Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).

By Alan Tonelson

The China National Offshore Oil Company's attempted takeover of the U.S. oil company Unocal may have suffered a fatal setback last week when the Unocal board endorsed a rival offer from U.S.-owned Chevron. In addition, Chinese appliance maker Haier has dropped out of the competition to buy U.S. competitor Maytag.

At the same time, U.S. officials still need to fill the policy vacuum revealed by these two offers – for many more will surely follow in their wake. The bid for Unocal in particular, seems to have finally awakened many U.S. leaders – especially in Congress – to the need for more realistic responses to this rising Asian giant. But Washington has not even begun to develop the kind of comprehensive, long-term China strategy that the nation urgently needs.

Today, America's approach to the People's Republic is a monument to incoherence. U.S. military leaders like Secretary of Defense Donald Rumsfeld and CIA Director Porter Goss have recently renewed their warnings about China's rapid military buildup and anti-American strategic aims. Yet U.S. economic policies continue to shower the People's Republic with advanced, militarily useful technology, as well as oceans of hard currency.

In particular, America's trade agreements with China have largely encouraged our best multinational companies not to export their U.S.-made products to China, but to use China as a low-cost base for supplying the United States with ever more numerous and sophisticated manufactured products. Not surprisingly, this outsourcing-centered trade strategy has enabled China to wrack up immense foreign exchange reserves – nearly $700 billion at last count and heading toward $1 trillion by year-end 2006 – and the wherewithal to buy anything from U.S. Treasury bills to Russian weapons.

The CNOOC and Haier bids showed that foreign currency reserves can enable China to buy American companies, too. And since many of these will be far more profitable than the low-yielding Treasury bills that have so far dominated China's purchases of U.S. assets, these two takeover attempts will doubtless be the start of something big.

Before a Chinese spending spree develops major momentum, Washington must deal much more seriously with two big questions. First, should such Chinese takeovers be judged individually? Supporters of the CNOOC bid for Unocal – which touched off a special outcry in Washington due to oil’s strategic importance – lobbied hard for just such an approach. But they were missing a huge reality: China has launched a worldwide campaign of acquiring natural resource and energy assets. These fuels and other commodities are needed to maintain the rapid growth so crucial to continuing the military buildup and to containing China's politically explosive unemployment crisis.

China is seeking control over these resources because it obviously doesn't trust market forces to satisfy its demand. In a dangerous world facing near-term shortages of many minerals and fuels, it's a strategy that's understandable. But even with the integration of global commodity markets, more control for China obviously means less control –  and less access at affordable prices – for others, including the United States. Consequently, approval of individual deals in the energy sector could set precedents that legalistic America would find very difficult to overturn, and that could sharply limit the nation's future energy options.

The second big question raised by the Chinese takeover bids stems from the very nature of big Chinese companies like CNOOC and Haier. The former, for example, is 70 percent owned by the Chinese government – unmistakable evidence that the Unocal bid was never just a simple commercial deal as the Chinese and their supporters insisted.

Just as important, CNOOC benefitted as a result from Chinese government subsidies for its ongoing operations and its acquisitions alike. These subsidies clearly explain why CNOOC was able to offer a premium over Chevron’s proposed terms. Moreover, even with its government aid, the Unocal bid led both Standard & Poor's and Moody's to put CNOOC on credit watch for a possible downgrade. Without the subsidies, this CNOOC Unocal ambitions would have been simply unaffordable.

Haier’s structure seems more complex. Once entirely state-owned, the firm now is called “collectively owned,” suggesting some private ownership. Yet its CEO is on the Communist Party’s Central Committee. And no matter the specifics and formalities, the intertwined Chinese government and Communist party play such a predominant role in the economy that powerful state influence has to be assumed at all times – and especially over big strategic decisions like buying up foreign corporations.  
  
What Washington needs to consider is why American companies should have to compete with such rivals, which are supported by foreign government treasuries. How would such practices ensure the fairest and most productive competition within the U.S. market? How would they help spread market forces and practices worldwide? The obvious answer: They shouldn't, and they don't.

If the United States doesn't want to start actually rewarding state-ism and subsidies – severely penalizing American firms in the process – it won't approve future Unocal-like deals until a genuinely level global financial playing field is created.

The CNOOC and Haier bids for Unocal and Maytag are revealing the costs of short-sighted U.S. policies toward China that have been dominated by narrow commercial concerns. Before Washington enables China to earn even more foreign exchange that can pay for ever more of the nation's economic vitals, it needs to develop a systematic, prudent approach for dealing with the intertwined military and economic challenges posed by China.

In short, it needs a China strategy – one that genuinely integrates national security with commercial objectives, looks at both the short- and long-term consequences of decisions, and recognizes when tough choices are unavoidable. This strategy will be as difficult to devise as it is imperative. Until it is in place, however, efforts by state-owned and aided enterprises from China and elsewhere to buy up America should be rebuffed.

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