Guns or butter

by Henry on June 28, 2005

Alex Tabarrok denounces Paul Krugman as an “illiberal demagogue” who has forgotten his heritage as an economist. The reason: Krugman’s claim that China is a strategic rival, and his recommendation that the Chinese bid for Unocal be blocked. Now I’m far from being an expert on Asian politics, and so won’t pronounce on the substance of whether Krugman is right or wrong on this specific issue. But I do think it’s fair to say that there’s another term than “illiberal demagogue” for someone who believes that strategic concerns trump trade interests when push comes to shove. That term is “mainstream international relations specialist.” The kind of “doux commerce” liberalism that Alex seems to favour has been out of fashion in IR theory since Norman Angell’s (somewhat unfairly) ballyhooed The Great Illusion .

If I understand Alex correctly, he’s telling us that economics, which likes to portray itself as a rationalistic and impartial approach to the understanding of human behaviour, is at its core a set of normative arguments for the increase of trade and commerce, and against the pursuit of a certain kind of ‘irrational’ self-interest. I think that Alex is largely right on this – though many economists wouldn’t admit it (and one is faced with the interesting question of whether scholars like, say, Dani Rodrik, are economists under Alex’s definition of the term). But it leads to the interesting question of when economists’ prescriptions for free trade over strategic manoeuvre are in fact the right prescriptions. On the one hand, posturing and mutual distrust can lead to a downward spiral and thus to war, in circumstances where peaceful commerce might otherwise have been possible. And it may well be, as Alex believes, that you can reconstruct people’s beliefs away from war, and towards peaceful exchange by substituting the voices of liberal economists for those of “mercantilists, imperialists and ‘national greatness’ warriors.”* On the other, if one state does see politics as a zero-sum game and is unlikely to be persuaded otherwise, then it may be a big mistake to concede strategic resources to that state – it may use them against you later. This is of course the reason that international trade in, say, advanced weapons systems, does not resemble a free market (whether control over oil companies is a similarly sensitive strategic asset, I’ll leave to the discussion section). Which means that if Alex wants to make a convincing case that Krugman isn’t just making a claim that runs against the usual normative biases of economists, but is actually wrong on the merits here, he needs to provide more evidence than an argument-by-assertion that China is now “moving” from war to trade. As stated above, I’m not a China expert, but from what I do know, this is very much an open debate.

  • interestingly, those in international relations theory who make this sort of claim are usually vehemently opposed to economic reasoning.

{ 81 comments }

1

abb1 06.28.05 at 11:47 am

…as if one needed another proof that dogmatic liberals are just as insane as, say, dogmatic libertarians. Or any other sort of true believers.

2

Brad DeLong 06.28.05 at 12:11 pm

Wasn’t it Adam Smith who said that “defense is more important than opulence”?

3

Michael H. 06.28.05 at 1:17 pm

Henry
I’m sorry to say that you didn’t really understand Prof. Tabarrok’s complaint. Krugman’s editorial suggests nowhere that he is concerned about the military threat that a stronger China might pose to the U.S. and it’s allies (and admittedly, that might complicate a pure free-trade argument if you really feared it). Instead Krugman is worried that China will out-compete us economically.

The two arguments from Krugman’s essay that would make any economist cringe are:

One difference [between 2005 China and 1985 Japan]is that, judging from early indications, the Chinese won’t squander their money as badly as the Japanese did.

The Japanese, back in the day, tended to go for prestige investments – Rockefeller Center, movie studios – that transferred lots of money to the American sellers, but never generated much return for the buyers. The result was, in effect, a subsidy to the United States.

The Chinese seem shrewder than that.

and:

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.

(Emphasis added)

It is clear that Krugman is concerned that China will own too much oil, copper, zinc, whatever commodity you like for his comfort. Why should we care? The Soviet Union was filthy rich in natural resources and what good did it do them? What economist today really cares about raw natural resources other than brain power) as a source of economic power. THIS is the reason Tabarrok lables Krugman a neo-mercantilist.

As for the field of Internation Relations, it shounds exactly like one of those useless university departments that out to be taken over by economists.

4

Henry 06.28.05 at 1:26 pm

Sorry Michael: _nul points_ for reading comprehension, with regard to both Krugman’s op-ed and Alex’s response to it. If you don’t believe me, ask Alex:

bq. The real question is how do rivals compete? Do they compete with war or by trade? China is moving from the former to the latter but shockingly Krugman prefers the former.

You may not like Krugman, but to dismiss him as a dimwitted mercantilist is both to completely misconstrue his argument, and to display a level of arrogance that seems to me to be quite unwarranted under the circumstances.

5

BigMacAttack 06.28.05 at 1:27 pm

Michael H,

You beat me to it. But in defense of Krugman you left out an important paragraph,

‘That doesn’t mean that America will lose from the deal. Maytag’s stockholders will gain, and the company will probably shed fewer American workers under Chinese ownership than it would have otherwise. Still, the deal won’t be as one-sided as the deals with the Japanese often were.’

So if you are being charitable you would just conclude that Krugman didn’t do that hot a job of saying what he wanted to say.

6

Michael H. 06.28.05 at 2:30 pm

Henry
Man your a tough grader.

But seriously, I do not see the military argument in Krugman’s piece at al. Do the CT reader see something I don’t see?

As for Tabarrok’s piece, your above quote is completely out of context. Tabarrok clearly believes that China does not represent a clear and present danger to U.S. security unless we treat them like a threat. That’s a completely different issue.

And it is further clear that Tabarrok does not consider the possiblity that China would corner the market on strategic commodites to be a serious military threat to the U.S., and I would argue that most economists would tend to agree with Tabarrok. In any case, that argument really isn’t in Krugman’s piece.

Please don’t put words in my mouth: I never said Krugman was stupid. I know he is regarded as a leading economist and the recipient of the prestigious John Bates Clark Medal. I don’t think he puts as much effort into his NY Times articles as maybe he should since, like all academics, his priority is publishing in peer-reviewed journals. His NY Times articles are widely read and influential so when he has a “bad day” it’s a dissappointment to many economists.

Bigmacattack: thank you for pointing to that paragraph but I’m not sure what to make of it. Krugman seems to be saying that deals are only good if you can get the best of others – he doesn’t really mean that, does he?

7

Alex Tabarrok 06.28.05 at 2:41 pm

Henry,

fine points but you did miss the IR argument. I said that blocking China’s bid for Unocal is likely to play into China’s fears of isolation and economic starvation at the hands of the U.S. thus encouraging them to launch a war to get control of their own oil supplies. Amazingly, Krugman seems to recognize this point but still comes out for blocking the bid.

Michael is quite correct when he writes:

“Tabarrok clearly believes that China does not represent a clear and present danger to U.S. security unless we treat them like a threat…And…Tabarrok does not consider the possiblity that China would corner the market on strategic commodites to be a serious military threat to the U.S., and I would argue that most economists would tend to agree with Tabarrok.”

Best

Alex

8

Kevin Donoghue 06.28.05 at 2:44 pm

In any case, that argument really isn’t in Krugman’s piece.

Oddly, I thought it was, when I read:

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.)

9

Alex Tabarrok 06.28.05 at 2:49 pm

P.S. Some context is also useful. China bashing is at an all time high in Washington and in policy circles. Consider the June issue of the Atlantic whose cover features a threatening Chinese navy man and an article by Robert Kaplan on “How we Would Fight China.”

http://www.theatlantic.com/doc/200506/cover

I worry about this mindset and think some “doux commerce” liberalism is in order whether it is in fashion or not.

Alex

10

abb1 06.28.05 at 2:56 pm

If I understand Alex correctly, he’s telling us that economics, which likes to portray itself as a rationalistic and impartial approach to the understanding of human behaviour, is at its core a set of normative arguments for the increase of trade and commerce, and against the pursuit of a certain kind of ‘irrational’ self-interest. I think that Alex is largely right on this…

I don’t understand; do the liberal economics acknowledge the concept of a state operating under social contract or is it considered irrational?

I mean, suppose you have a teenage son. You agreed to pay him, say, $50/week pocket money in exchange for him doing some chores. Let’s say one day a neighbor’s kid shows up and offers you to perform the same tasks for $30/week. What should your response be if you’re a rationalistic and impartial liberal person?

Thanks.

11

Kevin Donoghue 06.28.05 at 3:15 pm

China bashing is at an all time high in Washington and in policy circles.

It is sensible to be concerned about that and maybe Krugman is wrong to join the bashers, but it’s no justification for labelling his economics as “bizarre” when he is just pointing out that you don’t sell a potential enemy a rope to hang you with. Adam Smith made the same point with regard to the Navigation Acts, which benefitted the British navy at the expense of the Dutch. This is fairly standard fare for a course in international trade.

12

Kevin Donoghue 06.28.05 at 3:26 pm

Another point for Alex Tabarrok: if you want to claim that Krugman has abandoned economics, a link to an article at Tech Central Station which accuses him of “lowering the level of political discourse” isn’t especially persuasive.

