Economic nationalism is one of the few things that can unite Democrats and Republicans these days. Politicians in both parties have spoken out against Nippon Steel’s planned purchase of former giant U.S. Steel. But does the transaction truly pose a threat to US interests? Is steel still a strategic industry or does it merely evoke nostalgia for an industrial past? What national security or economic interest is at stake? After all, Japan is our most important ally in the Asia-Pacific region. And what kind of reviews must be passed for the deal to go through?
Background. U.S. Steel is long-time laggard in the American market, having been overtaken by Nucor Corporation with its newer mini-mills. In August last year, the company announced it had received multiple unsolicited bids. A domestic rival, Cleveland-Cliffs Inc., announced a $7.25 billion offer. A strategic review by U.S. Steel’s management produced a much higher bid in December from an unexpected source—Nippon Steel, which offered an all-cash bid of $14.1 billion (plus $800 million assumption of debt), representing more than twice U.S. Steel’s share price in August when the strategic review began.
The two sides reached agreement on December 18, and 98% of U.S. Steel’s voting shares approved the transaction in April 2024. Nippon Steel pledged to keep U.S. Steel’s name, US-based production, and Pittsburgh headquarters; to invest $1.4 billion in old plants; and to comply with existing labor contracts. The transaction still must pass muster with the Committee on Foreign Investment in the United States (CFIUS) and antitrust regulators before it can close. Meanwhile, the United Steelworkers (USW) and politicians from both parties expressed opposition on the grounds of national security and the need to protect US jobs.
What’s the Problem? If this were a purely domestic transaction, the main regulatory obstacle would be passing an antitrust review in the US, the European Union, and China. The EU cleared the deal in early May and the US investigation is now underway. There are four major American steel producers (within the top 50 globally). From a competition perspective, a domestic acquisition of U.S. Steel would presumably remove one of the four players from the US market, while a Nippon Steel acquisition that continues U.S. Steel’s business plans would likely strengthen competition.
From a corporate law perspective, the main issue is shareholder approval. U.S. Steel’s shareholders were thrilled by the high purchase price and easily approved the transaction. Such affirmative vote is generally conclusive to show that the transaction is in the corporation’s best interest; other stakeholders, such as workers, are generally not considered.
The problem is simply that Nippon Steel is a foreign company, albeit from a country that is closely aligned with the US. Both the USW and some politicians have stated they would not support a transaction with any foreign buyer.
U.S. Steel remains a powerful symbol of a time when the United States was a manufacturing powerhouse.
The Steel Industry. China dominates global steel production with 54% of the market, followed by India, Japan, and the US. U.S. Steel is the 27th largest producer globally and third largest in the US. The proposed acquisition by world No. 4 Nippon Steel would create the second largest steel company in the world and the largest outside of China. The US imports some 20% of its steel, mostly from Canada and Mexico. The little it imports from China recently became subject to a 25% tariff. Over the last century the American steel industry has declined, mainly due to falling consumption. Nevertheless, U.S. Steel remains a powerful symbol of a time when the United States was a manufacturing powerhouse.
Nippon Steel presumably outbid its rivals because it places a higher value on U.S. Steel’s business. It was likely attracted by the greater potential for growth in the US than at home due to a mix of factors: the promise of building substantial new infrastructure under the government’s Inflation Reduction Act and CHIPS and Science Act, a growing US population with cheap energy, and U.S. Steel’s strong position in the profitable automobile industry.
Economic Interest. If the US interest lies in on-shoring supply chains and maintaining industrial capacity at home, the transaction seems a plus. As noted above, the US already manufactures about 80% of the steel it uses. After paying a huge premium for the purchase of U.S. Steel, Nippon Steel has no intention of reducing its US capacity. On the contrary, its announced intentions are to maintain current capacity and invest in the company.
Unlike the 1980s, when Japanese multinationals first began buying American companies, there is no backdrop of a US-Japan trade war or concern about the American market being open while Japan’s is closed. Japan is now a market-based, relatively open economy that increasingly allows US acquisitions of its companies.
