Many comments imagine scenarios in which, the comment argues, foreign purchase of a U.S. firm would harm the United States. One comment asks whether I would favor allowing Iran to purchase Boeing. The answer is "no," because Boeing is a defense contractor and foreign nations should not be allowed to purchase companies that do highly classified defense work, unless the companies agree to spin off the defense-related parts of their business to U.S. firms. Parenthetically, I do not think that Iran poses anywhere near as great a long-term threat to the United States as China does. China may within a few decades become as powerful as the United States, and both China and the U.S. are Pacific powers. Iran is not a potential superpower and Iran and the United States do not share an ocean.
Another comment suggests that if China owned Unocal it might order it to export all its U.S. oil production to China, and then we would have to buy more foreign oil and so we would become even more dependent than we are on foreign oil nations, many of which are unstable or hostile. But if we are worried about our dependence on foreign oil, forbidding foreign purchases of U.S. oil producers is an extremely oblique response compared to, for example, imposing higher gasoline taxes, which would reduce demand for oil and hence for imported oil.
Another comment states that even if China had trillions of dollars invested in the United States, this would not inhibit it from invading Taiwan. Well, it would certainly increase the cost to China of such an invasion!
Finally and ingeniously, one comment suggests that if China had bought Unocal it could have infiltrated spies into the United States in the guise of oil workers and managers and also exert malign political influence on U.S. government policy. The first concern can I think be dismissed; China has sufficiently extensive business relations with the United States already to be able to plant as many spies in this country as it wants to, and it would certainly not replace more than a tiny fraction of Unocal employees (if that) with Chinese; nor would we permit it to do so.
The second concern has somewhat more merit. Although foreigners are not permitted to make contributions to American political campaigns, in the 1990s the Chinese apparently did make some indirect contributions, and conceivably American middle and upper management of a foreign-owned company might be inclined to make contributions or provide other support to politicians who favored the nation that owned the company. I have never heard of such a thing, however, and I am skeptical that Americans working for a company owned by a nation such as China with which the United States has somewhat tense relations would seek to aid that nation--or even would find a politican wishing to do so for the manager to support. Such a politician would be (moviegoers will recognize) a true Manchurian Candidate!
Most of the comments centered around a possible security threat from Chinese companies buying American companies in various industries, such as the American energy sector that CNOOC tried to enter by bidding for Unocal. Even accepting China as a potential military threat-which is possible but still uncertain- the comments opposing this purchase based on security (or other) reasons were not persuasive.
Some claimed that China could gain important information or even secrets by owning a company like Unocal, but it was never made clear what these were. All pipeline, customer information, etc. is public knowledge, as are most advanced methods for extracting oil and gas. If they need help on gaining access to methods used by other companies, many energy consultants are ready to help them in ways that are fully legal, and are not fully controlled by US policy.
Someone suggested that CNOOC might replace American employees of Unocal with Chinese ones. On the whole, there is nothing to that fear. To be sure, they could bring in some Chinese executives, although that would be at the expense of running the company efficiently. For other employees, They could not get immigration permits to replace the vast majority of Unocal employees in this country.
China does not allow American or other foreign companies to take over Chinese companies in some sectors, or even to enter certain sectors. But why is that a reason for the US opposing CNOOC's bid for Unocal? The case for allowing that bid is that it helps the US for the reasons outlined in my original comment, not that it helps the Chinese, or because of some slavish adherence to principles of "free trade".
Chinese ownership of American companies may not be sufficiently important "hostages" to discourage a military attack on Taiwan or elsewhere. But the point I tried to make on this issue is that China, not America, bears the economic risk from ownership of American assets, since these assets would be taken over by the US in the event of any military conflict, the way German assets in the US were taken over during world War II.
There is evidence, in studies by Solomon Polochek and others, that trade does reduce the probability of conflict between nations, but many other factors are also relevant. So a few examples are not decisive, whether they go in one direction or another. I believe that even the quantitative studies by Polochek and others are far from decisive, but they are the best we have so far.
