Commentary: Play Fair -- And Insist That China Do The Same

Blocking the Unocal bid won't fix Beijing's WTO lapses

With crude oil hovering around $60 a barrel due in part to China's growing appetite for oil, natural gas, and gasoline, it's no surprise that Beijing is shopping for energy resources. Still, the $18.5 billion cash bid by CNOOC Ltd. (CEO ), an energy company 70% owned by the Chinese government, for Unocal Corp. (UCL ), based in El Segundo, has raised alarms in Washington and calls for President George W. Bush to intervene on national security grounds.

That would be a mistake. There's no evidence that China's attempt to buy reserves in the ground is a bigger threat than its buying energy by the tankerful. And blocking the Unocal purchase to punish Beijing for other trade practices, as China critics advocate, would be counterproductive. The effort would not only fail to halt Beijing's global hunt for reserves but would also rekindle suspicions that the West seeks to contain China. That would make Beijing even more prickly.

No doubt, throwing a wrench into the takeover attempt would be satisfying to hawks worried about Beijing's growing economic and military might. China bashers also hope that stopping the deal would send a message to China that its pace of conforming with World Trade Organization rules is entirely too leisurely -- though whether Beijing would read it that way is far from clear. Fortunately, there are far better methods of addressing China's trade shortcomings, particularly when it comes to the issues that most concern Washington such as rampant intellectual-property theft, mercantilist currency manipulation, and high levels of government ownership in the economy.

Faster Action

As part of its deal to join the World Trade Organization in 2001, China agreed to follow the organization's free-market code, and the West allowed a liberal phase-in period. But Beijing has fallen far behind schedule in protecting patents and copyrights: An estimated 92% of computer software in China is pirated. Meanwhile, China's inflexible peg of the yuan to the dollar is fueling China's $160 billion trade deficit with the U.S. Under WTO rules, setting currency values can not be used to gain a trade advantage. So if Washington wants to force faster action on those fronts, it should bring a complaint before the WTO court. After all, when the U.S. filed a WTO case against China's discriminatory tax rebates on domestically produced computer chips in 2003, Beijing quickly backed down.

But using a bureaucratic dodge to deny China's purchase of U.S.-owned fuel reserves wouldn't build respect for the rules of trade. ``China is allowing the U.S. to buy big chunks of its banking system, and they've adopted an open investment environment,'' says Nicholas R. Lardy, a China expert at the Institute for International Economics. ``At the same time, we're trying to persuade Mexico and Saudi Arabia to open their oil industry to foreign participation.''

And what of complaints that the playing field is hardly level? There's truth to that claim: Beijing wouldn't let a U.S. company buy one of its energy giants or other core assets. Under the WTO agreement with China, foreigners are restricted to varying ownership percentages in strategic industries ranging from telecom to life insurance. But the U.S. and other developed countries agreed to those conditions, too -- precisely because they wanted to support China's development and its integration with the global economy. If China's rapid advance since then has left some of those agreements outdated, they should be changed by negotiation, not by threats that the U.S. won't play by the rules, either.

Others gripe that it's not clear how much of the $18.5 billion bid by CNOOC for Unocal -- which trumps a $16.4 billion cash-and-stock offer from Chevron Corp. (CVX ) -- will come from commercial sources and how much from below-market-rate loans from China's government. But that complaint, also, is better handled through negotiation and by insisting that China follow its WTO-imposed schedule for economic liberalization.

Rival Chevron is hoping a referral of the whole issue to the Committee on Foreign Investments in the U.S. will persuade Unocal stockholders to accept their lower, simpler bid. ``But our major overriding goal should be to engage China in a rules-based system,'' says Albert Keidel, a senior associate at the Carnegie Endowment for International Peace. Throwing out the WTO rule book on the Unocal merger would be a poor way to start.

By Paul Magnusson, with Stan Crock in Washington and Dexter Roberts in Beijing

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