Intelligence Brief: Unocal
During the week of July 11, the bidding war between U.S.-based oil giant Chevron and the Chinese National Offshore Oil Corporation (C.N.O.O.C.) for control of U.S. oil company Unocal heated up, with both adversaries mounting major public relations and lobbying campaigns, and U.S. Congressional opposition to a C.N.O.O.C. takeover ratcheting up to a fever pitch. [See: "Intelligence Brief: China"]
Until C.N.O.O.C. weighed in with an unsolicited $18.5 billion cash offer, it appeared that Chevron's $16.6 billion bid for Unocal would face clear sailing. The Chevron acquisition had already gained approval from Unocal's board, pending an August 10 stockholder vote, but C.N.O.O.C.'s intervention sent the deal off course. At a July 17 meeting, Unocal's board rejected C.N.O.O.C.'s offer in its present form, but the decision was not final. Analysts believe that Unocal's board is trying to play the two sides off against one another, seeking to get the adversaries to raise their bids.
Although Unocal accounts for only 0.23 percent of world oil production and 0.3 percent of U.S. consumption, the company has 1.75 billion barrels of reserves, 980 million of which are in Asia and 447 million of which are in the U.S. Unocal is particularly attractive to C.N.O.O.C. and to China's government, which owns 70 percent of C.N.O.O.C., because of the Asian reserves, which are located in Indonesia, Myanmar and Thailand. As the global oil industry consolidates and competition for reserves becomes more intense, Chevron sees Unocal -- a California neighbor -- as a prime strategic acquisition.
Neither of the adversaries seems willing to give way and, having been placed on the defensive, Chevron has politicized the conflict, exerting pressure in the U.S. Congress on a broad front to ban the C.N.O.O.C. takeover outright or to delay it sufficiently to persuade Unocal shareholders to accept Chevron's offer, which already has regulatory approval. Chevron's lobbying effort, which has met with impressive success, has been countered by a similar C.N.O.O.C. campaign. Vice Chairman of Chevron, Peter J. Robinson, openly admits trying to turn the company's conflict with C.N.O.O.C. into a "geopolitical" issue. C.N.O.O.C. strives to interpret the bidding war as simply an ordinary business deal.
Despite the Congressional outcry, the Bush administration has remained neutral in the Unocal dispute, promising that C.N.O.O.C.'s bid -- if it is accepted -- will be reviewed by the Committee on Foreign Investment in the U.S., which vets foreign takeovers of U.S. companies on security grounds. The administration's silence reflects the conflicting interests at play in Washington's global economic policy, which the Unocal fight has highlighted.
Globalization or Economic Nationalism
In its attempt to portray its conflict with C.N.O.O.C. as a geopolitical issue, Chevron has brought to the fore the increasingly difficult decisions faced by Washington in responding to the rise of China's economic power. Writing in U.S. News and World Report, Matthew Benjamin has summarized the problem succinctly: "Essentially, the United States and its politicians are learning that globalization is not pain free."
Sino-U.S. relations are among the most complex bilateral ties in the world and are marked by subtle patterns of dependency, interdependence, competition, cooperation and conflict. Up until the Unocal dispute, economic relations between the two great powers had achieved a highly unstable equilibrium based on Chinese exploitation of the U.S. market for its exports in return for China buying U.S. debt. That tacit bargain had already come under stress through the loss of U.S. manufacturing jobs to China, ballooning Chinese textile exports, alleged Chinese violations of intellectual property rights of U.S. companies, technological transfers and mounting opposition to the low currency valuation of China's yuan relative to the U.S. dollar.
Resistance in the U.S. to the domestic impact of China's growing strength has crystallized around the Unocal dispute because C.N.O.O.C.'s bid is the most serious instance of recent Chinese moves to acquire U.S. assets rather than simply to fund its debt. The recent rise in the price of oil and the high probability that elevated price levels will persist has made energy a sensitive political issue in the U.S. By going to Congress, Chevron has succeeded in making Unocal a strategic issue.
Finding access points in every Congressional committee concerned with foreign trade, resources and military security, Chevron's campaign culminated on July 13 at a hearing of the House Armed Services Committee at which congressmen favorable to Chevron joined with anti-Beijing defense hawks to commit to introducing a bill blocking a C.N.O.O.C. takeover. Linking fears that Beijing might use its acquisitions to disrupt the U.S. economy and the arguments that U.S. energy companies are barred from buying Chinese firms and that Beijing's financing of C.N.O.O.C.'s bid with low-interest loans violates fair trade principles, Congressional opposition to the bid spread beyond its original base in California to include every region.
The wave of economic nationalism set in motion by Chevron's lobbying carries with it the long term possibility that U.S. resistance to asset acquisition might place foreign investments of U.S. corporations in jeopardy, stalling or even reversing economic globalization. Analysts agree that C.N.O.O.C.'s bid, which follows Lenovo's acquisition of IBM's personal computer business and Haier's bid for Maytag, will be repeated by many more efforts by Chinese firms to acquire U.S. assets. As time goes on Washington will be increasingly forced to choose between globalization and nationalism.
The Bottom Line
Whether or not C.N.O.O.C. succeeds in making an offer generous enough to persuade Unocal's shareholders to acquiesce in a takeover, the bidding war has brought to the surface an underlying strain of economic nationalism in the U.S. that is unlikely to abate. As interests in the U.S. are affected adversely by Chinese economic initiatives, the alliance between those interests and anti-Beijing security hawks will strengthen, placing strains on Washington's support of globalized investment markets.
Look for a series of difficult decisions on asset acquisition to emerge in the years ahead that will significantly determine the future of globalization and the shape of Sino-U.S. relations.
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