By Laura D'Andrea Tyson
The now-withdrawn $18.5 billion acquisition bid for Unocal Corp. (UCL ) by CNOOC Ltd. (CEO ), China's third-largest oil company and one that is 70% owned by the Chinese government, encountered a buzz saw of opposition, exposing America's deep anxiety about China's rapid emergence as a global economic power. Even though the CNOOC bid failed, the concerns posed by the deal's opponents still warrant dispassionate consideration. With the possible help of their government and its $700 billion in foreign-exchange reserves, Chinese companies are poised to become bidders for U.S. companies across a variety of sectors. Yet, despite the protectionist rhetoric from U.S. politicians over the CNOOC bid, there's already a framework in place to adequately assess whether such purchases will serve America's economic interest.
First, all acquisitions of American companies, whether they involve domestic or foreign buyers or whether these buyers are private or state-owned companies, are routinely assessed for their impact on market competition. When the Justice Dept. determines that an acquisition would significantly reduce competition, it can be blocked altogether or its approval can be made conditional on substantial deal modifications such as divestitures by the acquiring or the acquired company. So, if it had been approved by the Unocal board, the CNOOC bid would automatically be subject to regulatory review for possible anticompetitive effects. Since Unocal accounts for less than 1% of global oil production, the bid, perhaps with minor modifications, would almost certainly have passed the standard competition tests.
SECOND, U.S. LAW ALSO PERMITS, but does not require, an inter-agency review of a foreign acquisition of an American company whenever there is "credible evidence" that an acquisition might pose a threat to national security. Since its inauguration in 1988, this review process has been mainly applied to foreign acquisitions of American companies producing military goods or components. Recently, such reviews have been extended to foreign acquisitions involving "strategic" dual-use technologies in the telecommunications, Internet, and computer industries. This extension is justifiable particularly when a potential military adversary like China is involved. The review committee recently approved the sale of IBM's (IBM ) personal-computer unit to China's Lenovo Group Ltd. after imposing a few security-enhancing conditions on the deal.
Congress called for a national security review of the CNOOC bid if it moved forward -- a sensible request. Oil may not be a strategic technology, but it is the ultimate geopolitical commodity. And China has emerged as a major player on the global oil market, accounting for more than 40% of the increase in global oil demand in recent years. But a CNOOC-Unocal deal would almost certainly have passed an objective national security test. Energy experts say there is no reason the U.S. should care who owns a particular oil company if its reserves are too small to influence the world price. Unocal clearly falls within this group. And China's purchase of Unocal could have meant more investment in global oil exploration and drilling than Unocal or other American companies have been willing to make. So, far from posing a national security threat, Chinese state ownership of a few hitherto private companies could actually mean an increase in global oil reserves and an easing of prices. The primary beneficiary would be the U.S., which accounts for more than one-quarter of global oil consumption, vs. only 8% for China.
Still, neither the competition nor the national security tests address "fairness" concerns voiced by opponents of the CNOOC bid, who objected to a deal because China limits the shares U.S. firms can own in several sectors including energy and financial services. But, despite such restrictions, China is remarkably open to foreign direct investment. Last year, American companies put $60 billion into China (including Hong Kong), vs. only $2 billion of direct investment by China in the U.S. Blocking an investment like CNOOC's to compel China to eliminate its remaining investment restrictions could provoke Beijing to retaliate by curtailing future American investment in China. Instead, the U.S. should use the WTO to challenge such limits.
Will a Chinese acquisition of any particular U.S. company harm the nation's economic interests? Existing mechanisms for rigorous analysis of a deal's competitive and national security impact should yield the right answer. Protectionist sentiment and alarmist China-bashing will not.
Laura D'Andrea Tyson is dean of London Business School (email@example.com)