Yesterday’s decision by China’s state-owned CNOOC Limited energy company to throw in the towel on its $18.4 billion bid for Unocal Corporation is a defeat for Unocal’s shareholders and a reminder that even in the wake of a new Central American Free Trade Agreement, foes of free markets are still an all-too-powerful force in Washington.

CNOOC’s bid – topping Chevron’s by nearly $1 billion – was doomed by a confluence of several forces. Some armchair strategists were alarmed that a major petroleum company would be falling into the hands of a Chinese state-owned firm at a time when China’s voracious appetite for oil is already putting upward pressure on world crude markets. Yet, as we wrote when CNOOC’s bid was first announced, many of the countries that currently control large portions of our petroleum supply aren’t precisely what one would call friends of America.

Chevron and its defenders have argued that it was competing on an uneven playing field, since CNOOC is subsidized by the Chinese government. Probably. But such market distortions are a fact of life in many sectors of the economy, as airlines in America discover, arguably to their benefit, whenever they do business with Airbus. Whatever the solution to the subsidy problem might be – and our own preference would be a revolution for freedom and capitalism in China – it should not involve American lawmakers meddling in merger deals that are best left to shareholder votes.

As it is, such meddling has exposed Americans to rhetoric that knows more fury than sense. Consider yesterday’s press release from the chairman of the House Resources Committee, Richard Pombo, an opponent of the CNOOC bid. Mr. Pombo managed both to condemn “Communist government ownership” as inconsistent with the “competitive, free market, global economy” he believes in, and also to say “China is doing exactly what the United States should be doing to grow our economy. … Their 10 percent economic growth is a testament to this – they get it.” Leaving aside the questionable credibility of China’s estimates of its own growth, Mr. Pombo and Co. might consider that if there is something we can learn from China, it is that opening up to foreign investment works.

Capitol Hill’s ignorance, willful or otherwise, about this basic economic concept has proven costly, both for America’s credibility as the torchbearer for global free trade and for Unocal’s shareholders. Granted, Unocal’s board had already agreed to accept Chevron’s offer after a little sweetening. But the threat of political and regulatory reprisals in Washington played an important role in the decision. We might have expected such a dynamic to unfold in a boardroom in Red China, but not in America.