Guns or butter

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

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?

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.)

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.

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.

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?

…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.

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?

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.”

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.

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.

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.

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.

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?)

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.”

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

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

Alex Tabarrok

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.)

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.

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.

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?

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.

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?

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

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.

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?

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?

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.

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.)

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.

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.

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.

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.”

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.

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.

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.

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.