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June 28, 2005

Paul Krugman Says Defense Is More Important than Opulence

He says that control of oil resources, possibly very scarce in the future, is more important than the value of the Chinese Communist Party as an agency of corporate control. As I read Paul, he says that if we did not need Chinese help on North Korea and if we were not very vulnerable to a cut-off of capital inflows, then it would be a no-brainer. In fact, he says, it's a close call. But he still would argue against allowing the Chinese bid for Unocal on the grounds that there are possible future states of the world in which control of oil flows will turn out to be very important indeed.

But we do need Chinese help on North Korea, and we are very vulnerable to a cut-off of capital inflows

The Chinese Challenge - New York Times : Maytag is a piece of American business history, [but] it isn't a prestige buy for Haier, the Chinese appliance manufacturer. Instead, it's a reasonable way to acquire a brand name and a distribution network to serve Haier's growing manufacturing capability.... Maytag's stockholders will gain, and the company will probably shed fewer American workers under Chinese ownership than it would have otherwise....

The more important difference from Japan's investment is that China, unlike Japan, really does seem to be emerging as America's strategic rival and a competitor for scarce resources - which makes last week's other big Chinese offer more than just a business proposition.

The China National Offshore Oil Corporation, a company that is 70 percent owned by the Chinese government, is seeking to acquire control of Unocal, an energy company with global reach. In particular, Unocal has a history -- oddly ignored in much reporting on the Chinese offer -- of doing business with problematic regimes in difficult places, including the Burmese junta and the Taliban....

Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices.

If it were up to me, I'd block the Chinese bid for Unocal. But it would be a lot easier to take that position if the United States weren't so dependent on China right now, not just to buy our I.O.U.'s, but to help us deal with North Korea now that our military is bogged down in Iraq.

Posted by DeLong at June 28, 2005 05:04 PM