BEWARE: China Buying America

Scare headlines have once again warned of the dire consequences of foreign countries or their citizens buying or taking significant investment positions in U.S.-owned enterprises.

In this instance, we are warned of the threat to our national security presented by the prospect of The China National Offshore Oil Corporation (CNOOC), a 70% the state-owned Chinese oil company, should it succeed in its quest for Unocal, a large California-based integrated oil company. CNOOC presented Unocal with an unsolicited bid of $18.5 billion, some 9% higher than a previous bid submitted by Chevron, and the politicos in Washington are aghast.

So let’s understand what is happening here: China, by successfully selling goods and services to Americans, has earned an excess of US dollars. (Simply put, they've been trading us goods in return for our paper currency). What is China to do with these extra dollars?

Well, there are three things that they are most likely to do: 1) purchase goods or services from US companies; 2) invest the dollars in dollar-denominated liquid assets, such as Treasury obligations; or 3) invest the dollars in dollar-denominated assets that aren't highly liquid, such as land and U.S. businesses.

It seems that option # 1 is the only one that is acceptable to our governing elite since option # 2 presents us with the fear that China may one day decide that investing in Treasury obligations is, after all, too risky and they will sell their bonds and take their hard-earned money somewhere else (where they might take it is an interesting question but not often discussed). Option #3, that is investing in long term assets and businesses within the United States, should be the most desirable since it bespeaks a much higher level of trust on the part of the investor (China, in this instance) and could even serve to dampen any tendencies toward armed conflict between the two countries as there would exist additional costs and risks to both sides as investments create ever closer economic ties and mutual dependencies. (Any concerns regarding the sale of assets directly affecting our national security can be addressed on a case-by-case basis.) Alas, our leaders fear these investments as well. Already a small group of U.S. lawmakers have urged the Bush administration to scrutinize the deal and the pundits are offering dark and ominous warnings.

During the oil crisis of the 1970’s similar fears were expressed that the Saudi’s and other oil-rich sheikdoms, which suddenly found themselves with an embarrassment of riches, would “buy” all of the United States and we would be even more beholden to them than was perceived by those countries dominant position in the oil business.

Similarly, during the boom days of Japan, fears were expressed that we would soon be owned by “Japan, Inc.”

History has shown us that free trade, and its concomitant surpluses and shortfalls of funds resulting from the inevitable “imbalance” of trade in goods and services between countries, only presents new and beneficial opportunities for all parties.

As an example, during the post WW II years, the US experienced a significant surplus in its balance of trade since it was the economic engine providing the goods and equipment necessary to rebuild both Europe and Japan. These excess funds were invested all over the world, bringing both capital for new businesses but, equally importantly, an interchange of ideas regarding business tactics, management, etc. All parties prospered to varying degrees. A few years later, our now tired and overworked industrial plant started to be overcome in efficiency and quality by the European manufacturers (utilizing the modern plants and equipment that had been acquired primarily from the U.S.) and calls for tariff protection and other forms of protectionism were heard across the land. To its everlasting credit, the Eisenhower administration essentially told the U.S. steel industry that it must solve its own problems and, within a few very difficult years, the cycle had turned and once again the U.S. steel industry became more efficient than that of the Europeans with their, by then, aging plants.

I remember proposing back in the 70’s that we should sell AT&T to the Saudis since it would have committed them to telephone poles, plant and equipment that would have forced them to share in the cost of increasing oil prices. I still share that view in principle but, I guess, the Saudis were too clever to accept my offer of AT&T which now seems to be in its last incarnation.

The real problem lies not in trade nor any form of free exchange; rather it lies in our profligate government policies whereby we run enormous domestic budget deficits, borrow the money from trade partners such as China and then become concerned that they have loaned us so much money. It strikes me as the height of ingratitude to blame the lenders who have, at our request, loaned us the means of maintaining our spending habits beyond our means. If we continue to do this, these lender-nations will certainly decide in the future that we are not worthy of their trust and will cease lending to us. You can be certain, however, that when that occurs, we will blame them for not trusting us.

Mr. DeRussy is an equipment leasing executive who writes from his home in Bronxville, NY.