13

BigMacAttack 06.28.05 at 3:32 pm

Michael H,

Beats me. The column is a mess.

But I think Alex is wrong to accuse Krugman of some kind of illiberal mercantilism based on that essay. I see why he did it but I think he is wrong.

It is reasonable to say hey I see China as
maybe leaning towards a mercantilist approach that will ultimately be backed by armed force. I don’t think allowing China to purchase Unocal will influence their decision making process about this one way or the other. But I do think allowing them to buy Unocal will give them a leg up in this process. So I say why take chances.

I don’t think it a very good argument but I don’t think making it necessarily makes you an illiberal mercantilist.

14

george 06.28.05 at 3:44 pm

Good post on a convoluted issue. This is the sort of thing CT does well.

Krugman seems not so much wrong as dramatically constrained by the column format. China *is* a strategic rival; Tabarrok may be correct that their turn from Communism has been a huge advance for living standards, but what they’re turning to seems to be a sort of fascism. I’d say there’s ample reason to be wary of allowing the Chinese access to levers of power, but on the other hand it may be even riskier to deny them access to energy. Interesting that Krugman compares them to the Japan of the 1980s, but not the Japan of the 1930s.

A related question for you economists: Krugman is probably correct that current US fiscal policy may be headed for a plunge in the dollar, but at times it seems to me that the US is almost daring the Chinese to dump their TSYs, which would have the effect of revaluing the yuan vs the dollar and (hopefully) reining in the trade deficit. Does that logic work? Even if it does, am I naive to think that US economic planners have thought through the issue to that extent?

15

JeT 06.28.05 at 3:47 pm

abb1,

Tell your kid to hire the neighbor’s kid and keep the $20 difference, of course!

16

Kevin Donoghue 06.28.05 at 4:03 pm

…the US is almost daring the Chinese to dump their TSYs, which would have the effect of revaluing the yuan vs the dollar and (hopefully) reining in the trade deficit.

George, it looks a bit like that to me also and I suspect that the US will get a nasty shock when it finally happens. Sure, an exchange rate adjustment helps to cut the trade deficit. But as any conscientious Krugman reader knows, that’s the easy part. At the end of the day the trade deficit is the gap between what a country produces and what it consumes. Closing that gap invariably hurts. Usually there is a lot of unemployment as jobs are shed rapidly in the non-traded sector (services, construction etc.) while jobs are not created so quickly in tradables (basically manufacturing).

A related point is that a struggling US economy, in that kind of transition, will find it harder to support the kind of military required to face down a distant rival.

Krugman’s critics should bear in mind that he is a Keynesian of sorts. He worries about transitions that the Panglossian school assume to be painless.

17

Kevin Donoghue 06.28.05 at 4:10 pm

By “the non-traded sector” I really mean just the sector whose output is not internationally tradable. AFAIK the really bloated sector in the US at present is construction, but I haven’t looked at that very closely.

18

george 06.28.05 at 4:22 pm

I’d agree with all that, Kevin (though as I’m not an economist, my opinion is worth about what you’re paying for it). But it seems more complicated than that even. The Chinese themselves profess to want to slow down their economy; that’s wise, I’d say, since given their weak financial institutions, there’s telling how they might respond to a bad bout of inflation. But they’re also politically addicted to those gaudy 8%-10% growth numbers — which, not incidentally, also make it a lot easier for them to modernize their own military. Meanwhile the US is stuck with a high-consuming culture and a (relatively) slow-growth economy. Is the US essentially trying to equalize the economic growth trends between itself and China (soon to be the world’s second-biggest economy), at the potential cost of being the world’s reserve currency?

19

george 06.28.05 at 4:23 pm

Uh, that would be “there’s *no* telling,” of course.

20

Kevin Donoghue 06.28.05 at 5:03 pm

Is the US essentially trying to equalize the economic growth trends between itself and China (soon to be the world’s second-biggest economy), at the potential cost of being the world’s reserve currency?

God only knows what the US is trying to do. Brad DeLong is fond of quoting this bit of dialogue from Apocalypse Now:

Willard: “They told me that you had gone totally insane, and that your methods were unsound.”

Kurtz: “Are my methods unsound?”

Willard: “I don’t see any method, at all, sir.”

As for being the world’s reserve currency, who cares? Certainly not Krugman and I have never seen anyone challenge his view that it’s a minor matter: “a subsidy to the US of $12-14 billion per year. Small change, for a $10 trillion economy.”

21

Henry 06.28.05 at 5:27 pm

Michael H – yeah, I’m a tough grader – but the contention that IR is a useless department ready for takeover by economists tends to bring out my tougher side (anyways, if David Kreps is right, economics is “about to be taken over”:http://www.aau.edu/aau/Kreps10.00.html by sociology ;)). But on the main point – where Krugman signals that he’s talking about war-war, not jaw-jaw is in his reference to the “Great Game.” This is a pretty clear signal that he’s writing about great power politics, rather than announcing a road-to-Damascus conversion to mercantilism. And his argument should be treated seriously.

Alex – I recognize that there’s a serious argument happening here, which is why I didn’t pronounce on the merits of the underlying case (or say that your argument was wrong; rather that your denunciation of Krugman seemed over-the-top, and your substantive claim needed considerably more evidence than you used to support it). I tried to put your case, as I understood it, when I said

bq. On the one hand, posturing and mutual distrust can lead to a downward spiral and thus to war, in circumstances where peaceful commerce might otherwise have been possible. And it may well be, as Alex believes, that you can reconstruct people’s beliefs away from war, and towards peaceful exchange by substituting the voices of liberal economists for those of “mercantilists, imperialists and ‘national greatness’ warriors.”

But what I’m saying here is that the other side of the argument – the claim that China is going to see peaceful overtures as concessions to be pocketed in a zero-sum conflict over militarily valuable resources – isn’t in itself a ridiculous claim. It could quite possibly be true, and if it is, then Krugman is doing exactly the right thing in his column. At the least, the argument can’t be dismissed as mere illiberal demagoguery (even if some not-especially liberal demagogues are also making it).

And there’s a second qualifying argument to the doux-commerce thesis. Whatever about the Kaplan thesis, it does seem to be quite clear that China has been creating ties with a number of nasty regimes, and in effect, insulating them from outside pressures for democratic reform that might go along with market opening. Does doux-commerce work when there’s a quasi-imperial power bolstering the autocrats against market pressures? At the least, it’s an important complicating factor.

22

Steve Carr 06.28.05 at 6:28 pm

Henry, what is the basis for the idea that we’re talking about a “zero-sum conflict over militarily valuable resources”? The United States doesn’t own, in any sense, Unocal’s reserves — the vast majority of which are, by the way, in Asia. So it’s not losing anything, because it doesn’t have anything. If, in this imaginary future that Krugman is conjuring, the US wants those reserves, it will have to take them by force — first nationalizing Unocal (or whatever American company comes along to pick up Unocal if the CNOCC bid is dropped) and then seizing and defending the reserves militarily against the Chinese (who, in Krugman’s model, will presumably be trying to take them). If Unocal is bought by CNOCC, and we want the reserves, we’ll again have to take them by force from a public company. The second seems mildly more difficult than the first, but in both cases you’re talking about a massive use of military force to secure energy resources. If we do end up in that future, I have a hard time believing that who owns the deed to the natural-gas fields in Indonesia is going to make much of a difference to anyone.

There is, then, no real downside (in strategic terms) to letting the deal go through. But there’s a real downside to blocking it: alienating China, making it clear to them that we perceive them as an enemy, looking like hypocrites in the eyes of the world, interfering with rights of Unocal shareholders, etc.

23

Steve Carr 06.28.05 at 6:31 pm

I’m also unconvinced that World War I once and for all discredited the “doux commerce” thesis — at least if we understand mutual trade as making countries less likely to go to war (rather than making it impossible for them to do so). How many examples in the last eighty-five years have there been of serious trading partners actually engaging in hostilities?

24

Steve Carr 06.28.05 at 6:37 pm

It seems reasonable to say that “strategic concerns trump trade interests when push comes to shove.” But surely if you have two countries that trade vigorously with each other, the line between strategic concerns and trade interests is blurrier than if you have two countries that have nothing to do with each other. More important, that “push comes to shove” moment isn’t a function of some deus ex machina, but is only arrived at as a result of the choices each player makes. And shoving the other guy — by, say, blocking his purchase of a company when you would never stop a British guy’s purchase of the same company — is probably not the best choice if you’re trying to stop that moment from coming.

25

Michael H. 06.28.05 at 7:01 pm

Hi Henry
I cannot speak for Paul Krugman so I cannot know what he was referring to when he mentions the “Great Game” but the purchase of a small oil company by a Chinese firm would not even be comparable to playing P-QR3 in chess. I would be more concerned if a Chinese firm tried to buy a Swiss Chocolate company because they could conceivable mess up that market (since what do Chinese know about chocolate?) but they could never control enough oil to make a difference.