National Security Interest. Steel is used to make weapons and ships, but this represents a relatively small end market which is not currently supplied by U.S. Steel. Steel is widely available and, despite some administration claims, is not generally considered to be a potential constraint on military preparedness. Steel-making technology is relatively mature and not subject to special controls; it is a commodity business. In an all-out war scenario, the US government might, as it did during World War II, order domestic auto manufacturers to switch production to military ordnance. If we are no longer worried about Japanese and other foreign companies purchasing or building auto factories in the US, why would steel be of greater concern?
CFIUS Review. National security review under CFIUS seeks to strike a balance between encouraging foreign direct investment and safeguarding national security interests. Japan is currently the largest foreign direct investor in the US. The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party actually recommended adding Japan to the “white list” of four close allies whose companies may be excused from CFIUS review. On the other hand, one potential concern cited for this transaction is Nippon Steel’s modest manufacturing capabilities in China (less than 5% of the company’s total output) and the possibility that China-produced steel would somehow be surreptitiously imported into the US.
Labor. The argument that U.S. Steel should be kept in American hands likely relates more to labor concerns than security concerns. The USW has a history of strained relations with U.S. Steel management, and it also seems to distrust the management of Nippon Steel. It has questioned the commitment of Nippon Steel to comply with existing labor agreements, as economic conditions and business plans are subject to change. But it is unclear why workers would objectively be worse off under Nippon Steel than under U.S. Steel or under another American company such as Cleveland-Cliffs.
Politics. Nippon Steel’s proposed acquisition has been unusual because of the political context, in the middle of a presidential election campaign. Both presidential candidates made strong pronouncements on national security interests even before CFIUS carried out its investigation. A statement from former President Trump that he would block the deal if elected led to less pointed remarks from President Biden that U.S. Steel should remain domestically owned. In any case, it is unclear if a US president has the power to block a foreign investment unless it is disapproved by CFIUS.
[T]his is a rare case where a union appears to have a real say, and potentially even a form of veto, over a significant corporate acquisition.
Also because of the election, this is a rare case where a union appears to have a real say, and potentially even a form of veto, over a significant corporate acquisition. Biden and Trump are competing hard for the votes of steel workers and other blue-collar workers in Pennsylvania, which has arguably resulted in a race to the bottom based on appeals to economic nationalism. The Japanese government has not pressed the Biden administration on this issue, presumably because it would like to depoliticize the matter as much as possible.
Substance or Symbol? Concerns about the proposed purchase of U.S. Steel seem to stem, in large part, from negative reactions to a symbolic decline in American industry rather than from clear national security or economic interests. One can’t help but wonder if reaction in the US would have been less intense if the target were Nucor, which is America’s leading steel producer but less famous than the iconic U.S. Steel.
What Lies Ahead? Nippon Steel continues to try to persuade US workers and politicians of the merits of the deal. It may end up adding some deal sweeteners, such as enhanced guarantees with respect to the labor agreement and more specific pledges of investment. And it has postponed the planned closing, likely until after the US presidential election, in hopes it might then proceed quietly. The transaction would act to advance critical long-term and nonpartisan US interests: increasing investment in US industry, enhancing supply chain resilience, and boosting relations with our leading ally in the Asia-Pacific region. Its approval should not depend on political infighting related to the election in November.
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Bruce Aronson is an adjunct professor at NYU School of Law and senior advisor at the Japan Center of the U.S.-Asia Law Institute. He has been a tenured law professor at universities in the United States and Japan and an outside director at a listed Japanese pharmaceutical company.
Suggested citation:
Bruce Aronson, “Manufactured Threat? Assessing Nippon Steel’s Plan to Buy U.S. Steel,” in USALI Perspectives, 4, No. 10, June 20, 2024, https://usali.org/usali-perspectives-blog/manufactured-threat-assessing-nippon-steels-plan-to-buy-us-steel.
The views expressed in USALI Perspectives essays are those of the authors, and do not represent those of USALI or NYU.
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