exchange of China's massive foreign exchange reserves for tangible assets. China is putting its American dollar reserves to work. If they overpay, it is destroying some of that value (which they may be happy to do, given they've got US$800 billion or so to spend). America's already sold off the farm to China, Japan and others in the form of Treasury bonds and notes. This is just a swap of those bonds for real assets."

[DTogo]

Theoretical free-trade arguments that are easily refuted by real world situations:

"Unocal controls less than 1% of the world's oil reserves. Of that a large percentage of its interests are in Asia, primarily in natural gas, not oil.

Natural gas can be frozen into LNG, which is what the US is now (finally) considering building terminals for on the West Coast.

There are no national security implications in CNOOC's overpaying for Unocal.

Nobody said there was, if they want to overpay for Unocal, for a mere $billion or two.

Oil is a fungible commodity, easily traded and purchased on the open market. Even if China did suspend the delivery of Unocal's oil to the US for nefarious purposes, there is 99% of the world's capacity still available.

And what would happen to the price of that remaining 99% if markets got wind that China was being "nefarious" towards the US with Unocal's reserves? We'd end up paying 10~20% more in a matter of days. And to whom? Our "allies" like Venezuela and Middle Eastern nations (so they can make more "charitable" contributions to Hamas, Hezbullah and Islamo-fascist Madrasses around the world).

Indeed it could be argued that the purchase is in the US's national interest.

Sure, if you're head is in the sand.

Not only does it tie China closer to America economically, it is an exchange of China's massive foreign exchange reserves for tangible assets.

Tangible assets that have very strategic implications, it's not just a simple real estate transaction! Not to mention that the cost to extract these reseverves would far less for the Chinese (cheaper labor, lax enviro laws, no OSHA rules, etc) which would mean greater profits for Beijing.

China is putting its American dollar reserves to work. If they overpay, it is destroying some of that value (which they may be happy to do, given they've got US$800 billion or so to spend).

To work for whom? They could close down various US offices and move them to Beijing, replace hundreds of int'l workers with their own, maybe even de-list Unocal from the NYSE and re-list in Shanghai where disclosure rules are far lax, etc. And a few $ billion in overpayment to them is nothing! They will get it back in a few weeks of doing nothing more than trading with us because of our trade deficit with them!

America's already sold off the farm to China, Japan and others in the form of Treasury bonds and notes. This is just a swap of those bonds for real assets.

And that's unfortunate we have "sold off the farm" to them because of excessive government spending. But do we now need to exacerbate the problem by selling a fuel source to our "farm" as well? Again, Unocal is not just a widget company or piece of real estate. This free-trader is completely ignoring China's military and geopolitical goals, fuelled (pun intended) by their trade surplus and US$ reserves.

[sittnick]

Just as Bank of America’s current bid for a stake in the China Construction Bank raises no objections among US politicians, China, too must be permitted to invest abroad freely.

Good point. We should prohibit American-based companies from buying into Red China.

Then maybe it will be easier for me to find non-Red Chinese manufactured goods.

When the Roman Catholic Church and non-official Christian denominations are made legal in Red China, AND families are not told how many children they are allowed to have, we can talk.

For those who want cheap imported stuff, I am sure that Malaysia, Taiwan (R.O.C.), Indonesia, Mexico and India can fill in.

[ponder life]

Never mind that by 2000 China had invested less than $400 million in the US, while Britain had invested over $230 billion and Japan $159 billion. IBM is one of America’s most iconic brands, and many US politicians were taken aback by China’s economic incursion.

This needs to be kept in mind when looking at the overall perspective of which country is the largest foreign owner of American assets and by how wide of a margin.

Good article and brilliantly written.