Speaking recently, Lourenco Goncalves (CEO of steelmaker Cleveland-Cliffs) labeled Japanese Nippon Steel’s ongoing acquisition of U.S. Steel a “fiasco.” Nippon (the world’s fourth-largest steel producer) paid handsomely for the smaller firm (the 27th-largest) — $14.9 billion. In doing so, Nippon outbid Goncalves’ Cleveland-Cliffs by 25 percent ($55 per share to $40). Anticipating significant profit potential, the Japanese company plans to modernize the U.S. Steel’s outdated facilities and tighten up its operations. Moreover, Nippon pledged to retain U.S. Steel’s current workforce, to honor its union contracts, and to keep its iconic company name. What should have been a simple acquisition by a large, well-run firm taking over a smaller, floundering one ended up being needlessly complicated.
The “fiasco” originated not in any misstep by Nippon or U.S. Steel but from political cronyism. Much of the fault lies with Goncalves himself and his union allies. To further their personal interests, they lobbied the federal government to block the deal. Still more fault lies with federal officials (including President Joe Biden and several senators) whose economically nationalist outlook apes Goncalves’ views. This coalition is threatening a deal that would ordinarily speed through regulatory review — to the benefit of American workers, industry, and consumers.
Each rationale advanced against the deal lacks internal consistency or factual accuracy. No valid economic rationale or national-security imperative suggests that the merger should not proceed. In the end, opposition seems grounded in a single dubious proposition: That it is inherently bad that the once-great U.S. Steel should come under foreign ownership. This argument has powerful emotional resonance for a certain phylum of populist politician, but it provides little basis for economic regulation.
Foreign companies like Nippon have done much to help American manufacturing. Populists have long bemoaned the American economy’s (albeit overstated) pivot from mid-century manufacturing — particularly those manufacturing jobs purportedly “export[ed]” to foreign nations such as China. However, even though foreign direct investment (FDI) keeps manufacturing jobs stateside, populists distrust it. As of 2022, FDI in the U.S. totaled $5.3 trillion, of which $2.2 trillion funded the manufacturing sector. As Sen. J.D. Vance (R-Ohio), now an outspoken critic of the deal, recognized in his 2016 memoir, Hillbilly Elegy, these inflows often save otherwise-doomed American companies and their employees from abject disaster. Vance has since reincarnated himself as an economic nationalist, but in 2016 he wrote that without Japanese Kawasaki’s entry, his hometown’s “flagship company probably would not have survived without it.”
Nippon and U.S. Steel’s intertwined stories read like a case study in the value of FDI. Nippon has operated in the U.S. for roughly four decades, and it reports at least partial ownership of eight American steel manufacturers and employs more than 963,000 Americans.
U.S. Steel, meanwhile, has become bloated and uncompetitive, more a has-been brand name than an economic powerhouse. Once the world’s largest corporation, U.S. Steel has mismanaged itself into obscurity, endangering its employees’ jobs along with its own shareholders’ profits. While it remains America’s third-largest steelmaker, the company has preferred rent-seeking to innovation, falling from the S&P 500 in 2014. In August, U.S. Steel’s market capitalization made it only the 925th-largest American company, though it rose once the Nippon acquisition appeared likely. Its roughly 22,500-person workforce numbers fewer than the respective workforces of Petco and Dave & Busters.
Nippon’s entry would likely reverse this decline. “Without exception Nippon has some of the highest-quality steel-making technology of any steel producer in the world,” Bruce Craig, a veteran steel metallurgical engineer, wrote to The Wall Street Journal. “America would benefit by having Nippon Steel upgrade the quality of our steel-making,” he continued.
Lacking an economic justification, Biden, Vance, and their allies often resort to national security to halt the deal. Allowing a foreign entity to control U.S. steelmaking could, they say, potentially deprive the military of necessary steel should a crisis arise. This rationale, too, fails utterly.
First off, the Pentagon utilizes just 1 to 3 percent of domestic steel output, rendering the national-security impacts of U.S. Steel’s ownership largely insignificant. As former deputy undersecretary of defense for industrial policy William C. Greenwalt notes, the steel most necessary to national security comes from two Cleveland-Cliffs plants in Pennsylvania. “The rest of the steel industry, however, has not only been mostly worthless to national security — it has arguably become detrimental to it,” Greenwalt argues. Domestic sourcing requirements raise Department of Defense costs, imposing large costs for no discernable benefit.
It is precisely this sort of protectionism that Cleveland-Cliffs now demands, and that Joe Biden supports. The president’s cronyism and nostalgic protectionism will prevent competition that could lower prices for downstream industries and consumers. Americans will — quite literally — pay the price.
