China Flexes Its Muscles

There’s an old saying in the oil industry: “The cheapest place to drill for oil is on Wall Street.”

China’s bid to take over Unocal has the policy world aflutter. Most commentary argues that China is becoming an economic and geopolitical juggernaut, the equivalent of 1980s Japan only this time with an army.

Leave it to Paul Krugman of the New York Times to point out the missing element in the press coverage. If ever there was a western company that could live easily under Chinese tutelage, it is Unocal. Its previous foray into Asian waters involved the alleged use of forced labor to build a pipeline through Myanmar (nee Burma).

But his column otherwise peddles the conventional wisdom, which argues that China poses a threat to America’s long-term security interests. I find such arguments unpersuasive. China is a rising economic power largely because of its access to the U.S. and other advanced industrial markets for low value-added goods like toys, clothes and small appliances. In the 1980s, Japan (and Germany) were devouring U.S. markets for automobiles, machine tools, steel and advanced electronics. Even today, which industries should the U.S. worry more about losing?

My own reading of Chinese history is that it has almost never sought to project military power beyond its borders, with the emphasis here on the word borders. Vietnam, Taiwan, North Korea, Tibet, Xinjiang – these are the areas that have the most to fear from China’s growing military might. The rest of Asia and large parts of the western world have more to gain from China’s greatest export – its people. The large overseas Chinese populations, including those in North America, will serve as a vast conduit for repatriating U.S. dollars into productive investments.

The Unocal bid reflects nothing more than China’s efforts to secure a hedge against the rising price of oil. China does not have large domestic reserves for its rapidly industrializing economy. Right now, not a single Chinese company benefits from the run-up in oil prices. It can hardly be a pleasant prospect to watch its dollar reserves earned from making toys and clothes getting recycled to the west in the form of dividends to ExxonMobil, Shell and Chevron.

In the 1980s, the Japanese challenge angered many Americans because the failure of U.S. corporations to successfully compete threatened their jobs. As oil moves inexorably toward $100 per barrel, I can’t believe that Americans will care one whit about the home country of the oil giants reaping the short-term rewards.