US Vulnerability to China

This week’s bid by a Chinese oil company (CNOOC) to buy an American oil company (Unocal) has provoked some interesting reactions in Washington. Despite the fact that 70% of Unocal’s oil reserves are in Asia, that it supplies just 1% of US oil needs, and that oil is highly fungible (meaning that oil from one source can and will be replaced by oil from another source at virtually the same price if necessary), it seems rather silly to worry about the US becoming more economically dependent on China if the deal goes through. Which means, I suppose, that I find many on Capitol Hill to be rather silly right now…

The Washington Post: “House and Senate members demanded an administration review of the bid, required under the Defense Production Act, to determine potential economic and security risks.”

The New York Times: “Two Republican congressmen, Richard W. Pombo, chairman of the House Committee on Resources, and Duncan Hunter, chairman of the House Armed Services Committee, wrote to President Bush last week, saying that ‘such an acquisition raises many concerns about U.S. jobs, energy production and energy security.'”

A.P.: “‘It’s not a business transaction at all,’ said C. Richard D’Amato, chairman of the U.S.-China Economic and Security Review Commission, a congressional advisory panel. ‘This is not a free market deal. This is the Chinese government acquiring energy resources.'”

I suppose that most of the reason that this deal is provoking such reactions among US politicians (compared to what would be the case if it was, say, a Brazilian company offering to buy a US company) is the idea that this deal would make the US more economically dependent on a country that may someday be an ‘enemy’ of the US in some sense.

Whether it is indeed likely that China will someday be an ‘enemy’ of the US is a subject for another day (personally, I’m skeptical). But even if you take that assumption as true, the fact is that this deal has virtually no macroeconomic relevance, and that this revelation about US economic dependence on China is coming very, very late.

Given that China’s government already controls hundreds of billions of dollars of US Treasury bonds – easily enough to wreak substantial havoc in US financial markets whenever they want to – the US economy is already extremely vulnerable to decisions made by the Chinese government. China’s acquisition of one billion barrels of oil reserves in Asia is nothing compared to the economic influence over the US that they already wield.

That’s why what really worries me about the sentiments coming out of Capitol Hill right now is simply the astonishing economic naivety that they display… and that these misconceptions have a good chance of leading to bad policy-making.