On an issue raised that is somewhat removed from the main subject, I do believe American airlines should be allowed to fail, as Eastern, Braniff, TWA, and others did fail. To get closer to our present topic, we should remove the obstacles that prevent foreign airlines like BA or Lufthansa from taking over American ones. I believe we should go further, and give many foreign airlines the right to transport passengers between different points within the US.
Should the US care if a Chinese company takes over a large American publicly owned company? This issue arose recently when the China National Offshore Oil Corporation (CNOOC), China's largest offshore oil producer, put forward a bid to buy the American oil and gas company, Unocal Corp, that significantly exceeded the competing offer from Chevron, another American oil company. The attempted takeover of Unocal by CNOOC aroused great opposition in Congress, which resulted in Senator Byron Dorgan introducing a bill that would prohibit any takeover or merger of these two companies. After pursuing Unocal for several months, CNOOC accepted defeat last Tuesday and withdrew its offer, blaming the Washington political atmosphere.
The Dorgan bill lists several reasons why the purchase of Unocal by CNOOC would not be in America's interests, but none are convincing. The first claim is that "oil and natural gas resources are strategic assets critical to national security and the Nation's economic prosperity." Among other things, this statement ignores that more than half of Unocal's oil and natural gas production is from seven countries outside of North America. Many countries, including Mexico, Brazil, and most Middle Eastern oil producers, have used the "strategic asset" argument to justify why government companies should control oil and natural gas production. They even do not trust domestic private companies with these assets. Fortunately, the US has not taken this path and has had a privately run and efficient energy sector.
Why would it hurt US interests if Chinese companies owned oil and gas producing assets in this country? The US already imports about 2/3 of its oil needs, and pays world prices for both imported oil and indirectly for its domestic oil. If CNOOC took over Unocal and only sold its output to China-which it promised not to do- that would replace other oil or gas that China would have bought on the world market at world determined prices- the present oil price is about $60 a barrel. So the oil and gas that would have been purchased by China would become available for American use at effectively the same prices Americans now pay when Unocal is an American company.
Even if Chinese companies controlled all American oil and natural gas reserves, a very unlikely event, they would still have a much smaller fraction of world oil and natural gas reserves than Saudi Arabia, Russia, and several other nations. Even then they would do minimal damage to the US if they sold all their US production to China since the US would then import what China would have purchased on world markets. In the event of a military showdown between China and the US, clearly the producing assets here would be taken away from the Chinese companies, and transferred to domestic companies. So that puts China, not America, at the greater economic risk in the event of a serious confrontation between the two nations.
The Dorgan bill also opposes the CNOOC bid because the central government of China owns about 70 per cent of the company, and the acquisition of Unocal would have been financed and subsidized by state-owned Chinese banks. Why should Chinese subsidies to help finance the bid be of concern to American interests? In fact, most large state-owned enterprises in China are inefficiently run, and they can only receive loans from state banks because banks are politically forced to make these loans. As a result, bank loans to state enterprises amounting to hundreds of billions of dollars are in trouble, and many are considered worthless. So it is very likely that CNOOC overbid for the assets of Unocal, which would have meant a transfer of dollars to stockholders of Unocal from the Chinese government.
The protests raised by CNOOC's attempt to buy Unocal were unusually strong, but there was also opposition to IBM's selling its unprofitable PC business to China's top personal computer company, Lenovo, and some discontent when a Chinese company bid for Maytag, a bid that proved to be unsuccessful. The continual opposition to Chinese companies buying American companies is reminiscent of the concern in the 1980's when Japanese companies, flush with liquid funds from its booming stock and real estate markets, purchased Pebble Beach Golf Course, Rockefeller Center, and many other renowned American institutions. There were threats then too to legislate limits on the scope of these activities, although Japanese companies never controlled more than a negligible fraction of land and other assets in the United States. As it turned out, Japanese companies greatly overpaid for most of their acquisitions, and ended up transferring some of their bubble-generated wealth to Americans.
Since China is much bigger than Japan, it is claimed to pose a much bigger economic threat to the US. However, a rich country like Japan is in more direct competition with the products produced and inputs used by American companies than is a poor nation like China. I believe the welfare of the average American is raised by the economic growth of both these nations, but especially by that of China, for China produces many labor-intensive goods, like toys and textiles, much more cheaply than they could be produced in America. Countries like Bangladesh might be hurt by China’s growth since they compete with similar products, but the typical consumer in the developed world has been helped by the economic development of China, India, Brazil, and other poorer nations.
