On the Nippon Steel-US Steel Deal, Politics (Again) Tops Policy

  • March 15, 2024
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Scott Lincicome and Alfredo Carrillo Obregon

In a “highly unusual” move, President Biden yesterday voiced his opposition to Japan‐​based Nippon Steel’s bid to acquire US Steel, saying that it’s “vital” for US Steel “to remain an American steel company that is domestically owned and operated.”

Vital for whom?

If the president were concerned about the vitality of the company, as well as the US steel industry and the US economy more broadly, he’d quietly let the deal proceed. As Scott Lincicome explained in a recent column, this isn’t your grandfather’s US Steel: after decades of poor management and stagnation, the company is today only the third largest steel producer in the United States (27th in the world) and employs just 20,000 people—less than the number of manufacturing jobs the US economy gained in November 2023 alone.

Nippon Steel, meanwhile, is not paying a large premium—over $5 billion above US Steel’s market capitalization—to shutter the company. It’s doing so because it sees an opportunity for growth and expansion in an American steel market that—thanks to US protectionism—has long been difficult to access. Nippon Steel management has accordingly stated their intention to invest in and enhance the technology of US Steel’s production facilities—investment that most steel industry experts and US steel‐​consuming manufacturers believe will benefit US Steel, its American workforce, and the broader manufacturing sector.

Such a result would hardly be uncommon. Foreign investments—including by Japanese companies, which had invested $712 billion in the United States by end‐​2022 and employ 963,000 Americans—have often benefited the US companies being acquired and their surrounding communities. The investments can result in increased spending in R&D and capital equipment and internal changes in management or business practices—precisely what both Nippon Steel and US Steel have told their shareholders about the current acquisition.

The president’s opposition also can’t be said to be about the “vitality” of US national security. As Lincicome also explained, Japan has been one of the United States’ closest allies for 60 years, hosts US military personnel and Department of Defense (DOD) civilians and their families and acquires more than 90 percent of its defense imports from the US. Similarly, Japanese investors haven’t been a concern for the Committee on Foreign Investment in the United States (CFIUS), which is reviewing the Nippon deal, since the 1980s. The House Select Committee on the Chinese Communist Party has even gone so far as to recently recommend that Congress put Japan on the CFIUS “whitelist” of close allies. Nippon Steel is also far removed from the days in which it was closely connected to the Japanese government, and almost a quarter of it is owned by foreign (i.e., non‐​Japanese) entities. And if a war or other national emergency arose that did necessitate the federal government nationalizing some of company’s US output, Nippon’s ownership would be immaterial.

This, of course, is extremely unlikely, and more realistic scenarios present even lower risks—or even argue for supporting the deal outright. The Defense Department doesn’t currently buy from US Steel, and DOD needs just 3 percent of domestic steel production to meet its procurement obligations. As former deputy undersecretary of defense for industrial policy William C. Greenwalt recently explained, in fact, the current steel industry—save a couple mills (not owned by US Steel) that produce defense‐​grade metals—“has not only been mostly worthless to national security—it has arguably become detrimental to it” because of its support for protectionism. In particular, the “adoption of domestic source restrictions that torture DOD’s supply chain to buy de minimis levels of steel found in products such as casings, fasteners and spare parts, often at higher prices than it could buy from abroad.” Thus, when DOD urgently needed more steel for its Mine‐​Resistant Ambush Protected (MRAP) program during the 2000s, most of the US steel industry declined to help, while one US company was blocked by “Buy America” restrictions because it sourced crude steel from Mexico. Thus, DOD instead turned to our allies for help, buying steel from Sweden, Germany, Israel, and Australia.

Given these realities, most independent observers understand President Biden’s decision as motivated by politics, not economics or national security. In particular, the president believes he needs the support of unions that oppose the Nippon Steel deal, and his opponent, Donald Trump, has publicly pledged that he would block it if elected. Thus, there’s really only one thing for which the president’s opposition can arguably be said to be “vital”: his reelection prospects.