Whatever the merits of a Japanese steel company’s ownership of U.S. Steel, whether and how it should take place, will be given serious consideration by the Biden administration. It is a politically sensitive issue at home and with a key American ally abroad.
National policies have become increasingly focused on economic security, shunning interdependence. In this instance, is accepting foreign capital really a matter for concern? Openness to foreign investment is a much more important question than this one transaction. So far, the case for blocking this transaction on national or economic security grounds has not been made.
Whatever the US government decides with respect to its treatment of foreign direct investment in this case in the name of national security, it is likely to be emulated by other countries. It is important that the US government consider the broader ramifications of its decisions, specifically the impact on the strength of its alliances and on the vibrancy of the global economy. Its verdict on this investment should not become part of a US retreat from international economic engagement.
On January 31, former President Trump told the Teamsters that that he would block the transaction “… instantaneously. Absolutely.” This declaration was made before any systematic review as to whether the purchase by Nippon Steel would be good for the US industrial base and jobs or harmful in some respect. A quick judgment such as this ignores the fact that foreign investment helped build this country. Emotions can quickly cloud what is at stake in this case.
This is a landmark case in several respects. United States Steel (commonly referred to as U.S. Steel) is an icon in the story of America’s historic rise as a world power and manufacturing powerhouse. The company was founded in 1901. J.P. Morgan financed it. Andrew Carnegie built it. It is said to have been at one time the world’s largest steel producer and largest corporation. It is a bit of a shock to think Nippon Steel, a foreign company with which it long competed, might acquire it, although Japanese acquisitions of other iconic US companies, including Rockefeller Center, Pebble Beach Golf Course, and Columbia Pictures, occurred frequently in the 1980s and 1990s.
Senator Sherrod Brown (D-OH) has called for US government scrutiny of the acquisition, as have other elected officials, and National Economic Council director Lael Brainard agrees. There are a number of questions that come to mind that will arise in any serious inquiry.
(Full disclosure: I was trade counsel to six American integrated steel producers for several decades, c. 1982–2003, including very prominently U.S. Steel, and I am coauthor of a definitive work on countries’ steel industrial policies, entitled Steel and the State, Westview Press, 1988. The activities of Nippon Steel in the 1970s and 1980s are part of the analyses presented in the book but are as irrelevant to the current proposed acquisition as the conduct of Andrew Carnegie in the rise of U.S. Steel.)
The normal point of departure for the US government with respect to a foreign acquisition of an American company, unless there are questions of national security or competition policy involved, is the longstanding American policy of welcoming foreign investment. The United States prides itself on being the world’s premier destination for foreign investment (FDI). In fact, it is currently the top destination. Foreign direct investment in the United States stood at $5.25 trillion at the end of 2022. Is an exception needed for this acquisition? Is the Nippon Steel offer to buy U.S. Steel a special case, requiring turning down this foreign investment?
There is a chronic global oversupply of steel, which has led to price wars, dumping, imports taking a 20 percent to 25 percent share of the domestic market, lost profits for domestic mills, and lost jobs in battleground states like Pennsylvania, where U.S. Steel has been headquartered for a century. Steel is an industry that has sought protection from injurious imports perhaps more than any other industry, because in the last 50 or so years it has been in the front ranks of industries embattled in competition with imports.
In more recent years, national security has been invoked to protect US steelmakers, although one thinks of military preparedness in the information age relying more on advanced semiconductor designs and computing power than steel. Two successive US administrations have made steel a national security issue for the first time outside of times of war.
The Trump administration invoked national security as a basis for placing tariffs on steel imports, even against allies, and the Biden administration has stood by that decision, confining itself to modifying the form of the import restrictions. Both administrations defended the measures as necessary for America’s essential security interests at the World Trade Organization (WTO) where no other country indicated that it saw America’s concerns as well-founded. The presidential national security determinations place steel within the likely ambit of interagency review by the Committee on Foreign Investment in the United States (CFIUS) chaired by the Treasury Department. Its recommendations to the president can include blocking or placing conditions on an acquisition.
What questions should be examined? First and foremost, does the acquisition strengthen or weaken the domestic industrial base? An infusion of capital, in this case from Japan, can lead to modernization of a company’s assets and even an expansion of output and jobs. Is that the likely outcome? Will foreign control result in the application of new technologies and know-how at home or the transfer of critical technologies in material science to a competitor abroad? To what extent does defense procurement or economic security require integrated mills? Integrated mills, such as U.S. Steel operates, make steel in blast furnaces from raw materials. Some two-thirds of the nation’s needs are currently met by mini-mills that melt scrap in electric arc furnaces, a cheaper way to make steel. Are the companies that make their steel from scrap able to meet the needs of defense applications?
There is also a fundamental question of foreign relations. Japan is an ally, an important one now that China poses an increasing security challenge. How does a Japanese company acquiring a US company threaten national security? This is an especially pointed question, in that a European company, ArcelorMittal (headquartered in Luxembourg), purchased a US steel conglomerate, International Steel Group (ISG), in 2005 from investor Wilbur Ross in 2005. (Ross, resigning from the board of ArcelorMittal when confirmed as commerce secretary, initiated the national security investigation leading to the Trump steel and aluminum tariffs.) ArcelorMittal is the world’s second largest steel producer. Nippon Steel is the fourth largest. For purposes of comparison, U.S. Steel is the 27th. Is there a tincture of xenophobia present in a claim that national security mandates a close review of this transaction?
Of course, there are economic and political questions as well as national security questions relevant to the Congress and to the president. Will a major foreign producer as an owner of U.S. Steel prefer its home market for new investment? Will nationality of ownership affect where green (environmentally improved) steel is made? Will it defend the US domestic production base through use of trade remedies to the extent that a domestic owner would? Does its investment depend on maintaining domestic US protection (the threat of protection in the automobile industry played a role in the creation of transplants, producing finished cars in the United States)? Does this foreign owner have better access to needed raw materials than does a domestic bidder, which may benefit US production?
Both presidential candidates tout their ability to protect jobs, particularly in manufacturing. U.S. Steel had 22,470 employees on December 31, 2022. How likely is it that this foreign multinational company’s employment decisions will discriminate against its US workforce? What assurances will Nippon Steel be willing to give? Can it win over support of the United Steelworkers Union, which would do much to obtain Democratic support, or at least neutrality, in the Congress? In its description of its reasons for acquiring U.S. Steel, Nippon Steel does address maintaining production in the United States.
A case has not been made to block this acquisition. It is too early to tell whether conditions of any kind are warranted on this investment. There are legitimate questions to be answered. At the same time, a caution: Discrimination against an investment coming from a key ally in Asia compared with the treatment given one from Europe had best be well-founded to avoid undermining a needed relationship and leading the world in the wrong direction.
This publication does not include a replication package.