Hamish McRae: Now the United States has finally woken up to the economic challenge from China

The US is taking a clearer and cooler view of its long-term strategic position, and not before time

Washington DC - Viewed from the outside, the principal economic concerns of the United States ought to be the fiscal and current account deficits and the impact of higher interest rates on what some people believe is a housing bubble. Viewed from within, the concerns that push themselves to the top of the pack are rather different. They are the rise in the price of fuel and the rising importance of China.

Washington DC - Viewed from the outside, the principal economic concerns of the United States ought to be the fiscal and current account deficits and the impact of higher interest rates on what some people believe is a housing bubble. Viewed from within, the concerns that push themselves to the top of the pack are rather different. They are the rise in the price of fuel and the rising importance of China.

They are closely connected. The oil price has been strong for the past year, but were it not for the surge in demand from what is now the world's second-largest oil importer, China, prices would not have risen so fast. The fact that the Chinese economy is growing at such a pace - its oil demand is expected to climb by 8 per cent this year - shows up at the US fuel pumps. Cheap imports from China have been one of the main features holding down the price of goods in the shops and that has been great for American consumers, but expensive oil has been a direct burden that they cannot do anything about. You can choose whether or not to buy a new Chinese-made sofa-bed. You cannot choose whether or not to fill up the car.

The other aspect of the relationship with China that is causing concern is that quite suddenly the country has emerged as a financial rival. It is bad enough having China build up huge trade surpluses. That has led to pressure in Congress for an across-the-board tariff on Chinese imports unless the country revalues the yuan. The US Treasury wants a 10 per cent revaluation, and something will happen, though maybe not as much as the Americans want, in the coming months.

But in a way that is almost an old story, even though the denouement is not yet clear. The new story is the way China is using its money to try to buy American companies. It is all very well having a trade deficit if the money the Chinese pile up goes into US treasury securities, and hence finances the government deficit. It is rather a different matter when the Chinese start buying a large US oil company.

The Chinese state-controlled oil group CNOOC has put in an $18.5bn (£10bn) bid for Unocal, a largish independent US energy group, beating a bid by the US oil major Chevron. This is the biggest takeover yet attempted by a mainland Chinese company of a US firm, so it is notable for that alone. It is also part of a Chinese strategy to try to secure energy resources around the world, so from their perspective it is unremarkable. But these deals have included supply deals with countries such as Venezuela, Iran, the Sudan and Burma, all of which makes Americans twitchy.

Now, by seeking to add a US company, they have really touched a nerve in the States, which has become quite paranoiac about its energy supplies. The White House says it has procedures in place to vet the deal, examining its security implications. But it would be difficult to prevent it without seeming to single out the Chinese as some sort of threat - less friendly than other trading partners. After all, BP was permitted some years back to buy the much larger Amoco group.

In narrow financial terms it might seem odd that the ownership issue should become so important. The oil price is the oil price and physical restrictions on supply are likely to be less important than the price in the market.

On the other hand this is not just about oil. It is about power. This is a concrete, visible use of Chinese financial resources, directed towards a political end. It is not some theoretical calculation about the long-term consequences of the current account imbalance.

It is also hard to see where this will end. There is a precedent of sorts, but only of sorts. That is the experience with Japan. In the middle 1980s, Japan's trade balance with the US moved into huge surplus, pushed among other things by an over-valued dollar. That led to pressure within the US for protectionist legislation, which was headed off by two things.

One was a currency agreement, the Plaza Pact, so-called because it was made in the Plaza Hotel in New York, whereby the finance ministers and central bankers of the US, Japan, Germany, France and Britain made a statement that the dollar was too high and backed that by central bank intervention in the markets. The dollar duly fell back, the decline being stabilised by the Louvre Accord, so-called because it was signed there, which declared that the dollar had fallen enough.

The other thing that headed off the pressures was the build-up of local production by Japan in the US. As more and more products for the American market were built in US factories, Japan acquired a vocal lobby of supporters. It was providing jobs in disadvantaged areas, particularly in the south, and suddenly no one wanted to be too nasty to a country that did that.

Japan also wasted a lot of money on its investments. It bought property at the top of the market during the late 1980s boom. It bought Hollywood studios that lost money for years. And then it had its own decade-long recession, from which it is only just emerging. All in all, by the late 1990s, the US had stopped worrying about Japan.

You could see some elements of the deal with Japan being repeated with China. There will not be another Plaza/Louvre-style currency agreement, though there is a good case for trying to work towards one. On the other hand, there will be some sort of bilateral deal over the yuan and the dollar, probably a modest revaluation, which will be enough to take the heat off for a bit. The Chinese can throw other sweeteners into the pot, such as the stronger enforcement of US intellectual property rights.

But the Chinese are unlikely to follow the Japanese course in other regards. There will be more Chinese direct investment in the US - there is some already - but this will never be on the scale of Japan. There was no cost disadvantage to the Japanese when they shifted production to the US, for wages were in the same general bracket. Chinese wages are so much lower that it really does not make sense for China to make things in America. Nor are they likely to make the same investment errors as Japan. Investments will be made for long-term strategic purposes, such as this bid for Unocal. The Chinese challenge will not disappear as swiftly as the Japanese one.

In some ways it is surprising that it has taken so long for America to become worried about both what might happen in the oil market and what might happen to its relationship with China. The "there's plenty of oil in the world" view dominated US thinking, particularly the thinking of this administration, just as the "the Chinese need our market as much as we need their products" view dominated US business. Now the US is suddenly taking a cooler and clearer view of its long-term strategic position, and not before time.