Free Markets - Yes, No...Or A Bit Pregnant?

Tuesday, June 28, 2005

The bid of the China National Offshore Oil Company (CNOOC) for the American oil company Unocal raises high waves on the political circuit. While the White House is buying time and shields itself behind some Congress members who suggested - along with CNOOC - a review of the deal by the Treasury's Committee on Foreign Investment in the US, see the WSJ, this matter raises one important question. Is the US now for a global free market economy where the highest bidder can satisfy the just demand of shareholders to yield the maximum return on their investment, or not, or will they try to be a bit pregnant?
It is most amusing to see that the nation that stands for the spread of capitalism, having preached the gospel of open markets for investment and trade for decades to everybody else, suddenly does not want to apply the same standards when the game reverses.
According to the latest available data from the BEA for the year 2003, US multinationals reduced their capital expenditure 2.1 percent to 435 billion dollars whereas that of foreign companies rose 4.8 percent to 116 billion dollars.
Remembering the recipes of the US-dominated International Monetary Fund (IMF) who monotonously told indebted nations - no one has more debts than the US - to open up their markets for foreign investment and products from abroad, the spontaneous retreat appears as a parody on these guidelines.
The parody is not limited to investments. It is played on the stage of international trade as well, the discussion about unilateral tariff sanctions shows. The applause in the latter case goes to Fed chairman Alan Greenspan and Treasury Secretary John Snow who warned correctly that such measures would likely result in a backlash on the US homeyard.
While Snow has not yet declared himself on the CNOOC bid, The Prudent Investor wants to remind readers on his stance on free investment 12 days ago.
"Business people are going to put capital where they feel they are welcome, where capital is honored and where they can get good returns," Snow said, adding, "it is not so much the language that is used, it is the policies that get embraced. And if policies get embraced that make capital feel unwelcome, capital won't come."
Snow made these comments on his recent trip to Europe where he felt anti-business sentiment after the rejection of the EU constitution. A bit of schizophrenia can also be smelled listening to the initial outcry of officials when Iran's new - democratically elected - leaders said that they might impose curbs on foreign investment in the country's oil sector. Now the US does the same.
A policy of "shut up and keep buying our IOU's" does not exactly encourage the belief in a system that otherwise propagates the free flow of capital. Warren Buffett said already some time ago that the US must be ready to see some of its assets sold, when the high-speed train that loads off Treasury debt all around the world does not stop.
PINR's "Intelligence Briefing: China"
The highly recommended Power and Interest News Report (PINR) has published the following intelligence briefing on China today.
Outlining China's geopolitical strategy - on the basis of its newly developed missiles with a range of 6,000 miles - that aims to heighten the global respect of the not-sleeping-anymore giant, the briefing's author Michael Weinstein has this theory:
Until Lenovo's acquisition of IBM, Beijing's development strategy had been based on attracting foreign investment to China on the basis of its massive pool of cheap labor and its potential market in order to build up its industries and acquire advanced technologies. Having succeeded in creating an industrial base with some powerful and cash-rich companies, the opportunity exists for China to expand its export markets and to secure supplies of the energy and mineral resources that it needs to run its burgeoning industrial machine through the purchase of foreign corporations.
The acquisition of foreign businesses has the added strategic advantage of creating interest groups in the countries in which those businesses are based that are economically dependent on China and, therefore, would tend to be favorable to its interests in political conflicts.
Unocal is especially attractive to Beijing because of the drilling rights that the company has in Thailand and Myanmar, which Beijing includes within its prospective sphere of dominant influence.
In order to achieve its goal of transforming China into a comprehensive world power, Beijing must have secure access to raw materials in markets that have become increasingly competitive and tight, due in great part to China's growth. The bid for Unocal signals that Beijing is aware that it must act quickly to guarantee its resource supplies, at the expense of competitors, especially the US. As part of Beijing's overall strategy, Chinese enterprises have recently purchased mines in Australia and Canada, and Beijing has pursued trade deals geared to natural resources in South America. Unocal is part of that larger picture.
He therefore concludes:
The Bush administration's tepid response to the Chinese bids reflects its conflicting commitments to globalized markets, national security and domestic interests that increasingly appear to be irreconcilable. Protectionist sentiment, aimed mainly at China, is rising in Congress and could ultimately threaten the globalization process. In a pattern that is becoming familiar over a broad range of international issues, the Bush administration is facing increasing difficulties in sorting out its priorities, giving the advantage to states with more coherent strategies.
China's next stage of development brings the incipient conflict between Beijing and Washington into full view. Holding back Chinese expansion - if that is even possible - carries the high probability of derailing globalization; allowing it to occur makes the realization of Beijing's geostrategic aims far more likely.
Look for Beijing to proceed confidently on its course and for Washington to be incapable of mounting effective resistance.
Apart from these concerns I also want to raise the issue of shareholder's rights. Can the government deny a shareholder a higher profit by directing Unocal's fate? If that is the case the US has arrived at an entirely new stage: Central planning.
A political decision on CNOOC's bid for Unocal will also bear the danger of slowing foreign direct investment in the US. When an investor is not guaranteed his right to sell to the highest bidder, he may turn elsewhere to put his money at work.
One thing is sure: There is no such state like being a bit pregnant.

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