Most politicians and journalists, and even many economists, support free trade, including purchase by foreign companies of American assets, only when other countries abide by the same free trade rules. As the Dorgan bill indicates, China does not allow free movement of capital, and restricts foreign purchases of Chinese companies. These policies hurt China, but nevertheless the US is better off when it allows foreign companies, including those from China, to bid for American companies. If they are high bidders, either they would overpay for the assets-called the "winners curse" in auction theory- or they are more efficient managers. The US benefits even in the second case because it raises overall productivity of the American economy, and sets a good example for competitors. The American auto industry is more efficient (and much smaller) than in the past in part because they had to compete with cars made in the US by efficient Japanese and German auto manufacturers. American car owners are also getting much better cars at lower prices than they would have had without foreign-owned auto companies in the US.
So for all these reasons my answer to the question posed by the title of my comment is “no”, that Chinese ownership of American companies is no problem or threat to American interests.
Version 3.16
I agree fully with Becker and therefore can be brief: foreign nations' purchase of U.S. companies should not be discouraged even when the foreign nation is a communist country potentially hostile to the United States and seeks to acquire the producer of a vital raw material, such as oil. Hence I do not think that the purchase by the Chinese government-owned oil company CNOOC of the U.S. oil company Unocal should have been prevented.
China holds vast amounts of U.S. dollars. To the extent that these holdings exceed China's need for financial reserves, China can benefit from holding dollars only by exchanging them for valuable goods, such as goods produced in the United States or assets of U.S. companies. We should want China to be able to make such purchases, since otherwise it will be less willing to hold dollars, which is to say less willing to sell us valuable goods in exchange for pieces of paper.
Of course there are some goods we should not sell, such as weapons designs more advanced than China can obtain from any other country. But there is no way in which China can obtain a power advantage over the U.S. by spending $18.5 billion on an oil company. Suppose--this seems to be the fear of the members of Congress who opposed the proposed acquisition--that the Chinese government, having bought Unocal, ordered it to sell all its oil to China. Would that hurt the United States? Not much, and in the long run not any, because oil is a fungible commodity, and the U.S. would replace Unocal's oil with that of other producers. There would, however, be short-term costs involved in recontracting for the replacement oil. But so provocative an action by CNOOC would in any event be unlikely because China would know that we would retaliate. In this connection, the fact that almost a third of Unocal's oil reserves are in North America, far from strengthening the case for blocking the merger, weakens it; for those reserves would function as hostages against China's using its control of Unocal to impede U.S. access to oil.
The fact that China wanted to give us these hostages is actually a hopeful sign for the future of Chinese-American relations. It suggests that China envisages peaceful, constructive commercial relations with the United States. Otherwise it would not spend billions of dollars to acquire assets that ultimately are under the control of our government.
There were many good comments. The common thread in many of them was that an economic analysis leaves out equally or more important "cultural" or "sociological" factors that cannot be reduced to economics. I do not deny the possibility that factors about which economics may, at least at its present level of development, have little to say may be extremely important in explaining the phenomenon of terrorism, and specifically why sympathy for Islamist terrorism appears to be more widespread in Western Europe than in the United States. One is simply the fact that because of our proximity to Mexico, most low-wage immigrants come from there rather than from the Islamic world. Another is that, as a nation of immigrants, the United States provides a more welcoming environment for immigrants; the Western European countries, in contrast, were, until recently, mainly nations of emigrants, and they may simply not have learned yet how to assimilate large immigrant populations. In addition, as Becker mentions, the fact that the United Kingdom has a serious problem of Islamic extremism doesn't sort well with the fact that it has relatively open labor markets and a porous safety net, much like the United States. One factor retarding assimilation of immigrants in the United Kingdom may be the class system.
But I believe that economic factors are important contributors to Europe's Muslim problem, and being underemphasized deserve special consideration. When mentioned they are usually related to poverty, it being assumed that poverty foments terrorism. But as I said in my original posting, the evidence for this is weak. What is important is the effect of economic institutions on the self-selection of immigrants and on their incentives when they arrive. If economic institutions such as open labor markets and a low safety net encourage the immigration of strivers, they and their children are unlikely to feel like resentful outsiders.
