Seven Questions: China and Unocal
A subsidiary of China’s state oil company, CNOOC, wants to buy California-based oil giant Unocal. To hear some Washington analysts tell it, the deal would amount to selling secrets to the enemy. FP asked James V. Feinerman, an expert in Chinese law and corporate finance, about the politics, economics, and hysterics surrounding the proposed deal.
FOREIGN POLICY: Would the sale of Unocal to CNOOC present a national security threat to the United States, as many have warned?
James Feinerman: No. The threat seems almost negligible. Some people in Washington have reacted a bit hysterically. I understand the general fear that important parts of the energy infrastructure of the United States acquired by foreign powers could present a threat. But Unocal is a fairly small oil company. Most of its productive assets are offshore, and they arent sold on U.S. markets.
If there is a legitimate concern about certain sensitive Unocal assets, then there is a way to thread the needle. You hive off those things that CNOOC cant have. They can say, Okay, you can have Unocal, except for this. It is done all the time in antitrust review of ordinary American-to-American corporate acquisitions.
FP: Oils strategic value doesnt make a difference?
JF: It doesnt. The sale of Unocal to CNOOC probably wouldnt change where oil is going today. The hawks on China have said China is trying to control the source and get the oil right from the well head and avoid the market. Thats nonsense, because that just offsets purchases they would otherwise have to make. So a barrel of oil costs them the same whether they are taking it right out of the ground from a well that they own in Indonesia or theyre purchasing them on the New York or London markets. People dont get it though. Theres a sense that the physical location of the assets matters somehow. But for a fungible commodity like oil, it doesnt make a difference.
FP: What explains the largely negative reaction to the proposed deal on Capitol Hill?
JF: There are three things. There is a feeling that some U.S. jobs are at risk with the CNOOC proposal. But its just as likely that those jobs would be lost if Unocal is acquired by another U.S. company.
The other two reasons are more baffling. The national security argument gets bound up in a zero-sum view of China: the idea we cant give them any advantage, any edge, if they are going to be a future enemy. Everything they gain, in other words, is a loss for us.
The third area is economics. China is a rising economic power, and we have a huge trade imbalance with them. Some say this deal might further skew the imbalance. Ironically, this may be a rare opportunity for China to put money back in the pockets of Unocals mostly American shareholders. But most people dont choose to see it that way.
FP: Some say that a CNOOC purchase wouldnt be a market transaction at all, as the company is backed by Beijings finances.
JF: Markets everywhere have varying degrees of perfection and efficiency. I wouldnt deny that CNOOC has access to capital on very favorable terms, ones probably no private company would ever be able to enjoy in a market economy country. But there are a lot of other countries around the worldincluding our European alliesthat similarly subsidize what they see as important strategic national industries.
FP: What would the larger repercussions be if Washington were to block a CNOOC deal with Unocal?
JF: That would force China into unfortunate reactions. They will see themselves as threatened because they are perceived as a threat. They would see every move that we make against themeven if there are other explanations for itas part of an overall rivalry. They see the CNOOC deal as a relatively harmless economic transaction, and would see a blocked deal as a protectionist, xenophobic, or maybe even racist reaction.
When Daimler-Benz acquired Chrysler, people didnt say, This company served the Nazis and, my God, the people who caused the Holocaust are taking over an American engineering and technical icon. They were white Europeans, and a lot of their surnames they share with a number of American citizens. But when its the Chinese, or before them, the Japanese, then all of a sudden we get worried because theyre different.
FP: Would Unocal be a greater human rights threat in Chinese hands, as some have argued?
JF: Its a theoretical possibility, but highly unlikely. The Chinese want to acquire Unocal in part because they want to get into world-class business operations. They are trying to upgrade their skills, including their management and human resources skills, rather than continue working like a domestic Chinese company. CNOOC would learn modern business management, including the human rights-related experience that oil majors have already gained.
Of course, Western companies themselves have been accused of human rights abuses. Unocal itself is the worst example. Its been an incredible, bad actor as an American company, so the idea that it could be any worse in Chinese hands is almost risible.
FP: Should there be greater worry about human rights now that China and India are eager to snatch up energy resources wherever they can find them, regardless of the consequences for human rights?
JF: I dont deny that the Chinese are doing bad things in Sudan and may persist in doing them in Southeast Asia in places where Unocal has been doing them already. But China might not be so desperate if they manage to acquire assets in other parts of the world where they dont have to make the dirty deals theyve been making with dictators.
Also, the Chinese might be forgiven if they say to Americans: Youre lecturing us on our human rights violations in our quest for oil. But one could view your whole enterprise in Iraq as an attempt to not only secure access to Iraqi oil but also to shore up your hegemony in the Middle East. You havent pushed democracy on the Saudis. So dont start lecturing us. I think that would be cynical, but understandable.
James V. Feinerman is director of Asian Law and Policy Studies and James M. Morita professor of Asian legal studies at Georgetown University Law Center.