Any mainstream economist would point out that there really is no difference betweeen spending $10 billion on oil or on marble. These are commodities, and unless you corner the market, your impact on the market is essentially nil.

The thing that really bothers free trade economists like Alex Tabarrok and myself is that free trade has done a world of good for the people of China and India and the rest of the world so to start back down the protectionist path based on rather vague fears seem tragic. Let me put it this way: If Unocal went out of business, would we have cared? If China had spent $10 billion on new tanks, would we be quaking in our boots? (I’m glad they are not doing this). But if neither happens but instead one Chinese company buys Unocal and keeps their employees employed, we should be concerned?

I would agree that it would be wonderful if China would liberalize its society and allow elections and allow more freedoms. I definitely would love that. I don’t think the Unocal purchase is relevant for that issue one way or the other.

As for sociology taking over economics (heh) I would like to see them try. Really! If they can be better economists than traditional economists, then so be it. But you to admit that the recent triumph of free markets over the bad old marxism has brought a lot of good things to the world, and it happened because economists had a very clear vision about how markets should work. It’s not like economists’ value added is zero.

26

v 06.28.05 at 8:29 pm

Mr Tabarrok’s accusations about Krugman being an “illiberal demagogue” would carry more weight if he did not go around quoting apologists and whitewashers of Imperial expansion like Niall Ferguson, approvingly in his previous posts.

I think there is validity to Mr Krugman’s discomfort over the bid for UNOCAL. UNOCAL may be small compared to Exxon, but it has a lot of assets in many very strategic places, and this has a value beyond the book estimates. Also, it may be interesting to consider what the reaction may have been if the Chinese Govt bid for UNOCAL directly, instead of a Chinese oil company. I suspect some of the reactions in the favour of this bid may have been different.

27

seth edenbaum 06.28.05 at 9:01 pm

This whole debate is laughable. If economics is merely ‘normative’ why not another version of the economic ‘norm?’ And Michael, India limited trade for decades before opening up. Also no one seems to consider the effect of the economic modernization of China on the relation of individuals to the state. ‘Normative’ greed will trump ‘normative’ nationalism in any country, just give it time. The economic avant garde these days is libertarian; it’s the last One True Way. It’ll pass just like the others, but not soon enough.

This persistent willingness to reconstruct the world in terms of one’s own simplistic ideas is bizarre.
Undialectical?

28

Henry 06.28.05 at 9:31 pm

Steve – to my knowledge there isn’t any evidence of a substantial effect of economic interdependence on likelihood of war – there’s disagreement in the literature, but most scholars find either a modest positive effect or a modest negative effect (and disagree about appropriate measurements). Thus, as far as I know, it’s a wash as to whether interdependence increases or decreases the chances of war. For an account of how interdependence can lead to asymmetric power relations and thus the possibility of conflict, see Hirschman’s work.

As noted in the post “whether control over oil companies is a similarly sensitive strategic asset, I’ll leave to the discussion section.” What I will say is that there is a plausible argument to be made that Unocal is indeed a strategic asset in the “Great Game,” just as Krugman argues. Insofar as Unocal is able to create preferential agreements with host governments, and influence the development of long term infrastructure (pipelines for example going through country _x_ rather than country _y_ ), then it could indeed be an important strategic asset. I’ll note that this argument only has to be plausible to serve my purposes. I don’t have to defend its truth; I just have to defend the proposition that a reasonable case can be made to support the claim that Krugman makes.

To put it another way – if the very strong language that Alex used to describe Krugman is justified, then it seems to me that one of two things has to be true. First, it would be justified if there were something inherently ridiculous about arguing that we should think about the strategic implications of foreign takeover bids before deciding whether to let them go ahead. To say that this is a ridiculous argument _in principle_ is to make a very strong claim indeed. To defend it one would have to be entirely sanguine about allowing the Chinese government to buy, say, Lockheed Martin. Second, it would be justified if the claim that we should think carefully about the strategic implications of this particular takeover was inherently ridiculous. This, it seems to me is what both Steve and Michael H are arguing – but I don’t think that they’ve made their case. They may be correct (or they may be incorrect) in arguing that Krugman is _wrong_, but they haven’t come close to showing that he’s being ridiculous.

And my final point for the evening – when someone has devoted the better part of their career to defending the proposition that free trade is good and mercantilism is bad, it probably doesn’t make sense to construe an op-ed that they have written as being a gung-ho case for mercantilism when there is a reasonable alternative explanation of what they are saying. Now personally, I don’t find accusations of economic deviationism to be very offensive, for the simple reason that I deviate substantially from the current economic wisdom on a variety of topics. But when people accuse Krugman of being a closet mercantilist, they’re talking smack.

29

cbisquit 06.28.05 at 10:07 pm

In other words this whole post boils down to “Hyperbole found on the internet, news at 11”
Next thing we’ll be hearing that journalists might make their headlines more clear if they weren’t so darned infatuated with alliteration

30

Steve Carr 06.28.05 at 10:53 pm

Henry, I think the standard you’re asking for here — demonstrating that what Krugman said was “ridiculous” — is too high to be all that interesting. Krugman is the one making the argument that the CNOOC bid should be blocked. He’s the economist who has in the past has spoken quite eloquently (particularly with regard to Japan) about the perils of framing trade in military terms and succumbing to a zero-sum view of the world. So the burden is on him to demonstrate that the China case is different, and that all the arguments (economic and strategic) in favor of free trade do not apply.
Does he do this in any convincing way? Hardly. Instead, he says that China is different because it’s not overspending as badly and because, unlike Japan, it’s a “strategic rival” that’s competing for “scarce resources.” Evidence? Well, he gives us none. Just the statement, and then some speculation that the Chinese government envisions the world as a “Great Game,” and is buying Unocal in lieu of (eventually) invading some poor country that has the oil it wants. Why does Krugman think this? Who knows? But one suspects he’s been reading some illiberal thinkers like, say, Robert Kaplan.

The assertion of China’s buy-or-invade strategy is, at the very least, a questionable thing to say about a country that has stayed within its borders for the last twenty-five years, and that allowed the British government to maintain an imperial outpost right next door for half a century. More important, the language of “strategic rivalry” and competition for resources was precisely the kind of language used about Japan, though the resources we were worried about in that case were technological (semiconductors, etc.) rather than natural. In addition, this idea of a competition for natural resources is, as more than a few people have pointed out, meaningless in a world with a single oil and a single natural gas market in which a given commodity is sold for the same price regardless of origin (taking into account sulfur content, etc.) The Chinese cannot hurt the U.S. by controlling more of the supply of oil. Their demand for oil drives up prices, but whether they own the oil they use or they buy it from someone else is irrelevant to the price we pay. You suggest that the pipelines, etc., are strategic assets. But again, with the exception of a world in which we are literally at war with China over oil (which is not a world in which the deed to Unocal is going to matter), in what world does the location of a pipeline actually matter to the end consumers of oil?

In any case, I agree that talking about the strategic implications of takeover bids is not per se ridiculous. But given what we know about the perils of nationalism, interest-group politics, and the persistence of mercantilist thinking, it’s not enough to just whip up some vaguely plausible scenario in which a foreign country constitutes a strategic threat and then use that to justify blocking a takeover, particularly when blocking the takeover sends a clear message that you consider the would-be acquirer a long-term threat. Krugman’s piece is flimsy and shoddy, and it simply does not fit with his earlier work. Defense may be more important than opulence, but before you give away opulence (and explicitly alienate other nations), you should be sure that defense is really what’s at stake.

31

Henry 06.28.05 at 11:36 pm

Steve – I don’t think so. My post was explicitly not a defence of Krugman’s argument (I think it’s plausible, but the jury is still out on whether he is right or not). It was a pointed disagreement with Alex’s claim that Krugman was an “illiberal demagogue” and that Krugman’s argument was more or less indefensible. Thus the ridiculousness standard – Krugman doesn’t have to be right for Alex’s rather extreme description to be unwarranted, he just has to be making a defensible argument. I’m glad to see that you don’t seem to think it was ridiculous, even if you very clearly don’t agree with it. Re: pipelines as strategic assets – they rather obviously are. Look at the very considerable amount that the US has invested over the last few years in Central Asian politics, trying to make sure that Iran doesn’t get a slice of the pipeline action (and thus a potential chokepoint). Finally, there is a pretty clear difference between Japan and China – Japan had neither military ambitions nor a sense of territorial grievance in the 1990’s. The Japan-bashing that I’m familiar with was fairly straightforward mercantilism. But Krugman’s case, agree with it or disagree with it, is neither mercantilist nor ridiculous on its face. I’ll agree that I’d like to see him set out his argument and sources at greater length than in an 800 word op-ed – but I just don’t think that what he is saying can be dismissed out of hand as illiberal demagoguery, as Alex claims.

