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08/07/2005

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Sam

I've always agreed with free trade but the idea of Chinese companies buying US corporate assets has bothered me.

I think some thought experiments can illustrate why. China would not be allowed to buy Lockheed, Boeing, Northrup or the Electric Boat division of General Dynamics, for obvious reasons. Similarly, bin Laden would not be allowed to buy the nuclear reactor division of Westinghouse.


But would China be allowed to buy Intel and Microsoft, thereby gaining access to virtually all corporate servers and desktops? No. But Sony and Matsushita probably would be.

Why the difference? Japan is an ally of the US and Sony and other Japanese companies are not regarded as extensions of the Japanese government.

China is currently thought of as a potential enemy of the US. Chinese companies are almost certainly extensions of the Chinese government, given the nature of the Chinese economic system.


When a company based in a friendly nation buys US assets, it is a reasonable assumption that usual commercial behaviour would apply, profits would be maximized and effiencies would be applied.


But when an enemy buys US assets, you can't make that assumption. Strategic or military goals may trump commercial interests.


In the case of Unocal, China may well be interested in proprietary information difficult to obtain some other way. Information sharing with other oil companies may tell China how to sabotage the US oil transport system or perform some other mayhem. No commercial company would ever do such thing, it would be corporate suicide. But the Chinese government may decide otherwise, in a strategic crisis. You can't possibly know how a potential enemy may use information belonging to a US corporation.


Recently a Chinese general said that China would likely use nuclear weapons against US cities should the US defend a US ally, Taiwan, from a Chinese attack. The tepid Chinese denial of that statement was frightening.


So does it make any sense to allow a country that has explicitly stated that it will use nuclear weapons against US population centers to buy any US assets, let alone potentially strategic assests like oil companies? I don't think so.


I think you've applied the assumptions and logic of industrial and commercial decision making to what may be a strategic and/or military situation. Two very different situations that lead to different conclusions.

Dan

God save us from the militarists and other "strategic" thinkers.

Does commerce make war inconvenient? Good!

Jack

I think that both Posner and Becker address the strategic/military question directly. China would, in fact, be putting themselves in a strategically disadvantaged position by acquiring assets which, ultimately, are under the control of the U.S.

As for getting an informational strategic advantage, I don't see how acquiring Unocal would give China special access to information that couldn't be had by doing regular business with American or other oil companies. In addition, allowing CNOOC to acquire Unocal could have the effect of improving relations between the U.S. and China, thereby reducing the likelihood of violent confrontation in the event that our interests or loyalties are at odds. Allowing the acquisition would also be an encouraging sign to both U.S. and Chinese investors such that each would be likely to exert more pressure on the Chinese government to relax its hold on the market. In recent years, the Chinese government has been more susceptible to such pressure.

N.E.Hatfield

Is CNOOC and Unocal the modern equivalent of Krupp-Vickers, IG Farbin-US Chem.Ind. or maybe GM-Opel, etc., etc.. I won't go into the details of top secret R&D, but is the US responsible for "Zyklon" and other thigs? Mann! Don't these guys ever learn? ;)

Patrick R. Sullivan

Well, the idea obviously causes strong emotional reactions in some. It even unhinged Paul Krugman.

Sam

As far as proprietary information that Unocal might have, I don't know what that information is, or how it might be used against the US. However, I think one lesson of 9/11 is that seemingly innocuous activities can have enormously destructive consequences.


Was there anything wrong with al Qaeda operatives taking lessons on how to fly (but not land) a jetliner? Was there anything wrong with Atta asking for a loan to build the world's largest crop duster? Before 9/11, there was only the faintest unease. After 9/11, those actions were recognized as incredibly dangerous.


I think the real issue is this: China has decided that the US is a potential enemy. Don't forget, it was a Chinese general who said that a nuclear first strike is something China might consider if the US tried to defend Taiwan against a Chinese aggression.


And so my point is this, should corporations controlled by countries who have adopted a nuclear first strike strategy against the US be allowed to buy US assets?


So in considering the Unocal purchase, I would argue that simply applying investment criteria to the purchase is not enough. If China were to buy up enough US assets and glean enough information from corporate information systems to successfully deter the US at a critical moment during a crisis, then the excess purchase price of US assets may be regarded as worthwhile.


Would China consider "wasting" $100B in overpaying for Intel, Microsoft, Unocal and other US assets if they could then capture Taiwan, Singapore and adding other SE Asian countries to the Chinese sphere of influence after successfully deterring the US from taking military action? Perhaps.


