Policy Analysis No. 553

U.S.-China Relations in the Wake of CNOOC

Executive Summary

Congress set a dangerous precedent when it interfered with Hong Kong–based CNOOC, Ltd.’s bid for Unocal. Supporters of the intervention argued that CNOOC, a subsidiary of state-owned China National Offshore Oil Company, could pose a threat to U.S. economic and national security. Yet Unocal was only a small player in the U.S. energy market and had no technology that might pose a real threat to U.S. security. Nonetheless, congressional pressures prompted CNOOC to withdraw its $18.5 billion bid, paving the way for Chevron to acquire Unocal for $17.7 billion.

The increasingly confrontational approach Congress is taking toward China is leading to “creeping protectionism,” often in the guise of protecting U.S. national security. Although it is proper to criticize China for its human rights violations and its lack of a transparent legal system, we should not ignore the substantial progress China has made since it embarked on economic liberalization in 1978.

A policy of engagement—or what Hu Jintao, president of the People’s Republic of China, calls “peaceful development”—is a necessary condition for constructive U.S.-China relations. Although China’s competitiveness does pose a threat to certain U.S. economic interests, it also benefits American consumers and exporters. Protectionism would harm both the United States and China and would increase the likelihood of conflict. Hardliners would gain at the expense of more reasonable voices.

To avert the risk of conflict, the United States needs to treat China as a normal great power, not as an adversary; ensure that only those commercial transactions that genuinely threaten national security are blocked; and recognize that by increasing economic freedom we increase personal freedom. Our economic security, as well as China’s, will depend on sound free-market policies, not on destructive protectionism.

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James A. Dorn is a China specialist and vice president for academic affairs at the Cato Institute. He is also professor of economics at Towson University in Maryland and coeditor of China’s Future: Constructive Partner or Emerging Threat?