32

Doug 06.29.05 at 12:18 am

Anybody in the North American part of the audience ever have a Bayer aspirin? Give much thought to the German company that made it famous, only to see all its US assets seized–lock, stock, and childproof bottle–as enemy property during WWI?

Which is to say that if push comes to shove, CNOOC ownership of Unocal is not likely to be much of an obstacle.

The more important task, however, is to ensure that push does not come to shove. China is surely a strategic rival, but that is a long way from being a strategic enemy, and questions like Chinese ownership of major companies does play a role in how China is integrated into the international system. (And I know that speaking of “the Chinese” is necessary shorthand in a 750-word op-ed, but surely here in blogland we know enough about bureaucratic competition and intra-state rivalry even in totalitarian systems to note that there is a plurality of motives for this purchase.)

Insofar as Unocal is able to create preferential agreements with host governments, and influence the development of long term infrastructure (pipelines for example going through country x rather than country y ), then it could indeed be an important strategic asset.

That’s an interesting proposition. Routing does play a role in other strategic considerations–see Baku-Ceyhan, or the various pipelines in Chechnya, for example–and the eastern terminus of the various pipelines from Central Asia and Russia is a live question at the moment. More as a market signal (sell to China or Japan?) than as a strategic one, I think, but the question of control is certainly out there. On the other hand, questions like this only become crucial if there is a true collapse in the global market for oil as a commodity. If that happens, we’re all screwed, well before questions of who owns what pipe become relevant.

Further, Krugman’s point about Unocal’s history of doing business with “problematic regimes in difficult places” is silly. The list of unproblematic regimes with serious oil is short: Norway, the UK and Alaska, and even that last depends on what you think about a governor giving his daughter a seat in the national Senate.

Finally, whatever business issues have made Unocal a takeover target, they’re not going to be waved away by a magic wand after a CNOOC purchase. And with oil at $60 a barrel, if Unocal is not making money hand over fist, those business issues are bound to be substantial. (Chevron’s bidding $2 billion less for Unocal. Of course some people in Congress are squawking about the CNOOC deal; if Chevron’s lobbying team can cause enough of a fuss to be kicked up and save the company $2 bn, won’t they have earned big fat bonuses this year?)

33

Steve Carr 06.29.05 at 12:19 am

Actually, I don’t think the fact that the US has invested a considerable amount of energy in Central Asian politics is proof that pipelines are strategic assets at all. It may be evidence that Cheney and Co. think of pipelines in that way, but that doesn’t mean, in any sense, that they’re right. You suggest that Iran could use the pipelines as a “chokepoint.” But in all seriousness, what would the consequences of this be? As long as Iran continued to sell all of the oil it controlled (or, to be more accurate, all of the oil that its quota allowed), then the effect on the world’s oil price would be nil. Iran already doesn’t sell any oil to the US, and it affects us not a bit, since the oil that China, et.al. buy from Iran is oil they don’t buy from others. So what are the strategic implications?

I’m also struck, on rereading your initial post, by your suggestion that Alex needs to prove that China is “moving from war to trade.” Why do you think that China’s default position is war? As far as I can tell, it’s now spent almost three decades growing through trade, freeing up its economy, etc. While it’s by no means a free-trade paragon, China’s historical record after the departures of Mao and the Gang of Four is certainly not the record of a country that views military intervention as the route to riches. So again, why is the default assumption that China is secretly some expansionist empire-in-waiting, ready to roll into Indonesia if it can’t buy itself some gas reserves?

34

Steve Carr 06.29.05 at 12:23 am

Doug’s is, I think, the crucial point about the idea of oil as a strategic weapon: “On the other hand, questions like this only become crucial if there is a true collapse in the global market for oil as a commodity. If that happens, we’re all screwed, well before questions of who owns what pipe become relevant.”

35

Doug 06.29.05 at 12:30 am

AFX News Limited
US lawmakers opposing China’s CNOOC bid for Unocal under scrutiny – report
06.29.2005, 01:49 AM

HONG KONG (AFX) – Washington lawmakers who have expressed opposition to CNOOC’s 18.5 bln usd bid for Unocal Corp have received more than 100,000 usd in campaign contributions from rival bidder Chevron since 2002, the Financial Times reported, citing publicly available filings in the US.

That has raised questions over whether Chevron is drumming up a campaign of opposition to the deal, it said in its online edition.

It cited an unidentified person close to CNOOC as saying that Chevron is using its political clout in Washington to try to increase uncertainty over the higher CNOOC bid for Unocal.

Thank you, Google News. Looks like CNOOC is starting to get its money’s worth for taking on JP Morgan and Goldman Sachs as advisers.

36

Doug 06.29.05 at 12:34 am

More from the Financial Times:

“Washington is abuzz,” said Brett Lambert, executive vice-president of DFI International, a Washington consultancy. “This deal will define [Committee on Foreign Investments in the US] for the next decade, and right now I think it’s a 50-50 call.”

http://news.ft.com/cms/s/51c508ee-e81f-11d9-9786-00000e2511c8.html

37

soru 06.29.05 at 5:03 am


On the other hand, questions like this only become crucial if there is a true collapse in the global market for oil as a commodity. If that happens, we’re all screwed

Surely the key point in this is whether chinese actions can reasonably be interpreted as setting themselves up to _not_ be fatally screwed in such a situation?

soru

38

Alex Tabarrok 06.29.05 at 9:20 am

Great comments Steve. I quote you on Marginal Revolution today.

Alex Tabarrok

39

Henry 06.29.05 at 10:54 am

Steve – you say:

bq. I’m also struck, on rereading your initial post, by your suggestion that Alex needs to prove that China is “moving from war to trade.” Why do you think that China’s default position is war? As far as I can tell, it’s now spent almost three decades growing through trade, freeing up its economy, etc. While it’s by no means a free-trade paragon, China’s historical record after the departures of Mao and the Gang of Four is certainly not the record of a country that views military intervention as the route to riches. So again, why is the default assumption that China is secretly some expansionist empire-in-waiting, ready to roll into Indonesia if it can’t buy itself some gas reserves?

What I was doing here was directly paraphrasing what _Alex_ said. Here’s the quote from his original post:

bq. Do they compete with war or by trade? China is moving from the former to the latter but shockingly Krugman prefers the former.

I will point out though that China-as-belligerent-threat isn’t just a figment of Kaplan’s imagination. I could construct an equally plausible counter-narrative to yours, invoking, say, the recent anti-Taiwan law and accompanying implicit threat of invasion, continuing disputes over natural resource rights and the Spratly islands, and the current upswell of anti-Japan nationalism to come up with a fairly plausible case that China is in fact a revisionist power which fully intends to remake the politics of the region by force or the threat of force. Again, I’m not saying that either narrative is correct – I’m not an Asian politics expert and don’t like straying too far from the areas that I know – but both narratives are plausible interpretations of recent events. Which is to say that if Krugman perceives a real difference between Japan bashing in the 1980’s and China bashing in the 2000’s, it’s not beyond the bounds of possibility that he’s right.

And I just don’t buy the “if world oil markets collapse we’re all screwed anyway, so why worry” argument. This is, as best as I can tell as a non-expert, a genuine possibility in the medium term. We may _have_ to worry about it.

40

Steve Carr 06.29.05 at 11:20 am

It’s not an argument that “if world oil markets collapse we’re all screwed anyway, so why worry.” The argument is that if world oil markets collapse, it’s all going to come down to who has the most and best guns, and not whose name is on the deed to Unocal. The distinction is essential.

In order to say that we should block the Unocal deal, you have to demonstrate that ownership of Unocal’s assets will make a meaningful strategic difference in some plausible state of the future. In the present and in any future that resembles the present, that is, a future with a functioning oil market, the ownership of those assets is undeniably irrelevant (for all the reasons enumerated above). The future in which national ownership of oil does matter is the future in which the world oil market has collapsed. But that is precisely the future in which ownership in a legal/corporate sense will be irrelevant, because force will determine who controls what. In both of these states of the future, then, the U.S. suffers no harm from letting CNOOC take over Unocal. But in the present, it suffers harm from blocking the deal. This is why Krugman’s piece is so disappointing: even if you buy his idea of China as a “strategic rival,” his proposed remedy does not, in economic terms, make any sense.

This should also make clear the sharp difference between buying a company like Unocal and buying, say, Lockheed-Martin. Having the best fighter jets in the world clearly does make a strategic difference today, and will clearly make a strategic difference in any plausible state of the future. It does matter who owns the fighter jets and who does not, and ownership of those jets in the future will, in a sense, be determined by who owns them in the present. None of these things are true of oil. (Again, the U.S. owns zero oil in the present — with the exception of the SPR — so if our access to oil in the future does depend on our current access to oil we’re screwed if we don’t start nationalizing ExxonMobil, et.al. Perhaps this is what Krugman will call for next.)

