With the presidential election over, Americans should focus on this transaction
In a previous Perspectives essay, I questioned whether there were legitimate national security reasons to block the proposed takeover of U.S. Steel by Nippon Steel of Japan, the closest ally of the United States in the Asia-Pacific region (see Manufactured Threat? Assessing Nippon Steel's Plan to Buy U.S. Steel). Continuing political debate about the proposed acquisition prompted the U.S.-Asia Law Institute to hold a public panel discussion on the topic on November 15 (for a video recording, see Nippon Steel, U.S. Steel, and the Implications for US-Japan Relations) followed by a private conversation with a small group of businessmen, bankers, lawyers, and diplomats who are following the deal closely. What I heard deepened my concern about negative impacts on U.S.-Japan economic relations should the proposed transaction be blocked.
This issue may soon come to a head. National security reviews of proposed incoming foreign investments are conducted by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee headed by the treasury secretary. CFIUS is currently due to make its recommendation to the president about whether the transaction should be permitted by Dec. 18, although it could push back that deadline.
The two main speakers in our public panel discussion held clearly contrasting views on the possible fallout if the deal is blocked. Will Chou, deputy director of the Hudson Institute’s Japan Chair, emphasized that the deal’s controversy stems primarily from the election-year timing and the strong views of two individuals: David McCall, president of the United Steelworkers union, and President Joe Biden. Chou argued that McCall’s opposition to the transaction and preference for an acquisition by an American steel company, Cleveland Cliffs, disregards the interests of rank-and-file union members at U.S. Steel. Meanwhile, the White House has been willing to go along with whatever course the union takes. Bottom line: Chou argued that this is a “one-off” situation without long-term implications for American policy or economic relations with Japan, and the Japanese should not take rejection of Nippon Steel as rejection of Japan. America remains an attractive and welcoming market for foreign direct investment (FDI) from Japan.
The question being asked in Japan is: why are we, America’s closest strategic ally in Asia, being treated like China, America’s greatest strategic competitor?
On the other hand, Hiroyuki Nishimura, a senior commentator for Nikkei, said the Japanese are paying very close attention to the case, and see it as an important indicator of how the US perceives economic relations with Japan. Nikkei, Japan’s leading business daily, has published over 200 articles and five editorials since the two companies agreed to the deal in December 2023. Japanese businessmen are concerned by a perceived lack of any legitimate national security interest, and wonder whether future attempts by Japanese companies to acquire US businesses might be blocked. Japanese politicians also have joined the fray, with all of the candidates in the recent election of the leader of the most important political party, the Liberal Democrats, vowing to fight an adverse decision. The question being asked in Japan is: why are we, America’s closest strategic ally in Asia, being treated like China, America’s greatest strategic competitor?
I worry that both views are partially correct. Nippon Steel’s proposed acquisition is taking place under unusual circumstances influenced by political maneuvering and distinct personalities. If the transaction is blocked, it should probably not be seen as an intentional expansion of the zone of national security so as to cover nearly all transactions (our “national interest” rather than “national security”). There is no indication that future Japanese investment will become unwelcome or subject to closer scrutiny.
Nonetheless, actions have consequences. Most Americans, including the media, have been preoccupied with the presidential election and ignored the broader consequences of blocking the Nippon Steel deal. But Japan’s intense focus is both understandable and real: if Japanese conclude that the US distrusts Japan and its companies, it could hurt future investment into the US and broader US-Japan economic relations.
If Japanese conclude that the US distrusts Japan and its companies, it could hurt future investment into the US and broader US-Japan economic relations.
National Security Review. USALI’s private conversation was conducted under Chatham House rules which do not allow identification of, or attribution to, the participants, but the overall sentiments expressed deepened my concerns. Steel production could theoretically be of national security interest due to supply chain concerns. But expert opinion seems unanimous that there is no real national security interest in the Nippon Steel-US Steel merger.
And procedural aspects of this case are even more troubling than the substance. CFIUS typically acts secretly in a collaborative, rather than adversarial, process with the foreign investor. Any national security concerns are generally addressed privately, with CFIUS and the parties negotiating mitigation measures and conditions that are tailored to the specific national security concern. In the absence of any critical technology or a strategic competitor (such as a Chinese company) in this case, any security issues might be readily resolvable.
Nippon Steel, like many acquirers, has eased the way for approval by pro-actively taking mitigation measures, including dissolution of its joint ventures in China and Alabama (with ArcelorMittal, the world’s second largest steel company). It also has self-imposed conditions in advance, including pledging to keep the US Steel name, Pittsburgh headquarters, and existing union contracts, and to invest some $2.7 billion to upgrade aging blast furnaces in Pennsylvania. Seemingly, none of these measures have had any effect; instead, during the presidential campaign, the proposed transaction was publicized and politicized.
Possible Consequences: Japanese Investment into the US. If the US government blocks the deal and the Japanese government and businesses interpret it as signaling that Japanese investment is unwelcome, we should expect a decline in Japanese investment into the US. Even if that is not the US’s intention, blocking the Nippon Steel-US Steel deal could nevertheless change the investment criteria for Japanese investors. The negative impact could easily extend to investors from other countries, who share Japan’s concerns (see Global Business Alliance et al., Letter to Janet Yellen).
