from Follow the Money

The (strange) politics of globalization

February 22, 2006

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Maybe the US would be better off if China owned Unocal's Asian oil fields

Not economically.  Unocal's oil and gas fields are presumably worth a bit more now than they were last summer.  But strategically.

The US might prefer Chinese investment in Indonesian gas fields to Chinese investment in Iranian gas fields.  Though maybe China would want to do both.

And at times, I also wonder if China might be better off if its state oil companies refrained from certain investments.  

Not financially.   I strongly suspect China could get a better long-term return if it invested its spare savings in oil and gas fields than in long-term fixed-rate dollar-denominated US treasuries.   China can probably get more on its reserves if it lends them out in dollars at 6% to its state oil companies to invest in places like Iran than if it buys US agencies and mortgage-backed securities.

But strategically.  China's footprint in resource-intensive parts of the world is still small - Chinese firms offshore reserves pale relative to those of US or European oil firms - but it is growing fast.  And most of the attractive oil and gas investment opportunities (at least those not reserved for national oil companies) are likely to be found in states that the US considers pariahs of one kind or another.

Iran.  Sudan.  And so on.  China's "quiet" strategic posture ("peaceful rise") is hard to square with massive investments in Iran.   Particularly right now.  

The lesson of Unocal - and perhaps the lesson of Dubai Ports World - is that the most politically potent anti-globalization coalition comes when concerns with the national security overlap with economic fears - whether fears about jobs or fears about a loss of control over key assets.  Or even a shift in control from a company headquartered in one long-standing (but politically and culturally similar) ally to another long-standing (but politically and culturally different) ally.

I have long been interested in the ways economic integration creates new sources of friction, not just shared gains from trade.

Competition for commodities considered too strategic to be left entirely to the market seems to be one such area.  China doesn't seem to trust non-Chinese oil companies to provide the supply that China needs (at the market price, of course).   Either that or it just wants Chinese capital to capture some of the profits (dark matter?) created by surging Chinese demand for commodities.   The US in principle relies on the market to meet its energy demand - but it is perhaps a bit easier to rely on the market when the market historically has been dominated by large American (and European) firms.   

Competition to set the global rules for commerce is another potential source of friction - as well as resentment at the dominant role some play in setting those global rules.  See Harold James' oped in the FT (Via Mark Thoma).  James argues:

The central problem identified by Gibbon and Smith is that complex societies need rules to function, whether on a national (state) level or in international relations. But we do not always comply voluntarily with rules and rules require some enforcement. In addition, they need to be formulated. The enforcement and the promulgation of rules are both consequences of power, and power is always concentrated and unequally distributed.

Interestingly, that resentment works both ways right now.  The US Congress is rather upset that China is trying to set rules governing the actions of the US corporations in China.    Or perhaps, folks in the US are upset that US firms are willing to go along with China's rule-setting.  China is too big for US firms to pass up.  China is to US firms as Iran's gas reserves are to China (?) ....

The possibility that the global rules might not be American rules is something that the US hasn't really had to grapple with.  

Small European nations have had to accept that their economies may not be governed by their own national rules.  But some are still struggling with the idea of European rules, let alone American-influenced rules.   France, for example, has long believed (perhaps naively) that since European rules would be French rules, it wouldn't have to give up much.   And it has struggled to come to grips with the possibility that European rules may require changing French rules.

The US right now is struggling with the notion that the Emirates might want to invest its petrodollars in something other than long-term US bonds.   The headline of Tom Friedman's column about "Empty Pockets" in the Muslim world felt just a bit off.   Right now, Saudis, the Kuwaitis and the Emirates all have pockets stuffed with petrodollars that they want to put to use.

One the ironies of the current situation is that the US doesn't like the government of some of its major creditors that much - in part because the states plays a far different role in the economies of our creditors than the state plays in the US, in part because many of these countries are not US allies (China) and in part because even countries that are US allies are not culturally close to the US.    The US is more than prepared to sell its debt to the Chinese, Russians, Saudis, Kuwaitis and Emirates.    But not to let these countries - and in a place like the Emirates the distinction between the state and the private sector is blurred by heavy state ownership of private firms - buy physical assets in the US.

IOUs.  Yes.  Oil companies.  No.  Ports.  Maybe Not.

That is one potential source of friction in an interdependent world.    The dollar bonds that China and others own cannot easily be traded - in practice, if not in theory - for a range of US assets.  They dollar assets of the People's Bank and the Saudi Monetary Authority are not fully convertible into physical assets.   Yet the US needs these countries to keep on providing it with financing - both to run large deficits, and to finance the foreign direct investment needed to produce future dark matter to pay for the deficits.

Someday, the United States' creditors may reject these terms.

The argument that interdependence produces shared economic gains leaves out the fact that debtors and creditors sometimes have different interests.

Another obvious source of friction, one that lies behind US demands for China to change its currency regime, let the RMB rise, increase the price US consumers pay for Chinese assembly (reducing the incentive to shift the assembly of additional sets of products to China) and potentially increase US interest rates.  The fact that the gains from trade - including the current US IOUs for Chinese goods and the world's oil trade -- are not necessarily shared broadly.  

Labor arbitrage isn't the only reason why median real wage (and compensation) growth has been anemic in the US, but it certainly is one reason.  Sure, China keeps manufactured prices lower - but it also has driven up commodity prices and driven down real wages - and US workers have to pay for both out of stalled wages. 

Home owners in California win from the current bargain.  But auto parts workers in Ohio and Michigan facing falling wages, big benefits cuts and higher gas prices (and cheap consumer goods at Walmart) do not.   They don't gain much from low interest rates either - real estate prices in (shrinking) manufacturing towns in flatland are not exactly comparable to those in Connecticut and California.  And there is no real mechanism for turning capital gains on coastal real estate into help for those in manufacturing flatland.

I find it interesting that the political debate in the US has focused on cutting taxes on capital (and on the income earned by those winning from globailization) at a moment when globalization is cutting into the returns on a wide range of labor.   The US seriously considered dismantling its most effective form of wage insurance precisely at the time when global competition heated up.    Think of Social Security as a form of "retirement" wage insurance that protects against lower than expected wage income as well as protection against the risk of lower retirement income should a worker may fall out of the labor force for a few years.

I suspect that preserving the (real) gains created by the process of globalization for many will require grappling with the (real) frictions created by the process of globalization, not just celebrating its gains. 

But I don't see much evidence that is happening.   

Nor much evidence that the US is prepared to accept the possibility that its creditors - not the US - might someday have the clout to set the terms for the financing the US now needs to sustain its current all-consumption/ no-savings economic path.    That path imply that foreigners will own a larger and larger swath of American assets.    And maybe not just the assets the US wants to sell.

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