41

Henry 06.29.05 at 11:33 am

Nope Steve, but I’m beginning to get a better idea of where your disagreement comes from (and of where, in my opinion, you’re misinterpreting Krugman). You’re effectively saying that there’s a dichotomy here, between peace – with oil-as-a-commodity and properly functioning markets, and war – where legal ownership is irrelevant. Seems to me that it’s not a dichotomy but a continuum. One can easily imagine a variety of intermediate states (again, Krugman’s ref. to the Great Game) with only partially functioning oil markets and supply shortages, without all-out conflict, but with covert hostilities, manoeuvring through puppet regimes etc. In this world, locations of pipelines, relations with dubious governments who have oil supplies etc, could have quite important strategic implications.

42

Steve Carr 06.29.05 at 12:10 pm

Henry, Krugman is the one who set up the dichotomy: “Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.” That’s not much of a continuum: functioning markets on the one hand, war on the other. (Of course, as quite a few people have pointed out, it seems odd that if he thinks these are the alternatives China is considering, he would favor blocking the deal and presumably forcing them to invade.) I’m not the one doing the misinterpreting.

43

Henry 06.29.05 at 12:24 pm

Huh? You’re completely misunderstanding what Krugman is saying here. He lays out a threefold distinction in the op-ed: (a) Buying Maytag – canny buy for the Chinese, but nothing for Americans to be worried about, (b) buying Unocal – worrying because of its strategic implications in a Great Game type situation where countries are jostling for influence over oil producers, and (c ) out-and-out war. No dichotomies there that I can see. Nor is he saying, as you seem to believe, that the Chinese government is now choosing between war and buying Unocal – that would be a quite ridiculous argument, and it’s manifestly not the one that he’s making. It’s a straw man of your own devising.

44

Steve Carr 06.29.05 at 12:24 pm

It’s worth underscoring just how crude Krugman thinks Chinese thinking is, since it boils down to: “If we can’t buy oil and gas reserves, we’d really like to take them by force. We won’t, because that would probably start a war with the U.S., but if we had our druthers, we’d just roll into Indonesia.” Now maybe this really is the way the Chinese think, but to me it has all the characteristics of “Yellow Peril” rhetoric and Kaplanesque thinking. China seems to have done a pretty good job of partnering and trading with oil-producing countries up to this point — unsavory ones to be sure, but no more so than many of the countries we buy from. Where is the evidence that they would otherwise be on the march?

For that matter, it’s perfectly plausible that CNOOC is buying Unocal because it thinks it’s a good investment, rather than as part of some Great-Game strategy. Certainly it’s hard to believe the Chinese government can keep buying US bonds at the same pace, and it has to put its money somewhere. When Chevron bids for Unocal, no one has any trouble believing that the economic motives of the deal make sense, but when CNOOC does, everyone leaps to the conclusion that this is part of some grand geopolitical strategy.

45

Henry 06.29.05 at 12:26 pm

As stated. A straw man of your own devising.

46

Steve Carr 06.29.05 at 12:30 pm

Henry, if I say about someone “Buying that car is a lot easier for him, in terms of risk and energy, than stealing that car” I think a reasonable assumption is that that person is seriously considering both approaches. If not, then it’s just an utterly banal statement. Why even mention the second alternative?

47

Henry 06.29.05 at 12:47 pm

Ah, but Krugman didn’t include the “for him” that you did in your example, did he. He’s clearly trying to draw an analogy between the purchasing of an oil-company and a military-strategic move – but he doesn’t say, or even imply that China is currently considering invading oil-producing countries. Seriously – if your case against Krugman now depends on constructing elaborate scenarios about invasions of Indonesia on the basis of a throwaway comment that doesn’t mean what you say it means, it’s in trouble.

48

Steve Carr 06.29.05 at 1:03 pm

No, as I think has been made pretty clear here, the case against Krugman rests on the implausibility of the analogy between the purchasing of a publicly-held oil company and invading an oil-producing country. It rests on the implausibility of thinking that for China to take over Unocal — an independent company whose reserves does not control — is analogous to it seizing fields that belong to the U.S. And it rests on his abandonment of his commitment to free trade in favor of a wildly speculative definition of and approach to national security that seems more likely to increase hostilities with China than to mute them.

49

Henry 06.29.05 at 1:10 pm

Well as noted above, case not proven. Krugman may quite possibly be wrong – but his argument isn’t ridiculous. It’s hardly wildly speculative either – there’s a reasoned case, with some evidence to back it up, supporting it. Krugman’s proposed solution may indeed increase hostilities with China – but that does depend on the extent to which China is genuinely interested in opening up markets as opposed to strategic power-plays, and, as noted, there is evidence to support either interpretation.

50

Doug 06.29.05 at 1:48 pm

I hope that those of you on the US East Coast will continue down here at the end of the thread after lunch, because it’s just getting good.

And I just don’t buy the “if world oil markets collapse we’re all screwed anyway, so why worry” argument. This is, as best as I can tell as a non-expert, a genuine possibility in the medium term. We may have to worry about it.

Ok, now I’m really interested. And also a non-expert; I couldn’t even get all the way through my Yergin.

I’m interested in this continuity between a commodity market and something else, which Henry briefly sketches in #41 above. Are there historical parallels?

I’ve scratched my head a bit, and I’m not sure. Suez crisis? Arab oil embargo and first oil shock? Despite everything that’s happened in the postwar international system, I don’t think the intermediate state Henry is thinking of–and worried about medium-term, which I take to be next 5-8 years–has actually occurred. Doesn’t mean that it can’t, but I’m interested in how we might get from here to there.

(In a Holbovian aside, I’m not at all blind to the strategic uses to which hydrocarbon supplies have been put since the end of the Cold War. One of the first moves of almost all post-Communist governments was to back construction of pipelines, usually natural gas pipelines, leading to West European supplies, usually the North Sea. Czech, Poland, Slovakia, for sure. Probably also Hungary and the Baltics, though I’d have to rummage around the RFE/RL archives to be sure. The Russians squawked, saying they would never have any intentions of using gas as a tool for political leverage, no really. Thanks all the same, said the Central Europeans and kept on building. Depending on a single source for the fuel to keep their populations warm in winter was not a risk the governments were willing to take.
(And indeed, Russia has tried to use its control of energy sources for political leverage. Usually it has come in the form of deliveries for below world market prices, forgiving debts run up from buying at world prices, or demanding full payment at awkward times. Putin tried some of this flim-flammery in his effort to support Yanukovich in the Ukrainian presidential election. It backfired, as a number of these moves have done. Belarus being mostly an exception. And of course Gazprom should be seen mostly as an extension of the state, while the government’s offensive against Yukos is part of a similar move.)

So yes, there’s a good bit of mercantilism going around in the control of oil companies. There’s also a counter-movement, as seen particularly in the Western majors’ efforts in Russia. In my reading, this is business as usual for the oil sector.

Which leads me to think that if I were King (or whatever), I wouldn’t block the sale. But I wouldn’t feel the need to bash Krugman about it, mostly because too many of the folks who do that seldom say anything more substantive than heh and indeed. There’s also the question of the business issues involved. Companies that have overpaid for an acquisition are legion, and buyer’s remorse here could be expensive and aggravating, even for a Chinese SOE.

Still, I’m most interested in the non-functioning-market, non-war state–what it might actually look like, what the drivers are from here to there, and how we might know if that was the scenario we are headed toward. Pensees, anyone?

51

abb1 06.29.05 at 2:26 pm

Well, he told you what it might look like – the great game.

52

J Mann 06.29.05 at 4:18 pm

I’m in the Steve-Alex camp on this one, but I can offer a little bit of possible explanation on what Krugman might be talking about.

Joseph Kahn of the NYT has a good piece on what China is up to. In his interpretation, (or that of the people he gets to opine), China is mostly concerned that the current oil market in South Asia is dominated by the US. They are paying above-market rates for control of nearby energy sources in order to build pipelines and refinery sources under their control.

In other words, what we are losing strategically as a result of the Unocal purchase is some portion of our ability to blockade China’s oil imports in the event of a future military conflict or sanction regime. I’m not sure that’s a good reason to block the purchase, but Krugman isn’t as crazy as he seems on first blush.

http://www.nytimes.com/2005/06/27/business/worldbusiness/27energy.html?pagewanted=all

53

Steve Carr 06.29.05 at 5:45 pm

The Kahn article is interesting, but to me it actually underscores two things: how speculative our insights into China’s motives are and, more important, how China’s worries about our potential behavior may be shaping their strategy. It’s in that context that I think explicitly making it clear that we regard them as an enemy is not a good idea.

It’s also important to remember that just because one player in the game is acting mercantilist, that doesn’t mean you need to. If China prefers, for mercantilist/strategic reasons, to buy oil companies instead of simply buying oil (which may or may not be an economically unwise thing to do), that’s not a reason for us to put ourselves on a war footing. The good thing about the oil market as it is is that it can have lots of players pursuing lots of different strategies and still generate effectively the same outcome: we get all the oil we want at the market price.