Impact on US-Japan Economic Relations. It is unlikely that Japan would directly retaliate. However, if the US is seen as acting unfairly to protect its narrow interests, Japan could respond in other areas where it has its own strong economic interests. To give just one example, consider US restrictions on technology exports to China. US subsidiaries of Japanese companies are directly and legally bound by US regulations. But it could become more difficult to pressure the government of Japan to enforce US restrictions against Japanese companies or persuade them to comply.
If the US is seen as acting unfairly to protect its narrow interests, Japan could respond in other areas where it has its own strong economic interests.
Global Impact. Blocking the Nippon Steel-US Steel deal could reinforce an ongoing global trend towards expanding “national security” considerations to include any poorly defined “national interest,” and using it arbitrarily to justify protectionist measures. CFIUS has been the model for national security screening in many advanced countries, including Japan. The US should seek to remain the leading exemplar of principled decision-making in balancing national security interests against the benefits of FDI. If the US is perceived as failing to do so, other countries may well follow suit, leading to a general increase in uncertainty and decline in foreign investment globally. Such a trend would hurt US businesses, who lead the world in overseas investment.
Symbol or Substance? Concerns about the proposed purchase of U.S. Steel seem to stem, in large part, from a negative reaction to the decline of American industry and especially of the formerly mighty U.S. Steel. Other important Japanese acquisitions have gone unremarked. For example, Daikin Industries, the world’s leading manufacturer of air conditioners (and thus a key player in the transition to renewable energy and carbon neutrality), has acquired a number of US companies to become a major player in North America without stirring controversy. Some companies simply have iconic significance. I have asked a number of knowledgeable Japanese whether Nippon Steel itself would be allowed to be acquired by a foreign entity. The response, after some hesitation, typically is “No. Not Nippon Steel (which translates as “Japan Steel”), since it is too famous and symbolic. Any other steel company would probably be OK.”
If “hard cases make bad law,” as Oliver Wendell Holmes, Jr. wrote in 1904, then symbolic cases make very bad law. Now that the US presidential election is over, I hope that CFIUS will rule on the acquisition solely on its national security merits, as traditionally defined. That is the best way for the US to maintain a healthy trust relationship with Japan, its strongest ally in a tense region.
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Timeline of Nippon Steel-US Steel Transaction
Aug. 2023: U.S. Steel announces it has received multiple unsolicited bids. A domestic rival, Cleveland-Cliffs Inc., announces a $7.25 billion offer.
Dec. 2023: A strategic review by U.S. Steel’s management produces a bid from Nippon Steel which is roughly twice as high ($14.1 billion plus $800 million assumption of debt).
Dec. 18, 2023: Nippon Steel and U.S. Steel reach agreement on the sale of U.S. Steel. Nippon Steel pledges to keep U.S. Steel’s name, US-based production, and Pittsburgh headquarters; to invest $1.4 billion in old plants (later increased to $2.7 billion); and to comply with existing labor contracts.
March 14, 2024: President Joe Biden comments that US Steel should stay in American hands. The same day, he reportedly calls David McCall, president of the United Steelworkers union, to say that he “has the steelworkers’ back.” One week later the union announces its endorsement of President Biden in the 2024 presidential election. This followed an earlier statement by presidential candidate Donald Trump in January that he would “absolutely” block the deal if elected.
April 12, 2024: 98% of U.S. Steel’s shares voted are in favor of the transaction.
Aug. 31, 2023: CFIUS reportedly sends a letter to the two parties stating that the proposed transaction poses a risk to national security by threatening the supply chain of steel for critical US industries (see “US fears Nippon bid for U.S. Steel could hit vital steel supplies”). Nippon Steel and US Steel reportedly file a response to CFIUS refuting its arguments (see “Nippon Steel rebuts CFIUS's case against its bid for US Steel-letter”).
Sept. 4: David Burritt, the CEO of US Steel, warns that there may be plant closings and a move of the company headquarters outside of Pittsburgh if the deal does not go through.
Sept. 18, 2024: CFIUS permits the two parties to refile, which begins a new 90-day period for CFIUS to make a recommendation on the transaction – ending after the presidential election.
Nov. 20, 2024: Japanese Prime Minister Shigeru Ishiba reportedly sends a letter directly to President Biden requesting US government approval of the deal (see “Japan PM Ishiba urges Biden to approve Nippon-US Steel deal, sources say”).
Nov. 22, 2024: Four House Republicans reportedly send a letter to the secretaries of Treasury and Commerce expressing “serious concerns” that political considerations tainted the CFIUS process in this case, and demanding the preservation of records for any future investigation (see US Steel Review Targeted by Republicans for Potential Probe).
Dec. 18, 2024: The current CFIUS deadline is due to expire. CFIUS may approve the deal (possibly with conditions), recommend that it be blocked, or further extend the deadline.
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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, “Why Blocking the Nippon Steel Deal May Seriously Harm US-Japan Relations,” USALI Perspectives, 5, No. 2, Nov. 30, 2024, https://usali.org/usali-perspectives-blog/why-blocking-the-nippon-steel-deal-may-seriously-harm-us-japan-relations.
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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