By Paul Sheard
It is hard to give credence to the argument that Nippon Steel’s attempted purchase of U.S. Steel constitutes a threat to US national security.
“Iron is the country.” “Tetsu wa kokka nari.” That is what Japan’s first prime minister, Prince Ito Hirobumi, said in 1901, channeling nineteenth century German statesman Otto von Bismarck, when the first blast furnace of Yahata Steel Works, Nippon Steel’s main antecedent company, was fired up. But that hardly applies to the United States and its iron and steel sector today. The manufacturing share of total employment in the US was 33 percent at the end of World War II, but is now down to eight percent. Within manufacturing, the employment share of the iron and steel sector has fallen, too, and is now less than one percent.
From a national security viewpoint, the inordinate attention paid to Nippon Steel’s bid to take over – and in the reckoning of both companies, attempt to revive the fortunes of – U.S. Steel appears anachronistic. The US is the world’s military superpower; it spends more on the military than the next nine countries combined. If any country has unassailable national security, it is the US. Could a relatively small M&A transaction among friends really threaten that?
In the 124 years since Prince Ito hailed the birth of Japan’s steel industry, modern economies have become information-intensive and service-oriented, driven more by silicon than steel. The five largest companies by market capitalization in the S&P 500 index are all, one way or another, digital companies (Apple, Microsoft, Nvidia, Amazon, and Alphabet), which together make up more than a quarter of the index. A stunning fact is that there is only one “old economy” company among the top 25, that being Exxon Mobil, a descendant of Standard Oil. Threats to national security these days are much more likely to emanate from cyberspace than factory production lines.
From a national security viewpoint, the inordinate attention paid to Nippon Steel’s bid to take over U.S. Steel appears anachronistic.
When foreign capital buys domestic assets, the assets don’t go out of the country – capital comes in. When a foreign firm buys a predominantly bricks-and-mortar domestic firm, it cannot pick up the physical assets and take them home, depriving the country of its precious productive capacity. It brings capital, management, and technological and operational know-how into the country, to the country’s manifest benefit.
How could the foreign takeover of a domestic manufacturer conceivably threaten national security? Two possibilities suggest themselves. Neither of them applies to the Nippon Steel/U.S. Steel case.
One would be if the firm being acquired was a supplier of critical inputs to the military industrial base and the acquiring firm intended to restrict that supply or even eliminate it. Steel is a critical input to the US military industrial base, but that does not mean the output of every single domestic or overseas supplier is a critical input. There is plenty of steel in the world and the market for steel is a highly competitive one. More to the point, unless it has predatory intent – a non sequitur in a competitive market – it can be presumed that the acquiring firm will want to expand its output and market share; otherwise, it wouldn’t be investing billions of dollars. In general, and particularly among allies, economic incentives are aligned with national security ones.
There is plenty of steel in the world and the market for steel is a highly competitive one.
Another way in which a foreign takeover conceivably could threaten national security would be if the firm being acquired possessed critical technology, which would then flow to the foreign firm. This is hardly the case here. U.S. Steel is a technologically lagging company in a mature industry, not a Silicon Valley start-up boasting a transformative technology. One measure of that fact is U.S. Steel’s stock market capitalization: at $9.74 billion, it is a mere 0.4% of Nvidia’s, a new economy upstart. Nippon Steel is the No. 4 producer of steel in the world and U.S. Steel is the No. 24. The flow of technological know-how will be overwhelmingly from the former to the latter. Transferring its technological, operating, and managerial know-how to the acquired firm is one of the principal ways that direct foreign investment yields financial returns for the acquiring firm, particularly when it takes the form of equity ownership.
The national security argument against Nippon Steel’s acquisition of U.S. Steel becomes even more shaky when the nature of the security alliance between the US and Japan is considered. The Treaty of Mutual Cooperation and Security between the United States of America and Japan has been the cornerstone of a strong alliance between the two countries since it was signed 65 years ago. While its language may be nuanced, the import of the treaty is that the US underwrites Japan’s security and defense. The treaty grants the US the use of designated land and facilities in Japan for its land, air, and naval forces. As of September 2023, the US had 53,246 active-duty troops in Japan, representing the US’s biggest single overseas military presence and about one-third of all US overseas troops. What sense does it make for the US to invoke national security concerns to stop Nippon Steel from buying U.S. Steel when it commits so much to Japan’s defense? The Japanese could be forgiven for feeling a tad insulted: Are we allies or not? We entrust our national defense significantly to you but you treat our proposal to buy a stake in your steel industry as a threat to your national security!
What better expression could there be of the strong national security ties between the US and Japan than for the best-known steel companies of each nation to become one?
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Paul Sheard, a former vice chairman of S&P Global, serves on the board of the Foreign Policy Association and is a member of the Council on Foreign Relations.
Suggested citation:
Paul Sheard, “The National Security Arguments about Nippon Steel Don’t Survive Scrutiny,” USALI Perspectives, 5, No. 9, March 31, 2025, https://usali.org/usali-perspectives-blog/the-national-security-arguments-about-nippon-steel-dont-survive-scrutiny.
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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