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China's bid for Unocal isn't its first use of U.S. dollars, and it won't be its last



Published: Sat, June 25, 2005 @ 12:00 a.m.



It should come as no surprise that China's state-owned oil company is making a bid to buy Unocal Corp., the ninth largest oil company in the United States.

American consumers cannot continue to buy tens of billions of dollars more in goods from China than China buys from the United States without suffering the consequences.

Perhaps the surprising thing is that China is buying only the ninth largest oil company. It could afford a lot more -- and it will be buying more U.S. assets.

To put the Unocal deal in perspective, China's CNOOC Ltd. offered $18.5 billion for California-based Unocal. The balance-of-trade deficit between the United States and China was $14.7 billion for the month of April. In the first four months of this year, the trade deficit with China was $56.7 billion. China could buy three Unocals with that and have a $1 billion left over for more U.S. Treasury notes.

As we have said in this space dozens of times over the past decade, the United States has been running up enormous trade deficits with China, pretending that there is no downside

By the numbers

Sometime in the next couple of weeks, the cumulative U.S. trade deficit with China over the last 20 years will exceed $1 trillion.

That's an amazing number. Even more amazing is how quickly the deficit grew -- as the chart at right shows -- beginning in 1985.

That year, the deficit was $6 million -- yes, million, not billion. The United States sold $3,855,700,000 in goods to China, while China sold $3,861,700,000 in goods to the United States. Five months that year, the United States actually showed a trade surplus with China.

The next year, the deficit jumped to $1.6 billion, and the United States had a trade surplus only one month. That month, April 1986, was the last month that the United States showed a trade surplus with China.

In the five years from 1985 through 1989, the deficit totaled $14.2 billion. In 1990, the deficit was $10.4 billion, and over the five years through 1994, it totaled $93.7 billion.

In 1995, the deficit was $33.8 billion and over the five years ending with 1999, the total was $248.6 billion. In 2000, the deficit was $83 billion, and over the five years ending with 2004, the total was $555 billion.

At the beginning of this year, the deficits for the preceding 20 years totaled $911 billion. The $56.7 billion registered for the first four months of the year brings the verified total to $968.7 billion. At this year's average of almost $14.2 billion a month, the $1 trillion mark should be reached right around the Fourth of July.

A trillion dollars is more than $3,500 for every man woman and child living in the United States. If you had $1 trillion in $10 bills, you could cover every inch of Mahoning, Trumbull and Columbiana counties with them. Think about that number -- a 1 followed by 12 zeros -- when you're putting out your flag July 4th. Think about it even more if your flag was made in China.

The Unocal deal may serve as a wake-up call.

Suddenly, members of Congress want the U.S. government to review the security implications of allowing a Chinese state-controlled firm to take control of a large American oil producer. Too bad Congress didn't question the security implications of running up annual budget deficits of hundreds of billions of dollars, even as it knew that some of that debt was being bought up by China.

What's a country to do?

Today, China simply has more U.S. dollars than it knows what to do with.

Certainly it can't plow all its dollars back into U.S. Treasury notes. And at a time when critics of the Social Security system -- up to and including President Bush -- think it's to their political advantage to describe the Social Security Trust Fund as little more than worthless IOUs, it is understandable if China begins to spend more of its money on hard assets rather than U.S. government paper.

The Unocal offer is only the largest in a string of acquisition bids by Chinese companies for American firms.

Appliance maker Haier Group and two U.S. private equity firms offered $1.28 billion for Maytag after it agreed to be bought by another U.S. firm. Maytag says it is considering the Haier consortium's offer. Chinese computer maker Lenovo's $1.75 billion purchase of IBM's personal computer division was cleared by a U.S. federal panel in March.

President Bush recently suggested that the answer to the balance of trade deficit with China is for U.S. consumers to buy fewer goods from China.

While we strongly endorse personal responsibility in buying habits, government policies based on the myth that free trade is fair trade have resulted in a saturation of the U.S. market with goods made in China -- including many of the bigger ticket items in American closets, homes and tool sheds.

It is time for the administration and Congress to demand changes. At the least, China must open its markets to more U.S. goods, adjust its artificially low currency rate of exchange, and crackdown on all forms of copyright and trademark piracy.

If the trade deficit is allowed to grow at the current rate, it will take less than five years to reach the $2 trillion mark.




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