My argument is that those other, non economic benefits of buying US corporate assets ought to be considered when evaluating any Chinese purchase of US assets.


Here is something else to ponder. Taiwan is one of the largest investors in Chinese factories, yet China still has formally adopted capturing Taiwan as a national goal. The argument that increased commercial activity somehow reduces tensions does not appear to work in the real world.


The USSR provided Nazi Germany with war materials right up to the time Hitler invaded the USSR, the US was the largest contributor of foreign aid ($370M IIRC) to the Taliban in Afghanistan before 9/11. Increased trade surely can reduce tensions, but it's also evident that it doesn't work all the time. It would be interesting if someone has done a study of trade prior to conflicts, perhaps measuring how often tensions have been reduced due to commercial activity.


I'm greatly in favour of increased trade between nations, but I'm also greatly not in favour of national suicide.

Palooka

Though commercial entanglements may reduce the chance of war/tension/criticism, is that always a good thing?

Let us say China ups its abuses of human rights, knowing that its commercial entanglments with the USA make it difficult for the USA to forcibly and meaningfully object. Is that a good thing?

Increasing our interdependence with China may cause us to be less firm on the Taiwain question. What if China, knowing the US's economy would severely suffer absent continued economic cooperation, chose to invade Taiwain precisely because of, rather than despite of, these sort of economic entanglements?

Surely, this sword cuts both ways. Increased cooperation and interdependence makes China more willing to bend to some of our demands. But does the influence only go one way? What if China was, at least in part, buying US assets in an attempt to mute future criticism of human rights abuses or to leverage themselves better for the Taiwain question? Should we OK such purchases knowing it will undercut our ability to further our human rights and foriegn policy objectives?

Dan

"Don't forget, it was a Chinese general who said that a nuclear first strike is something China might consider if the US tried to defend Taiwan against a Chinese aggression."

Even China has some neoconservatives.

ben

Sam

You have got Posner's hostages argument around the wrong way. China's ownership of America-based assets make Chinese aggression against America less likely, not the other way round. Taiwan's ownership of China-based assets make Taiwanese aggression less likely, not the other way round.

The hypothesis that trading nations are less likely to go to war is testable and has been confirmed. See Oneal and Russett (1997), "The Classical Liberals Were Right: Democracy, Interdependence, and Conflict," 1950-1985, International Studies Quarterly 41(2): 267-294.

9/11 has no value here, except in support of your conspiracy theories. Your USSR/Germany and Taliban examples are nearer the mark but on their own do not refute the hypothesis. As you note, other reasons for war (economic or otherwise) can overcome the disincentive for war provided by trade. Clearly this is not, on its own, a reason to avoid trade.

Under Posner's hostages theory, the incremental benefit from allowing a foreign government to buy US assets is higher when that country is an aggressor, because hostages raise the cost of aggression. You will counter, I think, that economic incentives do not matter in pursuit of military objectives. What evidence do you have for this?

Joe Merchant

It just feels bad.

Economically, having a competitor overpay to purchase a commodity is a good thing.

Strategically, having a potential enemy place "hostages" in your effective control is a good thing. All of the foreign car manufacturers with factories in the US are a great example of "hostages in the event of war."

However, until the potential enemy turns into a real enemy, they maintain control of these hostages, and to a certain extent, our pride is at risk - not only are these bozos threatening us with a nuclear strike, they're also calling the shots on who gets put out of work next week! Would it matter in the bigger picture if all Unocal Corp employees were fired and replaced with Chineese nationals? Not much - the truly talented and valuable would find other employment soon enough. But, it sure would feel bad.

In my view, it amounts to nationalistic posturing - something the U.S. was "big enough" to not do in the years following Apollo and Gulf War 1. But more than nuclear threat, I think the combination of Wal Mart and the Chineese manned space program has made the U.S. collectively question whether there really is a threat from Beijing, and I don't think we like the apparent answer.

Sam

Ben:

>You have got Posner's hostages argument around the wrong way. China's ownership of America-based >assets make Chinese aggression against America less likely, not the other way round. Taiwan's ownership of China-based assets make Taiwanese aggression less likely, not the other way round.


While Taiwan owns many factories in China, almost all of the design, marketing and management of those factories occurs in Taiwan. If China were to fire off 600+ missiles at Taiwan prior to an invasion, the factories in China would instantly become idle. Not only that, but the "Made in China" label would become a damaged brand and would make the marketing of Chinese products difficult, to say the least.

So China clearly has an incentive to not invade Taiwan and yet China overtly threatens to do so.

