My July 7th, 2005, column for the Pittsburgh Tribune-Review was inspired not only by the attempt by the China National Offshore Oil Corp. (CNOOC) to buy a majority stake in Unocal, a U.S.-headquartered oil company, but by some poorly reasoned opposition to this sale. (See, for example, this bizarrely bad column by Paul Krugman.) My arguments for why Americans had nothing to fear from this purchase are in the column beneath the fold.
Should Americans worry if China National Offshore Oil Corp. (CNOOC) buys a majority stake in the U.S.-headquartered oil company Unocal?
At least 40 members of Congress think so. They’re calling for a full government review of CNOOC’s $18.5 billion offer to Unocal shareholders. And newspapers, radio and the blogosphere are filled with panicky expressions of fear about this pending transaction.
Well everyone, pour yourselves some green tea and be calm.
China is a fast becoming a manufacturing marvel. The Chinese people have a knack for producing attractive goods and selling them to Americans at prices Americans like. When businesses successfully satisfy consumers, these businesses earn handsome profits. In the case of any businesses selling goods to Americans, these profits are in the form of dollars.
What are Chinese merchants to do with these dollars? They could spend every last one of them on U.S.-made goods and services. There would be nothing wrong with that option. But contrary to much muddled thought these days, there’s nothing especially right with that option, either.
The Chinese are no different from Americans. When they earn profits, they spend some of these profits on fancier cars, more powerful home computers, better medicines and other consumer goods. But why expect (or want) them to be superficial spendthrifts? Fortunately, they’re not, for – like successful business people everywhere – they invest many of the dollars that they earn.
The Chinese invest many of these dollars in U.S. treasuries. In this way, they help fund Uncle Sam’s bloated budget. (If it weren’t pregnant with threatening possibilities, Congress’ self-righteous anger at China for lending Congress lots of money would be a comedy skit worthy of “Saturday Night Live.”) But in the past several weeks, Chinese firms have unveiled plans to invest in America also by buying prominent U.S. companies – CNOOC has its bid for Unocal and China’s Haier Group wants to buy Maytag.
Suppose the Chinese manage these firms so well that their profitability rises. What a boon to all of us. Our economy’s output increases. Sure, the Chinese owners (like all owners) will take some of this higher output for themselves in the form of profit, but the competitive nature of markets ensures that the bulk of the benefits go to consumers.
What if the Chinese manage these firms poorly? The competitiveness of markets keeps the losses to the economy at a minimum and the losses suffered by the ineffective owners at a maximum. Continuing Chinese losses — should they prove unable to run these firms profitably — will lower the market value of shares in these firms. Prospective owners better able to run these firms will likely buy these shares and take majority control from the hapless Chinese.
In both possible scenarios, there’s nothing crucial about the nationality of the firms’ owners. What’s true of the Chinese is true of Americans, Italians and Cameroonians. Americans no less than Chinese can and do run some firms profitably; Americans no less than Chinese can and do run some firms ineffectively. And the Chinese are no more likely than are Americans to hold on to assets that in their hands prove to be consistently unprofitable.
But what about national security?
It’s easy to imagine grim scenarios in which foreign ownership of firms in the U.S. traps us in a national security nightmare. But it’s much more difficult to offer a compelling, realistic account of how such an outcome might transpire.
The greater the commercial connections that bind people to one another, the less likely they are to shoot each other. A basic rule of good business is: Kill neither thy customers nor thy suppliers (and don’t even mistreat them).
And all owners of firms in the U.S. are subject to U.S. law. A Chinese owner of offshore oil rigs in U.S. waters must abide by U.S. law no less than an American owner. If the Chinese owner starts to use these assets unlawfully, the government can take action against the firm just as easily as it can take action against the firm if its American owner breaks the law.
This last observation points to an important fact typically overlooked by those who react with fear to foreign ownership. In almost all cases, the physical assets remain in the U.S. and, hence, within the jurisdiction of American law. If, for example, Uncle Sam decides he needs to confiscate oil to fight a war, he can just as easily confiscate this oil from oil wells in America owned by Mr. Chang as he can from oil wells in America owned by Mr. Smith.
There’s no plausible reason to fear Chinese purchase of American firms.