By Paul Baiocchi

Just under four years ago when it was announced that CNOOC had dropped out of the bidding for Unocal, it was universally assumed that China would reciprocate, but nobody knew quite when. If by blocking Coca-Cola's $2.3 billion bid for China Huiyuan Juice Group Ltd., China was hoping to get revenge, it may have bitten off more than it can chew. While the implications for China-U.S. trade relations may be minimal, the impact globally could be extensive.

In blocking the deal for China's largest Juice maker on the ironic basis of antitrust concerns, the Chinese government may have opened up the proverbial can of worms. The leverage possessed by the United States in dealing with China is fleeting at best based on the massive U.S. Treasury collection the Bank of China has accumulated, but that does not ring true for the rest of the world.

Take Australia for example. Just last week I wrote about Chinalco's BOC financed capital infusion into Rio Tinto and the impact it will have on the commodities landscape. In the wake of this latest news on Coca-Cola it is likely countries like Australia may follow China's lead on the protectionist bandwagon. If there was already political pressure on Rio to break the deal then, imagine what type of noise there will be now. For a government which just footed the bill for a blockbuster financing package in a politically sensitive sector of the economy, natural resources, to block a deal like this is dangerous.

Coca-Cola's bid for China Huiyuan being blocked by China is another example of the same mindless upheaval that forced Unocal to take a haircut on its sale by settling for Chevron's lower bid, and the hoops and ladders Abu Dhabi had to go through in order to secure its port deal. This type of politicking destroys value and ultimately results in reactionary policies which have to potential to create a domino effect. 

China will continue to focus its large currency reserves on the development of infrastructure and the security of its resource needs. In order for both of these goals to be achieved concessions will need to be made by foreign governments and shareholders. More behavior of this kind by the Chinese government will only diminish the country's capacity to achieve its goals.

It will be most interesting in the short-run to see if this news affects Chinalco and Rio's deal. If it does the writing may be on the wall for protectionism's future. If not, it will likely be despite China's best efforts to contradict itself. It seems China's biggest obstacle in taking advantage of its large currency reserves may be itself and its own backwards policies.