China makes goods and sends them to Taiwan (or drop ships to the final destination) and Taiwan sends money to China in return. You're saying that China doesn't have an incentive to not attack Taiwan? I disagree.


What would China gain by invading Taiwan? Economically, nothing that I can see. But China would have much to lose. But that doesn't seem to have affected the Chinese determination to capture Taiwan.

>The hypothesis that trading nations are less likely to go to war is testable and has been >confirmed. See Oneal and Russett (1997), "The Classical Liberals Were Right: Democracy, Interdependence, and Conflict," 1950-1985, >International Studies Quarterly 41(2): 267-294.


I haven't read that article, but I suspect the key term in the title is "Democracy".

That isn't the situation here, China is not a democracy but the US is. So at first blush, I'd say that the premise and conclusion of that article would not apply in the current situation.

The other interesting thing is the time period covered by that article, 1950-1985. A curious choice of end points. After WW2 (when trade clearly didn't prevent the US Civil War, WW1 or WW2), and only during the Cold War, when trade between the US and USSR was largely frozen.

>9/11 has no value here, except in support of your conspiracy theories.

The reason I mentioned 9/11 wasn't in support of a conspiracy theory.

But now that you've brought it up, IMO a much larger dose of that kind of paranoid thinking from the time of the first WTC bombing in 1993 right up to 9/11 might have prevented 9/11, as the 9/11 commission copiously noted. Conspiracy theories have a place in a dangerous world. Surely you've heard the phrase, " just because you're paranoid doesn't mean the world isn't out to get you". :->


However, my point was that 9/11 illustrated that assuming apparently benign actions by an enemy are harmless can be a terrible error.

China is an enemy of the US. Not a shooting enemy to be sure, but not anywhere near an ally like Japan or the UK.


No other conclusion is possible, nations friendly to the US don't threaten a nuclear first strike.

So assuming that China has only benign commercial reasons for buying Unocal would be at best dubious. IMO, the safer action is what happened, make China back off until either more is known about their motives for attempting the purchase or until China truly acts like a friendly nation to the US.

>Your USSR/Germany and Taliban examples are nearer the mark but on their own do not refute the hypothesis.

Actually, I would argue that the USSR/Germany and Taliban examples go a very long way to refute the hypothesis. In fact, I might go so far as to argue that those two examples go all the way.

WW2 was the worst calamity of the 20th century, 9/11 was a disaster for the US. If increased trade wasn't able to avert either of those two events, then I would conclude that the effect of trade on preventing conflicts must be minor, if there is any impact at all.

If you have to go so far as to overtly try to ignore WW2 and 9/11 to make your case, you have a very weak argument indeed.

Prior to Pearl Harbour, trade between Japan and the US was halted. Trade between the USSR and Germany increased after the Stalin/Hitler pact.


No trade between Japan and the US led to Dec 7, 1941. Increased trade between the USSR and Germany led to the German invasion of the USSR.


No trade and increased trade, both preceded war. So how can you argue that trade is a factor in going to war or not going to war? I don't see it.


>As you note, other reasons for war (economic or otherwise) can overcome the disincentive for war provided by trade. Clearly this is not, on its own, a reason to avoid trade.


As I said, I'm in favour of trade but the issue of buying corporate assets is different. Right now China makes largely consumer goods for export to the US. If that flow of goods were halted, the harm done would be much less than the possible harm in allowing China access to corporate information and production facilities and methods.


But also, one has to factor in time. I'm not saying I'm in favour of forever preventing China from buying US assets.


The US would have been insane to allow Japanese or German companies to buy US resource companies in the years leading up to WW2. Yet now Sony can buy US real estate and Daimler can buy Chrysler and no one worries. Clearly, time is a factor.


I'm in favour of trade with China now, hoping that increased trade will eventually reduce friction. However, I'm not at this point in time in favour of allowing China to buy US assets.

Once China has proven to be a non aggressive, friendly state to the US, then I'd be in favour of changing that policy. No different than Japan, Germany and hopefully one day the USSR.


My preferred timeline runs like this. Increasing trade between the US and China, leading to increased friendliness. China stops being aggressive against the US and once it's clear China's intentions are peaceful (remember that pesky nuclear first strike threat), US/China relations come to the point where China allows the US to buy Chinese assets (not possible right now) and the US allows China to buy US assets. Eventually, China is allowed to buy US weapons to ensure peace in China's sphere of influence.


That's the event time line as it happened with the US and Japan and Germany, why not with China?

