(07/24/05) Clyde Prestowitz quoted in the New York Times
New York Times (NY)
Copyright (c) 2005 The New York Times. All rights reserved.
July 24, 2005
Who's Afraid of China Inc.?
WILLIAM A. REINSCH, an avowed free trader, welcomes China's rising
stature in the international economy. After all, he is the president of
the National Foreign Trade Council, an organization founded in 1914 to
promote an "open world trading system." Indeed, when he was a senior
trade official in the Clinton administration, Mr. Reinsch was chided by
some security analysts who said he was being soft on China by placing
matters of commerce ahead of national security.
But even Mr. Reinsch is uneasy about China's attempt to buy Unocal, a
midsize American oil company. The outcome of the takeover contest for
Unocal is uncertain, and last week its board embraced an improved offer
from Chevron. Yet Cnooc, a government-backed Chinese oil company, still
has the higher offer -- and it could up the ante.
If the Chinese bid proceeds, Mr. Reinsch wants to see a thorough
national security review of the deal, one that goes beyond the usual
focus on weapons technology to include energy security. "Our Army, Navy
and Air Force run on oil," he explained.
Oil is the ultimate geopolitical commodity -- it is "The Prize," as
Daniel Yergin titled his epic history of petroleum and international
politics. And even if Cnooc fails to grab Unocal, the pursuit has
pushed the two sides of the Chinese challenge together and into the
spotlight of public debate. For China is both an engine of economic
globalization and an emerging military power. In symbolic shorthand, it
is Wal-Mart with an army.
The two sides aren't neatly divided. But those who focus on economics
tend to see partnership, cooperation and reasons for optimism despite
tensions, while security experts are more pessimistic and anticipate
strategic conflict as the likely future for two political systems that
are so different.
In China, there are also two camps -- the security hawks and the
economic modernists, according to China analysts. The modernists see
China joining the United States as the second great economic power of
the 21st century, and the two nations sharing the gains from increased
trade ties and global growth. The hawks regard that view as naive, and
fret that American policy is to remain the world's only superpower and
to curb China's rise. So China's response, the hawks say, is to try to
erode United States hegemony and reduce America's power to hold China
Both faces of China have been evident recently. Two weeks ago, a senior
Chinese military official, Maj. Gen. Zhu Chenghu, said China should use
nuclear weapons against the United States if the American military
intervenes in any conflict over Taiwan. Then, bowing to pressure from
the United States and other trading partners, China announced last
Thursday that it would no longer peg its currency tightly to the
dollar. It is a measured step, and it will not do much to moderate
China's huge trade surplus with the United States anytime soon. But the
move is a sign of flexibility and accommodation.
"Do we see each other inevitably as antagonists, or do we see a world
of globalization from which both sides benefit? That is the big issue,"
said Kenneth Lieberthal, a senior official in the National Security
Council during the Clinton administration.
"And that framework, one way or another," added Mr. Lieberthal, a China
analyst and a professor at the University of Michigan business school,
"will drive an enormous number of policy decisions."
So that is the China question: Is it an opportunity or a threat? If
nothing else, the Cnooc bid for Unocal has shown how unsettled American
thinking is on China and how deep the anxieties run, both in matters of
national security and trade.
It is easy to dismiss Washington as a hot-air factory, but the scope of
the outcry in Congress is significant. Resolutions and legislative
proposals, all critical of Cnooc's takeover bid, have piled up in the
House and Senate, from Republicans and Democrats. A resolution
presented last month by Representative Richard W. Pombo, a California
Republican, declared that permitting the Chinese company to buy Unocal
would "threaten to impair the national security of the United States."
It passed, 398 to 15.
Senator Byron Dorgan, a North Dakota Democrat, has drafted three pieces
of anti-Cnooc legislation that range from calling for a six-month
Congressional inquiry into the bid to a bill that would prohibit the
deal. Mr. Dorgan objects to the Chinese move on fair-trade grounds. The
Chinese government, he says, would not allow an American company to buy
a Chinese oil company. "So why on earth should they be able to buy an
American oil company?" Mr. Dorgan said.
Yet the Chinese takeover bid taps into a deeper concern about trade and
globalization for Mr. Dorgan. He talks of manufacturing jobs lost to
China, intellectual-property pirates in China illegally copying
American movies and software, and a trade deficit with China that is
rising astronomically with no end in sight. "Trade should be mutually
beneficial, and it is certainly not with China," Mr. Dorgan said.
The tempest in Congress has increased the political risks surrounding
the Cnooc bid. At $18.5 billion, the bid remains higher than Chevron's
sweetened offer of $17 billion. But Wall Street analysts say Cnooc will
have to go higher to have a chance to win, offering a sizable premium
over the Chevron bid to compensate for delays of a government review of
the Chinese offer or even the possibility that Washington may block a
It would be an extreme step, but Congress has the power to "regulate
commerce with foreign nations," under Article I, Section 8 of the
Constitution. "My sense is that Congress is not going to stand still
for a Cnooc takeover being approved," said C. Richard D'Amato, chairman
of the United States-China Economic and Security Review Commission, an
advisory group to Congress. "That is the political reality."
Cnooc and its advisers misread the political environment in Washington.
Fu Chengyu, the Cnooc chairman who earned a graduate degree from the
University of Southern California, has said he was surprised by the
intensity of political criticism. Cnooc's path would have been smoother
if it had joined with an American oil company as a partner in its bid,
an option that was considered briefly but rejected, according to a
person close to the company.