54

Kevin Donoghue 06.29.05 at 6:37 pm

Like Henry, I am inclined to sit on the fence. Maybe Krugman is too trigger-happy. But could his critics please refrain from using the term “mercantilist” in this context? What we are discusing is whether a foreign power should be allowed to buy particular US assets. Those who say no, we will buy their exports, but we will pick and choose which US assets they are permitted to accumulate in exchange, are not mercantilists. The Humpty-Dumpty approach to the meanings of words turns every discussion of economic policy into a silly squabble.

55

Henry 06.29.05 at 6:51 pm

Steve – there’s a very important difference between mercantilism and strategic military advantage that you’re eliding here. Pursuing a non-mercantilist policy is, if you believe in the theory of comparative advantage, a two way bet. You’ll win if the rest of the world is mercantilist; you’ll win if it isn’t. Strategic military advantage isn’t so easy. If you eschew a possible advantage in order to demonstrate your peaceloving ways to another actor, you win if he reciprocates, but you lose if he just pockets the concession.

It’s clear from what Kahn says, that we are in a situation of strategic interdependence here rather than one of mercantilisms. China isn’t pursuing a mercantilist policy – instead, it is trying to ensure routes of supply that are independent of Western/US influence. And it’s doing so because it fears that oil isn’t (or won’t in the future) be a commodity traded on spot markets. Now, it could well be that all China needs is to be reassured that the West is prepared to share the goodies. Or it could be that it perceives itself as engaged in a zero-sum game for finite resources, in which case reassurance is at best going to be beside the point. Reasonable arguments can be made for both interpretations. But the claim that we shouldn’t respond to mercantilism with more mercantilism (a claim which Krugman has made more forcefully than anyone else I can think of in recent debates) is irrelevant – the Chinese manifestly aren’t motivated by mercantilism. It’s a different game that we’re involved in. Krugman may very well be wrong, but he isn’t stupid, and he isn’t making claims that are inconsistent with his previous arguments on this topic.

56

Steve Carr 06.29.05 at 9:43 pm

I’m fascinated by this distinction that you think I’m eliding. A mercantilist (or neo-mercantilist, if that’s more accurate) country thinks that it’s in a zero-sum game with finite resources — the resources being not just natural, but also intellectual, technological, etc. It wants to control assets and build self-sustaining industries because otherwise it will be at the dependence of trading partners, richer countries, etc. So I could let you build semiconductors and steel while I build televisions and cars, but that means that at any moment you can cut off my semiconductor supply, leaving me impoverished, etc. So I’m going to make sure I have my own supply of semiconductors, and perhaps in order to guarantee it I’ll buy the necessary technology from you.

China now is (perhaps) saying that while it could concentrate on producing televisions, cars, etc., and let other countries produce oil, doing so means that at any moment its supply of oil may be cut off, leaving it impoverished, etc. Therefore it’s going to make sure that it has its own supply of oil, and in order to do so it’s trying to buy one of the sources of supply from the US.

What’s the difference here? It’s not the nature of the competition for scarce resources: both Japan and the US were and are competing for a host of scarce resources (intellectual capital, technological innovations, to say nothing of steel, etc.). It’s not the possibility of cutting off supply — during the late 1980s and early 1990s the US was decidedly worried that Japan might simply refuse to sell it the microchips it needed, and Laura Tyson at one point actually tried to push an export quota, forcing the Japanese to sell a given percentage of its production to the US. Nor are the goals fundamentally different: in both cases the desire is to ensure economic well-being by guaranteeing self-sufficiency. So why is the first case — a hostile response to which Krugman rejected — about neo-mercantilism but the second — a hostile response to which Krugman is advocating — about “strategic interdependence”? Is it just that the Chinese are dangerous while the Japanese aren’t?

57

Henry 06.29.05 at 11:30 pm

Steve – it’s pretty straightforward. Mercantilists view international trade as being a competitive struggle between countries. Simplifying drastically, if you believe in comparative advantage, mercantilism and the policies associated with it are always going to be wrongheaded because trade isn’t about nations competing against each other in some zero sum game, it’s about nations exploiting their comparative advantage. Hence Krugman’s criticisms thereof. What Krugman is arguing in this piece is quite different – he’s arguing that the US might want to block Unocal for _politically_ strategic reasons (i.e. not because it would secure long term competitive advantage for the US economy, but because it helps shore up the US’ geopolitical position). International politics, as opposed to international trade, doesn’t have any law of comparative advantage, especially when it involves the implicit or explicit threat of military force.

Kevin’s right here – you’re using the term mercantilism in a loose and confusing way. Indeed, it seems to me that you’re making two mutually contradictory arguments. One is that Krugman is a neo-mercantilist of some sort; that he’s making claims which are kissing cousins to the global competitiveness claims that he criticized so trenchantly in the 1990’s. The other is that Krugman is making an argument that oil is _politically and militarily_ strategic, but that he’s incorrect in making this claim. These two criticisms can’t be true at one and the same time. Either he’s a neo-mercantilist or he’s making a directly non-mercantilist argument from military competition and perhaps getting it wrong. To put it another way – the way that you’re eliding the two would seem to imply that the argument that we shouldn’t sell Lockheed Martin to the Chinese is a mercantilist argument (which it very clearly isn’t).

58

abb1 06.30.05 at 4:07 am

So, would it be fair to say that liberal economics is based on unwavering belief that unrestricted trade between states guarantees the best socio-economic result for every participating state – and that’s in real life – according to the theory of comparative advantage? And if you don’t agree, then you’re an illiberal demagogue (or an idiot, I suppose?). Is this correct?

59

Michael H. 06.30.05 at 6:24 am

Hi Henry
This has been an interesting debate.

The NY Times mentioned above by J Mann (comment number 52) was very illuminating. Now I think I understand why China would like Unocal and what the “great game” is all about. Presently, China is extremely vulnerable to a blockade. They feel unconfortable about that – as any sovereign nation would. They may be considering developing an oil pipeline directly with central asia (that would be one long pipeline). Unocal might help develope that project.

From the above point of view, acquiring Unocal would be a strategic asset. However, it would completely reasonable from the point of view of the Chinese to do this. If this is specifically what Krugman was referring to in his “great game” reference, I have to admit that the issue here would not be merchantilist but more of a strategic national defense (China’s, not U.S) issue.

However, blocking the sale of Unocal could not be viewed as anything other than belligerent from the point of view of the Chinese. We would be saying: “We want to keep you vulnerable to our blockade.” Do we want to say this? Is this a legitimate position for the U.S. to take? And, to what extent would blocking the sale of Unocal really prevent China from building this pipeline in the near future anyway? Would we be slapping China in the face, only to see them buy from the next vendor?

I will point out again that if you are not talking about blockading China, oil and oil production technology are in no way strategic assets. These are just commodities, bought and sold in a free market. Hoarding a bit of oil or an oil company or two will make no difference in the world market for oil.

Another point to make is that we are seeing the endgame for oil, in all probability. At $60 a barrel, it is almost too costly to refine oil in to useable fuel. At $80 to $100 a barrel, liquified natural gas and even ethanol refined from sugar cane become more economical to produce and use. So worrying about who has the oil technology is less important today than ever before.

60

Doug 06.30.05 at 6:33 am

I appear to have posed a difficult question–

Still, I’m most interested in the non-functioning-market, non-war state—what it might actually look like, what the drivers are from here to there, and how we might know if that was the scenario we are headed toward.

–and one, unfortunately, unrelated to the semantics of ‘mercantilism’. (Thanks for the link, abb1, but the sketch history of the Great Game didn’t tell me anything about what I wanted to know.)

There may be second-order signals being sent, but it seems that the world in which ownership of Unocal makes a strategic difference is a world in which (1) the spot oil market has broken down to the extent that physical possession of oil fields and pipelines matters; and (2) the rest of the international corporate environment has not broken down, and Unocal’s contractual ownership is still more important than, say, an oil field’s physical presence in Indonesia. At first glance, this looks like a difficult pair of conditions to meet, which rather undermines the case for blocking the purchase on political, strategic grounds.

At second glance, it looks much the same. What are other readers seeing that I am not?

Personally, I think the outcome will hinge on the effectiveness of Chevron’s lobbyists in Washington and how much Chevron raises its bid. But I’m still interested in what we here think ought to happen.

61

Steve Carr 06.30.05 at 7:13 am

Henry, I actually think I’ve been arguing one thing, and the same thing, from the beginning: Krugman says we should block the deal because we need to choose defense over opulence, but his case for Unocal’s relationship to American national security is exceedingly weak, and divorced from any reasonable economic analysis of either today’s oil market or this imaginary Great Game that he conjures up.