Furthermore, I'd make a stronger statement. The US and EU refuse to sell weapons to China. If you won't sell weapons to China, then why would you sell to China US and EU corporate assets?

If you can't trust China with weapons, why trust them with the corporate means of production? It doesn't make any sense to me, at this time .

>Under Posner's hostages theory, the incremental benefit from allowing a foreign government to buy US assets is higher when that country is an aggressor, because hostages raise the cost of aggression. You will counter, I think, that economic incentives do not matter in pursuit of military objectives. What evidence do you have for this?

Taliban prior to 9/11, Japan prior to Pearl Harbour, Germany prior to invasion of USSR, North Korea prior to their invasion of South Korea in 1950, Saddam Hussein prior to the invasion of Kuwait.

You could make a good argument that much of history has occurred when economic incentives are ignored and something else takes its place.

I would argue that Posner is entirely incorrect. War has a strong tendency to wreck economies. I doubt that any country goes to war thinking about economic incentives. It doesn't make any sense and certainly has not worked out in practice in the last hundred years.

Did the US think about the impact on trade prior to the 2001 toppling of the Taliban in Afghanistan or the 2003 toppling of Saddam Hussein? I don't remember that issue being part of the debate.


I think that military objectives involve a different "currency" than economics, lives rather than dollars. I don't see how economics can be anything other than an miniscule factor when decisions involving lives are being considered.

ben

Sam

Congratulations on a deconstruction of arguments I did not make. Straw man, anyone?

Causes of war are undoubtedly complex but I think you are wrong to rule out economic incentives from the mix.

I encourage you start thinking about the question at the margin. One can cite examples in support of anything, the question here is the direction in which, other things being equal, trade, or in this case cross-border ownership, is likely to move relations, and what signals a prospective purchaser of a foreign asset sends by bidding. Nothing you have written addresses this.

ZHIYUAN

hi.

my answer to your title is also the most definitely "no".


I have to say, it is hard to know Chinese~

Sam

Ben:


>Causes of war are undoubtedly complex but I think you are wrong to rule out economic incentives from the mix.


Time for another thought experiment.


The Chinese leader, whomever he may be at the time, is considering capturing Taiwan. I don't know why he wants to do so, any more than I understood why China felt the need to recapture Hong Kong. But China recently passed a resolution calling for the capture of Taiwan and that leader intends to execute that policy.


If you read Chinese military discussion web pages, you'll see disturbing threads about what China must do to defeat the US Navy. It seems the ability to sink three US carriers is the victory threshold.


So that future Chinese leader is thinking about going to war against the US Navy, possibly killing 15,000 US sailors. Invading Taiwan after defeating the US Pacific fleet starts with firing 1000-2000 missiles that would likely kill another 10,000 to 20,000 Taiwanese soldiers and citizens.

The Chinese invasion fleet of 100,000+ soldiers would likely incur 30% casualties (the projected US casualty rate of the first wave of the WW2 invasion of the Japanese home islands), possibly another 30,000 dead.

So the Chinese leader is thinking about an invasion that might cause 50,000+ dead in order to capture Taiwan.

And do you seriously think that he's going to say "Oh, BTW, what about that Unocal investment?"

I don't believe that for a second. That kind of thinking, worried about dollars when lives are at stake, would be irrational and, IMO, regarded as insane.

What is your argument in favour of such thinking? Do you actually believe that economic issues are ever a factor when tens of thousands of lives are at stake in a decision involving war? I don't.

Ken Zimmerman

I love economics and economists!! They live in another world, one that does not exist. And therein lies a problem.

The most "efficient" manner for managing a business such as oil exploration and extraction is with the whip and slave labor. Baring that the next best option is with secret police. China utilizes both options. But that really doesn't matter to investors, right? Just so long as the return is high. Facism and capitalism have always been a good fit for this reason, among others. Facist communism (the kind that exists in China) and capitalism are thus a good fit.

The basic tenent of capitalism is and always has been: allow consumers choice so long as they don't choose economic democracy or egalitarianism. China has just figured out that capitalism was never its enemy, but rather an ally. Democracy and equality were the enemy, but capitalism never "bought off" on these anyway.

Patrick R. Sullivan

'If you can't trust China with weapons, why trust them with the corporate means of production?'

Because they aren't weapons.

JS

'Would it matter in the bigger picture if all Unocal Corp employees were fired and replaced with Chineese nationals?'