The idea, the person said, would have been that the American company
would acquire Unocal's assets in the United States, while Cnooc took
the main prize in the deal -- Unocal's offshore natural gas fields in
Asia and its expertise in offshore exploration and production. The gas
reserves and skill are considered strategic to China's goal of moving
away from coal and generating 20 percent of the nation's electricity
from natural gas by 2020. "It would have been better to have not made
this big move a head-on attack, to have linked up with an American
partner so the deal would have been less threatening and less a
lightning rod for China politics in the United States," the person
Perhaps, but many economists and trade specialists contend that the
American angst over the Cnooc bid says more about the United States
than it does about China or Cnooc's tactics. "All this really points to
the anxieties about globalization in our own society," said Clyde V.
Prestowitz, a trade official in the Reagan administration and president
of the Economic Strategy Institute in Washington. "We are so
economically interdependent with China now and we chose that path."
Washington pushed for China's integration into the international
economy and its entry into the World Trade Organization in 2001.
American companies have farmed out much of their manufacturing to
Chinese factories. American consumers have been on a Chinese shopping
spree for years, buying everything from clothes to computers made
there. That is why the United States had a record $162 billion trade
deficit with China last year. China sits on $700 billion in foreign
exchange reserves, mostly in dollars. It recycles those funds in good
part by investing in United States Treasury bonds; that keeps American
interest rates low, fueling the real estate boom.
"We handed China the money they are using to try to buy Unocal," said
Mr. Prestowitz, author of a new book on the shift of wealth and power
to Asia, "Three Billion New Capitalists" (Basic Books, 2005). "And now
we're telling the Chinese, please keep investing in our bonds but you
can't invest what amounts to a sliver of their surplus in an oil
company. That's really confused and hypocritical on our part."
Where others see muddle, R. James Woolsey, director of the Central
Intelligence Agency in the Clinton administration, sees strategic
clarity in challenging the Cnooc bid. Oil is a globally traded
commodity, Mr. Woolsey concedes, but it is also a strategic resource in
a market that is tightening because of rising demand from fast-growing
nations like China and India. That, Mr. Woolsey says, is before one
begins thinking of the possible impact of, say, an act of terrorist
sabotage in a crucial Middle East oil field.
"China is realistically assuming there may be a shortage of oil," said
Mr. Woolsey, a vice president in the Booz Allen Hamilton consulting
In China, Mr. Woolsey sees a nation with military ambitions to
challenge the United States, and a political system with little regard
for human rights and free speech. Cnooc, in Mr. Woolsey's view, is the
corporate vehicle of "a Communist dictatorship."
The Cnooc move, according to Frank Gaffney Jr., a senior Defense
Department official in the Reagan administration, is a step to ensure
that China has the resources for its overarching national design.
"China's strategy is to supplant the United States as the premier
economic power in the world and, should it become necessary, defeat us
militarily," said Mr. Gaffney, president of the Center for Security
The strategic concern was much narrower at William Blair & Company.
Until recently, William Blair, the investment firm in Chicago, was the
largest outside shareholder in Cnooc, which is majority-owned by the
Chinese government. But William Blair sold off its stake, worth about
$160 million, in recent weeks because of worries that Cnooc was
behaving too much like a state-owned company and not enough like a
capitalist enterprise trying to maximize returns to shareholders,
explained David Merjan, a fund manager at the firm.
The pricey bid for Unocal, Mr. Merjan said, raised doubts about how
independent Cnooc really was from the Chinese government. "If China is
going to sell shares in a company like Cnooc to outside shareholders,
it should not be run for the benefit of Chinese economic policy," Mr.
CNOOC and its pursuit of Unocal, it seems, are part of China's
evolutionary path. Cnooc is playing its hand with plenty of government
help, about $7 billion in loans on terms Western oil companies could
not hope to get. Accordingly, Cnooc may be willing and able to overpay.
Yes, China is hunting for oil and gas assets around the world as a
national priority. Still, that is happening in a nation that is
drifting steadily toward a market economy, though one with more central
control than Americans view as a free-market economy.
The Chinese Communist Party, with 60 million members -- more than the
population of France -- does guide the economy, if less and less over
time. "But think of it as the Chinese bureaucratic capitalist party,"
said Mr. Lieberthal of the University of Michigan. "It has nothing
really to do with Communism."
Mr. Lieberthal counts himself as among the optimists on China.
Globalization, he says, and continued integration of the Chinese and
American economies can work to mutual benefit. The spread of
middle-class affluence and education across more of the Chinese
population should eventually be a force for democratic liberalization,
following the pattern of Taiwan and South Korea.
"Am I a hundred percent sure I'm right? No, but that's the long-term
bet I'd make," Mr. Lieberthal said. "And if you let the pessimists --
the people who believe that the U.S. and China will inevitably be
enemies -- drive policy, then the outcome will be the one they
Photos: China's offer to acquire Unocal has touched off intense debates
on trade, globalization and military might. Above, Chinese soldiers
marched in Beijing. (Photo by Jason Lee/Reuters)(pg. 1); A Chinese
soldier checked an oil tank in the Qinghai province last year. China
considered, but then rejected, the idea of teaming with an American
company in a bid to acquire Unocal. (Photo by Shan Haijing/European
Pressphoto Agency)(pg. 9)