This is why Doug’s question — which I’d still be interested in hearing your answer to — is so important. Krugman imagines a world in which the US does not have free access to oil, and is restricted to getting it from “American” suppliers, but in which the most important thing about an oil field is not its location but rather whose name is on the deed. I still find this utterly implausible, and I don’t think he makes a case for it. Again, if you’re a major exponent of free trade, and you’re telling us to abandon its principles, you have to do so convincingly, not toss off some line about “competition for scarce resources” — as if we weren’t competing for scarce resources with Japan in the early 1990s.

I’ll also say that I think the line between questions of economic competitiveness on the one hand and national security on the other is much blurrier than you’re making it out to be. Americans weren’t just worried about competition from Japan because they were worried about their jobs. They were also worried about competition from Japan because they thought it weakened us geopolitically. A Defense Department Science Commission report on semiconductors, for instance, concluded: “American’s Semiconductor Industry for its commercial mass production is losing its superiority minute by minute. There is a strong relationship between superiority in production technology and superiority in semiconductor technology, [and] this is being transferred to foreign countries minute by minute. Very soon now, the defense of America will become dependent upon supply sources abroad. It is the opinion of the task team that this is something which is absolutely unacceptable for the United States.” Krugman dismissed those concerns as unimportant then, and attacked those who were cautioning against Japanese investment as wrong-headed and so on. I just think he’s in their position today.

62

Doug 06.30.05 at 7:40 am

Time & energy permitting, when I head home tonight, I’ll have a look and see if Yergin’s The Prize has anything about the emergence of the spot market. That could tell us something about how it might go away.

Google News has everyone expecting Chevron to up its bid. Key question of course is how much.

(There’s another argument to work here, too, if you’re a Chevron lobbyist working for that big bonus, or anyone else who thinks the Chinese buyout is a bad idea; namely, CNOOC can only pay an above-market price because it is state-owned. Thus the premium amounts to a government subsidy. With enough art, that’s probably grounds for blockage either under WTO rules or some section of US code.)

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Henry 06.30.05 at 7:40 am

Doug – what I’ve been arguing here (or not really arguing, putting forward as a plausible case more like it) is not that Unocal’s contracts would matter all that much _ex post_ in a world where spot markets don’t work very well. It’s that oil companies can serve as a valuable _ex ante_ tool in ensuring that the physical infrastructure takes on one shape, and not another, goes through a friendly country rather than an unfriendly one etc, and also in creating political relationships with the relevant regimes that can later be leveraged. Both of these are, I think, fairly unexceptionable claims – there’s an interesting (if sorely understudied, except by the cranks) nexus between the US government and major US oil companies at the moment; sometimes the latter serve willingly as proxies for the former, or so I’m assured by a friend who works on this kind of thing.

Steve – the point, and I’ll repeat it again, is that the claims that Krugman is making are _not mercantilist claims_. That is not to say that they haven’t been made in a somewhat disingenuous form by mercantilists in the past, but they do not invoke a mercantilist logic. Mercantilism is an argument about how markets work. Krugman is making an argument about how international politics work. So you can either argue that Krugman has secretly converted to mercantilism, and is making a disingenuously non-mercantilist argument to push for the mercantilist end of squashing China as an economic competitor. Or, you can apply Occam’s razor, and agree that Krugman is not a mercantilist, hasn’t been a mercantilist, and is not likely to be a mercantilist in the future, and actually examine his claims on its merits with respect to the evidence. Which is what I’ve been pushing for, obviously. But, and I’ll emphasize it again _the claim that Krugman is making is not a mercantilist claim._ Nor, I think given Kahn etc, does the claim that Krugman is “conjuring up” some “imaginary Great Game” for unstated purposes hold any water. It’s also a rather tendentious description, don’t you think? There’s a serious argument to be had here.

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J Mann 06.30.05 at 8:23 am

I’m not sure that we’re talking about mercantilism either, but it’s probably just depends on what definition you use.

Building on the Kahn article, I will hazard a guess that what concerns China is the (IMHO quite plausible) possibility that at some point in the future, the UN and/or Western powers will decide either to impose economic sanctions or a full military blockade on China.

By acquiring the nearby energy infrastructure, China can try to protect itself against sanctions/blockade. It can develop Chinese engineers, managers and other human infrastructure, it can develop economic ties with the energy producing nations in which it does business, and it can build pipelines.

I’m not sure that’s “mercantilism,” but I don’t know the formal definition.

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Steve Carr 06.30.05 at 8:31 am

I have to work, so this will be it for me, but I’ve really enjoyed this. In any case, I’m mystified by your reiteration of the point about mercantilism. I explained what my problem with Krugman is: if you examine his claims on the merits with respect to the evidence, they don’t hold up. The point about semiconductors is not that people were making disingenuous geopolitical arguments to disguise their mercantilist feelings, but that they had genuine geopolitical worries about allowing Japan to eclipse the US economically. I think those worries were ill-considered then, and I think Krugman’s anxieties about China are ill-considered now.

As for the Great Game question, I don’t think my description is tendentious at all. It may very well be that China thinks that it needs to own oil resources in order to protect itself from the US. Given the world we live in, and the oil market that we have, that is immaterial to the question of US national security. It is impossible for China to control enough oil to shut us out, and whether China owns oil or buys it does not affect the US economy. Even in the case of international relations, the fact that one player thinks it’s in a zero-sum game does not mean that the game really is zero-sum. Nor it does mean, more importantly, that the appropriate response on our part is to respond aggressively, especially when that response comes at a high price — abandoning commitment to free trade, alienating China, and so on.

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Doug 06.30.05 at 8:38 am

Both of these are, I think, fairly unexceptionable claims

No exception taken here.

The role of big corps as proxies is not, of course, restricted to the oil business, though it has been a strong suit of theirs. Look also to the big international construction firms, Bechtel comes to mind, but there are bound to be others. There’s even some of that down at the NGO level, where we saw, for instance, lively competition between German and US models of legislation for all sorts of things in the post-communist world of the early and mid-90s. They’re all elements of influence and potential back channels, sure, but they’re also indirect and prone to put their own interests first–or even to pretend that their business interests are by definition congruent with the government interests.

I’m not sure that it adds up to a reason for Unocal shareholders to take $2bn less for their interests, or to prefer cash-and-stock with its inherent risk over all-cash.

The one really relevant pipeline squabble I can think of off the top of my head is the proposed eastern terminus of a pipe from various Siberian fields. The location of the end is thought to be a proxy for whether the dominant share of the goods will be sold to Japan or to China. The building of Baku-Ceyhan is another example. It’s probably better for the end users that the pipeline did not run through Karabakh, and it’s a tribute to arm-twisting that it didn’t run through Iran to the straits of Hormuz, but still, not a lot of there there, in terms of influence.

It’s interesting, too, if not at all unexpected, that Western governments have been pushing exactly the opposite of Krugman’s point of view in questions concerning Russian oil companies.

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Kevin Donoghue 06.30.05 at 9:55 am

The non-functioning-market, non-war state which Doug wants to explore is difficult for me to paint because I don’t know enough about the oil business. However, I am pretty sure that a situation where the Japanese defence forces buy their fuel from a Chinese company is less attractive to Pentagon strategists than one in which the company is American. Sure, if the oil is coming from Venezuela then the US navy can nullify the contract pretty quickly if a war starts. But in peacetime the scope for Chinese arm-twisting is greater and the scope for American arm-twisting is less. Some of the comments here focus only on whether China can injure US interests directly, but in the real world the worry is about pressure on smaller players.

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jalrin 06.30.05 at 12:52 pm

One consideration that everybody seems to be overlooking is the nature of
CNOOC itself. If you read the Wall Street Journal on Monday, you would find a front page article on the efforts of CNOOC to (with the help of the Chinese Navy) to drill for gas that at least partially belongs to Japan. Does this sound like a company that we want controlling important resources? Remember, Japan is our friend and we have a LOT invested in them feeling that we will protect them.

This is why economists are not allowed to make all decisions (as Crooked Timer correctly pointed out to begin with): there are other issues than promoting trade.

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Kevin Donoghue 06.30.05 at 2:49 pm

By acquiring the nearby energy infrastructure, China can try to protect itself against sanctions/blockade. It can … develop economic ties with the energy producing nations in which it does business, and it can build pipelines.

I’m not sure that’s “mercantilism,” but I don’t know the formal definition.

The term that seems to fit best is informal empire. Britain had one, America has one, China wants one. While we are on the subject of terminology, the doctrine which Krugman was attacking in the early 1990s wasn’t usually called mercantilism (by him anyway). He called it competitive internationalism or Pop Internationalism (the title of his book on the subject). If Steve Carr is right and Krugman has now become a pop internationalist, it ought to be possible to demolish his argument by taking his own words and substituting China for Japan, oil for HDTV. I’ve had a go but it doesn’t seem to work. The argument just isn’t the same. You can be a free-trader, and even a believer in the free movement of capital, and still be a hardline IR realist, without contradiction. No surprise there; the Victorian Brits, in many cases, were all three.

