Trade War Tensions Flare Over Oil

The possibility of a trade war with China over oil took another turn to the worse with Congress urging Bush to block the sale of Unocal to a Chinese firm.

"We cannot, in my opinion, afford to have a major U.S. energy supplier controlled by the Communist Chinese," said Rep. William J. Jefferson, a Louisiana Democrat.

China responded with harsh language of its own: "We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries," the Foreign Ministry said in a written statement. "CNOOC's bid to take over the U.S. Unocal company is a normal commercial activity between enterprises and should not fall victim to political interference. The development of economic and trade cooperation between China and the United States conforms to the interests of both sides."

US Congress was already fuming over China's huge $160 billion trade surplus with the United States. Some congressmen have accused China of manipulating the RMB by pegging it to the US dollar which in their minds keeps the RMB artificially low, making Chinese goods unfairly cheap on world markets. The Bush administration and various leaders from Europe have all pressured China to let RMB float freely.

The idea that currency movements along can solve the trade deficit is preposterous of course, given the 20-1 wage differentials between the US and China. That does not stop US trade groups from asking for tariffs, and Congress has indeed threatened to label China a "currency manipulator" and impose 27.5% tariffs in retaliation. Of course this will solve nothing but drive up the price of goods 27.5%, saving a sum total of zero jobs in the process. On second thought, it would cost US jobs as demand for goods would plummet. China believes it is being made a scapegoat for the decline of U.S. manufacturing and I would agree.

Because of China’s trade surplus with the US, it happens to be sitting on a pile of cash, perhaps to the tune of about $650 Billion as the Washington Post article stipulates. It's smart on the part of China to attempt to buy hard assets such as oil with some of that money.

Congress sees this as a threat to the US. It is no such thing.
1) Most of Unocal's reserves are in Asia anyway, not the US
2) Oil is Fungible

Whatever demand China has for oil, its bid for Unocal is not going to change that demand. Oil prices will go wherever they are headed whether Unocal gets sold to China, France, or some other interest in the US.

BTW, I do not want to be misunderstood here. China indeed is a threat to the US but that threat had nothing to do with the fact that China is a Communist country, nor does it have anything to do with this deal in particular. The threat comes because the US is living well beyond its means at a time of increasing prosperity in China and India as well as increasing demand for resources from both of those countries. Blocking the deal will not address the issue of China's increasing demand for resources nor would it address the issue of the US living beyond its means.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/