The materialism of America's capitalist culture came in for some knocks from some of the commenters. But as Samuel Johnson said, people are rarely as innocently engaged as when trying to make money. Commercial values historically and today are inimical to the pursuit of Utopian fantasies and the glorification of violence.
Several comments misunderstood me to be arguing that long vacations cause terrorism. That of course would be absurd. My point was that a system of regulations that discourage work create a barrier to the integration of immigrants. As one commenter pointed out, Paul Krugman's statement that productivity is higher in France than in the United States mistakes a problem for a solution. A nation that makes it difficult for low-skilled workers, who therefore are not highly productive, to find jobs will have a high measured productivity, but that productivity advantage is an artifact of failing to make full use of the nation's productive labor resources.
Several comments expressed in the manner of Krugman a preference for the French way of life, with its greater emphasis on leisure. But this preference fails to reckon with the profound costs in economic stagnation and diminished fertility, which in combination with public policies that discourage work have forced Europe to import huge numbers of Muslim workers without being able to assimilate them. The problem will not be solved by celebrating the joys of leisure. The policies that encourage leisure have contributed to Europe's serious, perhaps critical, problems. To these problems Paul Krugman seems oblivious.
As some very good comments indicated, the causes of terrorism are far from well understood, and neither Posner nor I claimed we had anywhere near the full answers. Still, some things are reasonably clear.
To be sure, there have been non-Muslim terrorists in Japan, Germany, Italy, and even the United States, but they have been less coordinated across countries, of shorter duration, and much less lethal. For reasons given in some comments, Islamic terrorism cannot be linked simply to the invasions of Afghanistan or Iraq since a considerable degree of destructive terrorism preceded these events.
I do not believe that the main explanation for the more extensive Muslim terrorism in Europe is that the less ambitious Muslim immigrants go to Europe. That may be true on average, but I believe their ambition is more likely to be sapped by high unemployment rates, high welfare payments, and greater discrimination. As I noted, Britain is partly a counterexample to my thesis on the connection between terrorism and restricive employment and other regulations since unemployment rates are low there too as well as in the US, and payments to those on the dole are not generous in Britain. But it has long been recognized that Britain has accepted foreigners much less readily than the United States, and that foreigners there feel less integrated into mainstream society.
Some of you stressed, correctly I believe, that terrorism may be greater in Europe partly because Muslims are a larger fraction of the populations of France, Britain, Spain, and some other European nations than of the US. That could have encouraged greater discrimination against Muslims in Europe, and hence greater resentment. Larger relative numbers also encourages bigger enclaves of Muslim populations where radical clerics and others can more easily espouse their brand of hatred of the West.
I did not claim that America is stronger on all family values than Europe. I was objecting to the claim that the French and other European labor and other legislation that reduced working time improved family values. Surely, fertility should be one of the most sensitive indicators of family values, and also sensitive to the amount of leisure, yet fertility rates are generally much lower in all European nations than in the US. And the growth in property crime, and to a lesser extent in violent crime, in Europe while American crime rates were falling is partly related to the much higher unemployment rates in Europe, especially among their Muslim and other minorities.
The data still indicate that America is generally the first choice of immigrants, Muslim as well as others, although perhaps by a smaller margin than in the past. The change in where immigrants go is partly due to the fact that it has become more difficult to get into the US, so more Muslim and others go to Germany, France, Spain, and other European nations.
Someone made a relevant point about the distinction between hours spent not working and leisure time. It has long been known that many Swedes, for example, spend much time painting their houses, etc because of the high rates of taxes on additional earnings. But it is also true that vacations are much longer in most European nations than in the US, and Europe has more work holidays.
Switzerland is indeed another interesting example. It is difficult to become a citizen there and foreigners are isolated. However, unemployment rates of immigrants are much lower there than in other European countries, and that could help explain the low levels of Swiss terrorism. Still, comparisons of terrorist activities in Switzerland, Britain, Spain, France, and other European nations is an excellent research topic.
