It's not easy being a pioneer.

As executives at China National Offshore Oil Corp. worked through the night to craft a bid for El Segundo-based Unocal Corp., they could have expected an outcry in Washington the next day. For U.S. lawmakers already concerned about overseas conglomerates wanting to acquire American firms, the $18.5 billion offer was easy pickings.

"It is critical to understand the implications for American interests and most especially the threat posed by China's governmental pursuit of world energy resources," wrote California Reps. Richard W. Pombo and Duncan Hunter in a letter to President Bush. The U.S., they continued, needed to examine its economic agenda in the context of foreign policy and national security.

Cold War rhetoric, however, appears to be the least of CNOOC's problems. As of late last week, the general consensus was that Chevron Corp., which had been ready to take over Unocal with its earlier $16.65 billion offer, could still emerge victorious. "At a maximum, all they would have to do is tweak their bid," said Scott Keller, president of Analytics Research LLC.

For its part, San Francisco-based Chevron was holding pat. "We're satisfied with the bid we have on the table," Peter Robertson, Chevron vice chairman, said in an interview on CNBC. "We think it's still the best opportunity for the shareholders.

It's hard to know whether that's just posturing, but one point is obvious: CNOOC's timing certainly isn't great.

While there's little to support any significant security threat in a state-run Chinese company taking over Unocal, there are other matters to consider: a refusal by the Chinese government to revalue the yuan against the dollar, a flood of Chinese imports coming into the United States resulting in lost business for domestic manufacturers and the jump in oil prices that has been caused, at least in part, by the growing Chinese industrial empire.

"Are we powerless or are you oblivious?" Sen. John Kerry, D-Mass., asked Treasury Secretary John Snow during Senate hearings last week. Snow assured the committee that the administration is conducting a comprehensive review of its trade policies with China.

Chinese M & A;
Two U.S. senators are sponsoring a bill that would slap a 27.5 percent tariff on Chinese imports if China does not take steps to revalue the yuan. "The opponents of our bill are protectionist," said one of the sponsors, Sen. Charles Schumer, D-N.Y. "They are protecting China from joining the community of free trading nations."

Globalization has gotten very complicated and perhaps a bit unfair. Even with a higher offer than Chevron and promises to retain most of Unocal's employees in the United States unlike Chevron's likely layoffs of Unocal workers CNOOC finds itself in the middle of a growing debate over trade policy, one that seemed to explode with word of the new offer.

Last month, Chinese computer maker Lenovo completed its $1.75 billion deal for IBM Corp.'s personal computer business. Just last week, a group of Chinese investors was prepared to acquire Maytag Corp. for $1.75 billion. And recently the manufacturing operations for the RCA-brand of electronics products were taken over by Chinese TV maker TCL Corp.

While none of these deals captured much public notice, they served to confirm China's arrival on the merger and acquisition stage a goal long sought in that nation by government officials and private entrepreneurs alike.

What's more, the emergence of capitalism in China is being fueled by an infrastructure of U.S. interests that include lawyers, accountants, investment bankers and institutional investors. Ironically, the CNOOC bid is being financed in part by $3 billion in bridge loans from Goldman Sachs Group Inc. and J.P. Morgan Chase & Co.

And CNOOC's commitment to retaining local jobs at Unocal is ironic, considering all the rhetoric about U.S. companies outsourcing work to China.

"It means the Chinese oil company has gotten very good advice from Goldman Sachs and J.P. Morgan Chase and that they're aware of the sensitivities," said Jack Chen, chairman of the Asia Pacific division of investment bankers Barrington Associates. "Those are the correct steps the Chinese are taking to show they're not taking away U.S. jobs and giving less ammunition to the opponents of the deal."

Unocal's board has not set a date to put the competing offers before shareholders and many expect the timetable to be moved back several weeks or even months.

Test case
Some analysts speculate that the Chinese company is using Unocal as a kind of test case to determine what it takes to successfully purchase a U.S. company, perhaps recognizing that its effort might not be successful.

Opponents of the deal also see this as a test. If CNOOC does acquire Unocal, it could set in motion other deals involving potentially sensitive industries. In their letter to Bush, Pombo and Hunter cited concerns that CNOOC could withhold from the U.S. critical oil supplies tapped by Unocal.

Another concern is the contention that CNOOC has access to the Chinese treasury. U.S. Treasury officials have been pressuring China to let its currency float against the dollar; China has kept its currency artificially depressed, driving down the price of exports to the U.S.

There are, in fact, relatively few avenues available to block the deal. Under a 1988 law, only the President can veto a foreign takeover of a U.S. company on national security grounds. That has been exercised only once, when George H.W. Bush, blocked the sale of a Seattle aerospace parts company to a Chinese firm in February 1990, just eight months after the Chinese crackdown on protestors in Tiananmen Square.

"It's a very high bar that's set. The vast majority of cases do go through," said Tony Fratto, spokesman for the U.S. Treasury Department.

Among the security concerns are suggestions that by CNOOC taking over Unocal, the Chinese government could obtain seismic data normally used for detecting pockets in sediments that would be useful in underground testing of nuclear weapons. Such a notion has been generally dismissed among oil experts.

"There's zero military applications for deep-sea drilling," said Bernard Picchi, oil analyst with New York-based Foresight Research Solutions LLC, an equity research firm.

Security concerns were also raised in 2002 when a consortium led by China Netcom, the No. 2 fixed line phone company in China, wanted to purchase assets of the bankrupt U.S. fiber optic company Global Crossing Ltd. Critics tried unsuccessfully to block the purchase because the bidder had close ties to the Chinese government.

Ultimately, a consortium put up $122 million in 2003 to buy the debt of Asia Global Crossing Ltd. The deal was approved after being modified so that the Chinese company only acquired the Chinese assets of Global Crossing.

The little-known Committee on Foreign Investment in the United States could ultimately resolve the Unocal matter. It is charged with reviewing every foreign acquisition of a U.S. company, but since its establishment in 1988, only 25 of the 1,560 proposals have generated enough national security concerns to prompt full-blown investigations. In 13 of those cases, the deals fell apart before the investigations were complete; the other 12 were referred to the president.

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