There are labor laws in this country. Just because a firm is owned by the Chinese government, it's US operations will have to respect US labor laws.

ben

Some low quality comments this week. Highlights include Sam spending three paragraphs calculating casualties from a Chinese invasion of Taiwan using US casualty rates from an invasion 60 years ago which did not happen. Ken Zimmerman argues fascism, communism and capitalism are a good fit and that slavery is efficient while claiming it is economists who do not live in the real world. None of this has anything to do with the topic. It seems Posner and Becker have touched a xenophobic nerve in a couple of contributors.

Thanks for the entertainment, boys.

N.E.Hatfield

Ben, You're right. Questions regarding National Security have always been xenophobic. And the new world order is a warm and fuzzy place.

Uh-huh! Right?!

ben

So let's talk about national security. Let's see a coherent argument. Let's see a careful response to points made. Sam and Ken are knocking over straw men.

KJ

Some means of production are weapons.

Sometimes, as Adam Smith said, free trade should be restricted for national security reasons.

Sometimes, a nation that has decided to go to war will not care about or be detered by "US labor laws." [Actually, that was an incredibly funny statement, JS. I'm glad I wasn't drinking anything b/c I would have soaked my monitor.]

I think Sam has discussed about every argument possible. I don't buy all of it, but I for one feel good that China was denied this particular type of asset. Just as managers sometimes have different incentives than the shareholders, China may have different incentives than maximizing shareholder equity when it comes to valuable war time assets like an oil company.

I find this case to be at least the possible exception to the free trade rule.

Sam

Patrick R. Sullivan:

>'If you can't trust China with weapons, why trust them with the corporate means of production?'

>Because they aren't weapons.


A 767 isn't a weapon but 9/11 proved otherwise.

Information about oil pipelines, choke points in oil distribution, distribution patterns of fuel oil for US naval use, isn't a weapon. But all that information could be obtained from the corporate servers of Unocal. That information likely isn't publicly available. But if you're in the oil distribution business, it's all available.


It's an interesting issue, how in the post industrial world information can be used as a means to inflict damage on an enemy and how assets used in commercial applications can be used in new ways.

And that is my point, why give an enemy any means of inflicting damage to the US?

At the moment, China produces consumer electronics, clothing and other relatively low tech goods. It's an excellent, low risk way to engage China to see if they will one day adopt a friendly stance with the US.

If China becomes friends with the US, and if they allow US companies to buy Chinese companies, then I wouldn't object to Chinese companies buying US companies. But that's not the situation right now and I haven't read anyone disputing that point.


BTW, has anyone else noticed that there appears to be a curious inconsistency in the position favouring allowing China to buy Unocal?

AFAIK, US companies are not allowed to buy Chinese companies. In fact, given the primitive state of the Chinese legal system, it's a bit of a puzzle to figure out what it might actually mean to buy a Chinese company, since property rights are undeveloped in China.

So at the moment, China has an infinitely high trade barrier preventing Chinese companies from being sold to foreigners, but they insist on the US having no barriers when it comes to Chinese companies (controlled by the Chinese government) buying US companies.

If China asked to be able to sell cars into the US but did not allow GM to sell US made cars into China, I don't think any free trader would find that acceptable. And yet it appears that some people here would allow China to buy GM itself while accepting China's position preventing any Chinese auto company from being sold to GM.


A free trader would not accept a closed Chinese auto market but some people here would accept a closed Chinese corporate market? Isn't that both inconsistent and unacceptable to a free trader?


China can buy US companies but the US cannot buy Chinese companies.

Why would the US accept such an asymmetric arrangement? Doesn't that seem, well, kind of less than optimal?

Joe Merchant

'Would it matter in the bigger picture if all Unocal Corp employees were fired and replaced with Chineese nationals?'

I don't believe our labor laws are strong enough to prevent the economic efficiency of "outsourcing", are they? Wouldn't take too much imagination to ship all the valuable jobs back to China and leave our labor laws protecting the core manual laborers - many of which are "contractors" from Mexico... and if they have the occasional industrial accident in the middle of Houston, will Beijing lose any sleep?

nate


http://msnbc.msn.com/id/8511474/

The collaboration of ExxonMobil and China was interesting. This may be a better deal for the Chinese than buying Unocal?

Jahed

What about the rapid military buildup that China has been going through since 1999? What about their threat to Taiwan? Also, apparently they are very adept at stealing military secrets, and have been doing so with the aid of civilian and student spies in America for quite some time now. While their energy needs are need being fulfilled, perhaps it is a preemptive move on their part to purchase Unocal and fuel themselves for war with Taiwan and, maybe, America as well. Either way, we should have never declared our solidarity in protecting Taiwan from an aggressive war by China. This can only lead to bad things.

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