The US Steel deal is a test of friendshoring—and the US is failing

In mid-December 2023, US Steel announced that it agreed to be bought by Nippon Steel for approximately $14.1 billion, a 40 percent premium over its stock price at the time of the announcement. The deal would quickly catapult the Japanese company to second place in the global steel production league charts, accounting for 4.5 percent of annual global crude steel production, behind China Baowu Group’s 7 percent. Such a merger could unlock efficiency-promoting technology—including advances in green production techniques—while providing Nippon Steel with the size and resources necessary to act as a counterweight to Chinese dominance in the global steel industry. Six of the largest ten steel producers are Chinese, as are twenty-four of the forty-six companies worldwide that produce at least ten million tons of steel per year.

One might think that US policymakers would welcome this announcement. It is a “win” for policies that have protected domestic production through tariffs; Nippon Steel’s offer to US Steel reflects its desire to expand steel production capacity in the United States to serve North American markets through domestic (and therefore tariff-free) production. Those concerned about industry consolidation and antitrust issues should prefer this deal to other potential buyers, such as Cleveland-Cliffs and Nucor, which are both major domestic competitors of US Steel. In contrast, Nippon Steel has very few production capabilities in the United States.

If Washington won’t allow this transaction—involving a buyer from a G7 country—then what foreign buyer would it see as a permissible owner?

The acquisition will preserve more than fourteen thousand US jobs, and Nippon Steel is better positioned than was US Steel to invest in advanced technologies necessary to keep production profitable and growing. The company has ambitious goals to increase its global production to one hundred million tons a year, and therefore will likely invest in plant expansions that will create new jobs for US workers. The prospect of job creation and the fact that US Steel would retain its name and Pittsburgh headquarters would usually be seen positively in an election year. The outcome might, for example, be viewed as a sign of a booming domestic steel industry with lucrative employment opportunities in the industrial Midwest, an area of the country with outsized influence over presidential election outcomes.

The transaction is also a “win” for “friendshoring” policy objectives, which were first announced by US Treasury Secretary Janet Yellen in April 2022 at the Atlantic Council. These objectives emphasize cultivating closer trade and investment connections with reliable geopolitical allies, especially for critical supply chains. There is very little risk that Nippon Steel would offshore production, as the business rationale for the acquisition rests on serving North American markets and low US production costs due to low energy prices compared to prices in Europe or Japan. Instead, the company’s expansion into the US market can help provide both the United States and other countries the ability to further diversify their steel supply needs away from China. As Biden administration officials have repeatedly admitted, the United States cannot reduce its reliance on Chinese-made critical inputs alone.

Despite all the benefits of the deal, some policymakers have voiced vociferous opposition to it, arguing that the deal is bad for union workers and also a danger to US national security. Several members of Congress have requested that the Committee on Foreign Investment in the United States (CFIUS) review and potentially block the transaction. The Biden administration has also expressed wariness, saying that the deal needs “serious scrutiny.”

A CFIUS prohibition would be a mistake. First, CFIUS is supposed to be narrowly focused on national security risks, not broad economic competitiveness or national prestige concerns. It is very hard to credibly argue that a Japanese owner of a US business would suddenly stop selling steel to US buyers, particularly since the business rationale for the acquisition is so that Nippon Steel can more competitively serve the North American market. Washington blocking such a sale to a close Group of Seven (G7) partner would indicate that CFIUS has veered from narrow national security concerns to the business of broader economic protection. This would invite retaliation against US companies abroad and undermine US messages about the importance of an open, market-oriented, and rules-based economic system.

Second, US leaders are understandably concerned about China’s willingness to use its control over critical supply chains to engage in coercive economic practices. To address these concerns, the United States needs other countries—and particularly its closest allies—to trust that it remains an open and welcoming place for their businesses. If Washington won’t allow this transaction—involving a buyer from a G7 country—then what foreign buyer would it see as a permissible owner? A block would communicate that the steel industry is completely closed off to foreign investors. Allied and partner countries and their companies would understandably lose confidence that the US market will remain open to them. A lack of trust has the potential to frustrate efforts to invest resources in restructuring these critical supply chains at global volume to effectively insulate the United States and its friends from coercive Chinese trade practices.

A block would communicate that the steel industry is completely closed off to foreign investors.

Finally, there is one concern regarding foreign acquisitions in critical industries that is worth considering. Because Nippon Steel is listed on the Tokyo Stock Exchange, this deal would likely cause US Steel to delist from the New York Stock Exchange, which would limit the power of the US Securities and Exchange Commission (SEC) to regulate the company. Many Japanese-listed companies that have acquired US businesses voluntarily provide annual financial disclosures to the SEC, as should Nippon Steel.

More importantly, because Nippon Steel is listed in Japan, it is subject to Japanese corporate governance rules rather than US ones. The US government may worry about the national security implications if the company acquires US Steel and then is subsequently acquired by a more problematic third party, such as a Chinese entity. If Japan had weak corporate governance practices, this would be a more relevant concern. However, Japanese corporate structures are notorious for guarding against hostile takeovers, making this scenario exceedingly unlikely. Still, other countries don’t always have as strong protections; rather than blocking transactions with close allies, the United States should be engaging in greater outreach to allies and partners with weaker corporate governance structures to encourage reforms that alleviate these kinds of worries.

Sarah Bauerle Danzman is a 2023-2024 scholar-in-residence at the Atlantic Council’s GeoEconomics Center’s Economic Statecraft Initiative and an associate professor of international studies at Indiana University, Bloomington.

Further reading

Image: Sparks fly as a ladle (right) of molten hot iron is poured into a vessel of scrap during the steel manufacturing process the US Steel Granite City Works plant in Granite City, Illinois, on Thursday, June 28, 2018. (David Carson/St. Louis Post-Dispatch/TNS/ABACAPRESS.COM)