An Abuse of the Free Market

August 5, 2005 • Commentary
This article appeared in the South China Morning Post on August 5, 2005.

The US Congress’ latest attack on private property has come at the expense of Unocal shareholders who have lost at least US$1 billion because of CNOOC’s decision to drop its bid, due not to market forces but to political pressure from Capitol Hill. Chevron is the clear winner, with its bid of about US$17.6 billion, but the damage done to US‐​China relations and to the free flow of investment funds in global capital markets could be substantial.

By politicising the takeover market and weakening the private property rights of Unocal’s shareholders, Congress is violating the very free‐​market principles it is supposed to uphold. There was absolutely no national security threat from the Chinese takeover bid. Yet that bogus risk was used to justify treating Unocal as a public asset rather than a private firm with the right to conduct its own business.

In a letter to Unocal’s board, Peter Schoenfeld of P. Schoenfeld Asset Management, which controls a block of Unocal shares, wrote: “It is your duty to maximise value for stockholders.” Indeed it is. But Congress’s hysterical China‐​bashing and ignorance of the energy markets have compromised that duty.

Even without a legal prohibition on a deal, Congress can intimidate a foreign company like China National Offshore Oil Corp by imposing considerable costs on the takeover process and using the secretive Committee on Foreign Investment (CFIUS) to breed uncertainty. That is not to say we should let foreign companies have totally free access to US assets. In some cases, especially in the area of sensitive technology with military applications, there may be legitimate risks. Going through a government vetting process would then be warranted.

That was not the case for CNOOC. By bringing Congress into what should have been a private transaction, Washington abused its power and may jeopardise US business interests in China.

CFIUS, which is chaired by the secretary of the treasury, investigates foreign investments and recommends a presidential block on those that pose legitimate national security concerns. The review process, however, is far from transparent and leaves considerable discretion in determining what constitutes a credible threat. With the bulk of Unocal’s oil and natural gas operations in Asia and with its US production accounting for less than 1 per cent of US consumption, it is difficult to see how the committee could have found “credible evidence” that the proposed takeover endangers US security.

Beijing will view this action as yet another attempt by the US to widen its power at the expense of China’s development, further fuelling anti‐​American sentiment.

On June 30, a non‐​binding House of Representatives resolution recommending presidential review of the proposed takeover of Unocal was passed by 398 votes to 15.

In a letter to President Bush, House Energy and Commerce Committee chairman Joe Barton declared: “We urge you to protect American national security by ensuring that vital US energy assets are never sold to the Chinese government.” The reality is that globalisation, financial innovation, and the information revolution have made energy markets highly resilient. Oil is interchangeable and will flow to the highest bidders.

China’s thirst for oil and natural gas has driven world demand upwards and increased prices, and that trend is likely to continue. Over time, production and consumption will respond to higher prices as producers search for new supplies and consumers conserve and switch to cheaper alternatives. If the US government interferes with the market process, future production will suffer, and US energy companies will find it more difficult to operate in foreign countries.

If Beijing wanted to provide “cheap credit” using part of its US$711 billion in foreign exchange reserves to help CNOOC purchase Unocal, that would have been a gift to US shareholders and a loss for Chinese taxpayers — not a concern for Congress or US energy security.

About the Author
James A. Dorn

Vice President for Monetary Studies, Senior Fellow, and Editor of Cato Journal