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Unocal Won't Be The Last, So Set The Rules Now


The U.S. is one of the world's most ardent cheerleaders for the benefits of free trade. But you wouldn't know it from the protectionist howls coming out of Washington after the $18.5 billion bid by China's state-controlled CNOOC Ltd. (CEO) for Unocal Corp. (UCL). While American apprehension over China's bold move is understandable, it's shortsighted and rong. Foreign trade has given an immeasurable boost to U.S. economic prosperity, holding down prices for American consumers and supporting the jobs of workers who produce the $1.1 trillion in annual U.S. exports. Much of the recent increase in trade has been with China, which today ranks as America's third-largest trading partner and the manufacturing outpost of choice for everything from Wal-Mart (WMT) T-shirts to Dell (DELL) laptop computers.

To continue enjoying the benefits of that relationship -- and to maintain credibility as it presses other countries to remove trade barriers to American competition -- the U.S. cannot conveniently embrace protectionism whenever it fears that free trade won't be to its advantage. That's especially true concerning China, which has allowed $48 billion in direct investment by U.S. companies and has kept U.S. interest rates low thanks to the more than $200 billion in Treasury Dept. debt that it has amassed in its currency reserves. Now that dollar-rich China is asking for its due, it will be difficult for the U.S. to just say no.

But that doesn't mean America must simply roll out the red carpet for the Chinese. Most nations have long considered energy holdings to be strategic assets whose ownership can be restricted for national security reasons -- just as the U.S. limits foreign ownership of airlines and broadcast licenses. So the federal Committee on Foreign Investments in the U.S. (CFIUS), which must approve the deal if it is accepted by Unocal's board, should not feel shy about imposing some reasonable conditions to safeguard U.S. interests.

First would be to make sure the Chinese government, which controls CNOOC parent China National Offshore Oil Corp. and the banks financing its Unocal bid, cannot unfairly subsidize CNOOC's future energy exploration or pricing efforts to the detriment of American competitors or provide it with below market-rate financing that is unavailable to U.S. companies. World Trade Organization rules address such unfair practices. But as we've seen from the ongoing U.S.-Europe bickering over alleged subsidies to both Airbus' and Boeing Co.'s (BA) commercial jet businesses, it's best to have clear limits on government support spelled out early on.

Next, to make sure America's dependence on foreign energy sources doesn't increase as a result of the deal, the CFIUS review should require that oil and gas currently produced by Unocal properties in the U.S. continue to be sold in America, and future output from Unocal properties under development in the Gulf of Mexico should be marketed in the U.S. Likewise, Unocal's ownership stakes in U.S. energy pipelines and storage facilities -- unquestionably strategic resources -- should be restructured to assure American control or sold to other U.S. companies over time.

For political reasons, any CNOOC agreement must also include some restrictions on the loss of U.S. jobs, at least in the initial years following the takeover. That's a sensitive topic for many American voters and a key driver of congressional rhetoric against the deal. Defusing those job-loss fears shouldn't be difficult, since 70% of Unocal's operations are outside the U.S., and CNOOC's media-savvy advisers are already promising Unocal management that the Chinese company will maintain U.S. employment at current levels -- something rival bidder Chevron Corp. (CVX) may not do.

A more crucial task for federal reviewers, however, is the need to press the Chinese for assurances that there will be reciprocity if and when an American outfit wants to acquire a similarly sensitive asset inside China. True, U.S. companies such as General Motors (GM) and Ford Motor (F) have major operations on the mainland, Anheuser-Busch (BUD) now owns big Chinese beermaker Harbin Brewery, and Bank of America (BAC) recently purchased a 10% stake in China's largest mortgage lender. But none of those deals matches the strategic and symbolic significance of the Unocal acquisition, China's largest single foreign investment.

It's particularly important that the Bush Administration craft a Unocal agreement with these important protections because this megadeal won't be cash-rich China's last. So Washington must not miss this opportunity to put forth a realistic, rhetoric-free framework for dealing with China's growing aspirations for investment in the U.S.


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