President Biden’s insistence that blocking the U.S. Steel--Nippon Steel merger would be beneficial for U.S. security and the career prospects of U.S. Steelworkers reflect a fundamental misunderstanding of the industry and broader economy. If he follows through on his threat it will inevitably result in fewer jobs in the domestic steel industry, a frayed alliance with Japan, and a reduced steelmaking capacity--precisely the opposite of his ostensible goal.
The domestic steel industry has been in decline for decades as global production has surged, largely driven by an enormous expansion of China’s production capacity: They account for 54 percent of all steel production on the globe and produce much more than the country’s domestic demand, which has caused global prices to plummet. Today’s prices are well below where they were fifteen years ago despite sharply higher input costs for steel producers.
Saving the domestic steel industry in the face of this surge of supply is going to take a lot more than wishful thinking but it appears that the White House strategy amounts to precisely that: Wishful thinking.
Last year Nippon Steel announced its intent to merge with U.S. Steel: Its plan entailed investing and expanding the U.S. production capacity and retaining the current workforce. However, the merger has run into a buzzsaw of opposition. For starters, the United Steelworkers Union leadership has been vociferously against the merger, even though its workers don’t seem to share their leadership’s position. President Biden--who considers himself the most pro-union president ever--announced his opposition as well.
However, the workers’ preferences in this matter--which would entail either for U.S. Steel to remain on its own or else merge with Cleveland Cliffs--are not viable options. Consolidating with Cleveland Cliffs--another domestic steel producer that has indicated an interest in purchasing U.S. Steel--would create a domestic monopoly for rolled steel, which car manufacturers rely on: Even a Federal Trade Commission that is not besotted with inane ideas on antitrust matters like the current one is going to prohibit that transaction.
What’s more, Cleveland Cliffs has its own financial issues, and it is unclear whether it could finance such a takeover (it’s banking on paying a much lower price than Nippon Steel has offered) or even if the new combination would have the financial resources to maintain its market share. And U.S. Steel has announced that if it cannot find a viable partner, it will begin selling off its assets and effectively dismantling itself. The status quo is no longer financially tenable.
The other objection to the merger--that it would create a national security problem--is even more risible, as the CFIUS process has amply demonstrated. CFIUS--the Committee on Foreign Investment in the United States--reviews major transactions that involve a U.S. entity and a foreign concern to ensure that it does not pose a risk to national security.
Nine different agencies must agree that an acquisition has no serious security implications for CFIUS to approve it: Without unanimity the decision rests with the president. While the Treasury, Pentagon, and State Department have all given their approval, the U.S. Trade Representative--led by Katherine Tai--has continued to oppose the deal despite having no particular expertise or portfolio related to national security.
A letter sent by CFIUS to U.S. Steel and Nippon Steel in October hints at the lack of any valid rationale for Tai’s stance. The missive said that the committee feared that a joint Nippon--U.S. Steel combined entity would be less likely to petition the government for tariffs on Chinese Steel--an accusation that boggles the mind. Besides the insane assertion that a Japanese-owned company would be, in essence, less vigilant about protecting its investment, the assertion neglects the fact that even if that were to happen, the federal government would still have the ability to impose tariffs on its own if it deemed them necessary to protect domestic production capacity.
Tai’s statements on the matter reveal another unfortunate reality about the entire CFIUS process, which is that the Biden Administration effectively hijacked the process and the White House has used it to try to buy a few votes in Pennsylvania in the election. Now that the election is over, it’s as if he’s following through on his original position merely out of spite.
If the Biden Administration is truly concerned about protecting American steelmaking jobs, ensuring that the U.S. maintains the ability to produce steel domestically, and protecting our country’s relationship with Japan it would approve this merger promptly. Unfortunately, short-term political vicissitudes appear to be more important to it than any of these tangible U.S. priorities.
