Criticism Widespread for China Unocal Deal

The House Armed Services Committee was holding a hearing Wednesday on the national security implications of a possible merger of the China National Offshore Oil Corporation with Unocal Corporation, the ninth largest oil firm in the United States.

The potential deal has been criticized by both Democrats and Republicans, and has drawn some unfavorable reviews of the Bush administration's broader dealings with China.

Click in the box to the right to watch a report by FOX News' Major Garrett.

The unsolicited bid for Unocal from the Chinese National Offshore Oil Company, known as CNOOC, took the energy markets by storm and by surprise. The bid for $18.5 billion in cash is $2 billion more than the stock and cash bid from U.S.-based Chevron.

If the deal were only about dollars, it might already be done, but more than money is at stake.

"This takeover is part of a Chinese strategy to move very aggressively into acquiring natural resource assets all over the world to fuel China's continued growth because China is relatively resource-poor," said Alan Tonelson, a research fellow with the U.S. Business and Industry Council. "It's also part of a Chinese campaign to move, again, very aggressively into the American economy."

Under current law, a committee headed by Treasury Secretary John Snow (search) could nullify any Chinese takeover of Unocal on national security grounds. In late June, the House voted overwhelmingly to demand such a review. Some analysts and many conservatives perceive a national security threat, particularly in an era of limited crude oil supplies and high gasoline prices. But other experts disagree.

"The evidence we have so far would indicate that it is not a dire national security threat," said former ambassador to China and South Korea James Lilly (search).

Among the reasons why the merger is less of a concern to Lilly and others is that sizable Unocal gasoline is already owned by other Asian subsidiaries. The Chinese have promised not to take control of Unocal's U.S.-based gasoline pipelines or meddle with Unocal's gasoline supplies. Lastly, the Chinese already have business deals with other U.S. oil companies.

"There is a long record of this. I mean Chevron's involved today with the Chinese, (they are) very heavily in Mobile, Exxon and many other companies," Lilly said.

But other national security questions include whether China would use Unocal profits to accelerate development of their land- and sea-based military assets or whether acquiring a U.S. oil company would give the Chinese an energy bargaining chip when the United States seeks a tougher line against North Korea's nuclear program.

"China is not a U.S. military ally. It's not a friendly country. It's not a free-market system and to allow Chinese entities to establish greater and greater control over the U.S. economy without thinking through the long-term effects would be an enormous mistake," Tonelson said.

China has accumulated more than $700 billion in U.S. currency reserves, largely through its massive trade surplus with the United States. Those cash reserves fuel attempts to buy U.S. firms and produce advanced weaponry.

"They call it comprehensive national power — CNP — and they take all the things cultural, political, economic, military and they put it in there and they say we are going to become a powerful nation," Lilly said.

President Bush labels China a "strategic competitor." But he also frequently points to the long-term benefits of close economic ties with the Communist nation.

Unocal is in close negotiations with CNOOC and shareholders appear interested in CNOOC's bigger offer. Both Unocal and CNOOC say before the deal is finalized, they want the administration to declare that it won't nullify it on national security grounds. Instead, the White House, mindful of congressional pressure, won't begin the review process until Unocal and CNOOC shake on a deal.

In Wednesday's House Armed Services Committee hearing, Rep. Curt Weldon, R-Pa., a China expert, was expected to raise questions about the involvement of one of the president's foreign intelligence advisers in the proposed merger.

James Langdon, chairman of the president's foreign intelligence advisory board, talked to investment bankers in China in February, trying to win some work for his law firm to lobby for that merger. According to The Washington Post, Langdon took himself out of involvement in that merger in March. He said he will recuse himself further if the issue comes before the advisory board.