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Steve Carr 06.30.05 at 4:06 pm

Try substituting China for Japan, oil for semiconductors, and see if it works then.

Speaking of tendentious, let’s ditch the description “realist,” as if those of us who don’t believe that China cut us off our oxygen are “unrealists.”

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Steve Carr 06.30.05 at 4:08 pm

That is “China wants to cut off our oxygen.” I’ll try to keep it in English next time.

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Henry 06.30.05 at 4:11 pm

Steve, “IR realist” is a term of art here – refers to a widespread body of IR theory which believes that the international system is anarchic, that states face a fundamental security dilemma etc etc. It’s a self-serving description, sure, but it’s also a very widely accepted one.

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Steve Carr 06.30.05 at 5:16 pm

Henry, I realize it’s a term of art. But it’s a term of art I’ve always found absurd, a phrase that tilts the debate in one direction as soon as it’s uttered. So I’d prefer to ditch it. It’s especially dubious in the context of this debate, which isn’t about whether national security should be a priority but about whether preventing China from buying a publicly-held oil company actually affects our national security one way or the other.

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Kevin Donoghue 06.30.05 at 5:27 pm

Steve, let me know if you can do better than this (at least I get to experiment with HTML tags; preview would be good here):

The productivity of the average American worker is determined by a complex array of factors, most of them out of reach of any likely government policy. So if you accept the reality that our “competitive” problem is really a domestic productivity problem pure and simple, you are unlikely to be optimistic about any dramatic turnaround. But if you can convince yourself that the problem is really one of failures in international competition – that imports are pushing workers out of high-wage jobs, or that subsidized foreign competition is driving the United States out of the high value-added sectors oil business – then the answers to economic malaise may seem to you to involve simple things like subsidizing high technology the energy sector and being tough on Japan China.

Does the revised version look to you like something Krugman would publish?

As to IR realists, John J. Mearsheimer calls his doctrine offensive realism theory, so if you prefer to call these guys ORTs that’s fine by me. Henry has summarised the viewpoint pretty succinctly. According to ORT, America is an “offshore balancer” whose game-plan is to curb Chinese expansion by supporting the weaker regional powers, principally Japan, India and Russia by all available means. That surely includes ensuring that Chinese oilmen are in no position to push them around.

I am neither defending ORT nor attacking it, only saying that it isn’t inconsistent with Krugman’s economic views. He isn’t the first liberal Keynesian economist to display a hawkish streak; his mentor James Tobin gave Eisenhower a hard time over the (mythical) missile gap.

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Steve Carr 06.30.05 at 6:54 pm

See, this is the line that makes no sense to me: “ensuring that Chinese oilmen are in no position to push them around.” How, exactly, does the purchase of Unocal make it easier for Chinese oilmen (as opposed to the Chinese military) to push Japan, India, Russia, etc. around? So China says: “We will break your long-term contracts and we will not sell you our oil,” and the other country responds by saying: “That’s too bad. I guess we will have to buy it from Russia, Saudi Arabia, Venezuela, Nigeria, Norway, or Iran. Interestingly enough, they’re selling their oil at pretty much the same price you’re selling it for.” Where’s the pressure coming from? (I know — it’s this mish-mash about pipeline location and friendly regimes. But what, in concrete terms, does that mean?)

For the Unocal purchase to be strategically dangerous to the U.S., it would have to give China, by virtue of owning Unocal’s reserves, meaningful market power. (It has to be market power because we’re talking about the impact of the ownership of a commodity.) There is no evidence that it does, or could ever do, anything of the kind. In fact, from a strategic point of view, Japanese semiconductor companies in the mid-1980s were in a much better position to push people around, since they had close to a monopolistic position at one point in time. (Krugman, of course, dismissed those concerns as unimportant — for good reason.)

I’ll actually go further and ask this question: is there any example, in history, of an oil-producing state successfully pushing another state around to achieve strategic geopolitical goals (without, that is, using military force or the threat thereof)? I presume there is, but if someone could actually provide a real example, I’d appreciate it. (Needless to say, the OPEC embargo in 1973 is not an example of successful political pressure.)

Finally, to return to where we started, there is no way anyone who adheres to John Mearsheimer’s view of the world can reasonably be called “liberal.”

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Kevin Donoghue 07.01.05 at 3:13 am

For the Unocal purchase to be strategically dangerous to the U.S., it would have to give China, by virtue of owning Unocal’s reserves, meaningful market power.

Chinese sage, him say: the journey of a thousand miles begins with one step. If American policy is to ensure that China does not win significant clout in energy markets the obvious way to do that is to make no concessions, not even small ones.

Japanese semiconductor companies in the mid-1980s were in a much better position to push people around, since they had close to a monopolistic position at one point in time. (Krugman, of course, dismissed those concerns as unimportant—for good reason.)

The raw material for semiconductors is sand. That makes a difference. Anyway, who says Krugman wasn’t a realist (sorry, an ORT) even then? According to Jagdish Bhagwati, the reason the Clinton administration finally toned down the Japan-bashing was that the Pentagon told the Commerce Department to stop messing with a vital ally. I can’t imagine Krugman saying: no, guys, this isn’t about politics. His focus was on the economics, but he could quite justifiably have said that the politics were lousy also.

Needless to say, the OPEC embargo in 1973 is not an example of successful political pressure.

That’s debatable. Some Israelis believe that the oil-shock cost them European support. It’s a complicated story which might have ended very differently if Nixon had been in a position publicly to express his private feelings about Jews, or if Americans had been as dependent on oil imports as they are today. Oil has never been enough to give the Arabs real clout, but that’s because they have never had much else. Anyway, you are asking a lot when you ask for an example of an oil-producing state pushing another state around without the threat of force. In ORT, those who can threaten, do so; those who can’t get pushed around. Put it like this: if the USSR had owned the Seven Sisters, wouldn’t that have worried Nato?

Finally, to return to where we started, there is no way anyone who adheres to John Mearsheimer’s view of the world can reasonably be called “liberal.”

Maybe not in American English. On this side of the pond the term has different connotations. But your contention is not merely that Krugman is not the brand of liberal you presumed him to be, but that his views on how to play the Chinese oil game are inconsistent with his views on how to play the Japanese chip game. You are wrong, because the two situations are very different. As Samuel L. Jackson would say, it’s not the same ball-park; it’s not even the same sport.

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Doug 07.01.05 at 7:45 am

if the USSR had owned the Seven Sisters, wouldn’t that have worried Nato?

Except that Unocal is hardly a sister. More of a second cousin, possibly once removed. If the USSR had been buying up Treasuries at the rate that the Chinses central bank has been buying them, that probably would have been a cause for concern, too. If a Soviet company had bought IBM’s PC division, that might have sparked worries as well. And so on. I don’t think the analogy applies very well.

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Kevin Donoghue 07.01.05 at 9:00 am

The only point I mean to make by dragging the Seven Sisters into it is that states exert influence in lots of different ways. It seems to me that the significance of oil companies is being downplayed here, as if the only thing that matters is whether you can seize the oil-fields themselves. Having said that, I’m not really persuaded that it makes sense to treat a bid for an oil company in the same way as a bid for a defence contractor. Krugman hasn’t made a case for blocking the sale. But his critics haven’t substantiated the charge that he has abandoned the views published in essays such as those in Pop Internationalism. A look at that book will confirm that those arguments really have no bearing on the present case. Back then, he was attacking the idea that states compete in the sense that companies do, that if Japan’s productivity growth outstrips America’s then Americans will be impoverished, and other stuff along those lines. The issue here is different.

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Steve Carr 07.01.05 at 9:28 am

I agree that the issue is different. My point all along has been that Krugman had not made the case for blocking the sale, and that his analysis of the strategic and economic issues was cavalier and shoddy.

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Doug 07.01.05 at 5:00 pm

I’m with steve carr on the first point: I don’t think the column made the case.

The rest of the debate has been illuminating — head and shoulders above most blog discussions that run to 80 comments — and I’m glad folks have stuck with it even after it fell off the front page.

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Barry Naughten 07.02.05 at 7:59 am

1. Krugman’s point about this Chinese FDI being more rational than Japan’s was (a decade or so ago) is implicitly and rightly contested in Joseph Kahn’s longer piece in the same NYT (June 27). Kahn argues convincingly that China’s scramble for energy investments is panic-driven, in contrast with its other recent FDI projects in the US which do make commercial sense. Krugman is arguing that China’s panic/scramble should be met in kind by the US blocking it, thereby escalating the panic on all sides — an exceedingly bad idea. The mutually escalating aspect of scrambles is what makes them so dangerous (‘security dilemmas’ in IR-speak ).

2. Chinese Chief Planner Ma Kai’s notion (quoted by Kahn) of how China should address the economic costs of price spikes seems glib. If the Chinese are overpaying for their overseas energy assets there are no foreign-sourced ‘profits’ to balance against its higher import bills when the spikes occur.

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