Biden's political block of Nippon Steel deal to cloud future input into US

United States President Joe Biden announced on Friday his decision to block Nippon Steel's proposed acquisition of US Steel, citing concerns over national security.

"As a committee of national security and trade experts across the executive branch determined, this acquisition would place one of America's largest steel producers under foreign control and create risk for our national security and our critical supply chains," Biden said in a statement. "It is my solemn responsibility as president to ensure that, now and long into the future, America has a strong domestically owned and operated steel industry that can continue to power our national sources of strength at home and abroad; and it is a fulfillment of that responsibility to block foreign ownership of this vital American company."

It is unusual for a US president to block an acquisition that has been agreed upon by private companies from allied nations and the move is likely to affect future Japan-US relations. Additionally, Biden's decision may set a precedent that will make companies considering future investment in the US think twice, Japan's daily newspaper The Asahi Shimbun reported.

"Biden's decision makes it clear that what the US expects from Japan is for Japan to unconditionally allow the free stationing of US military forces within its borders while continuing to be the largest foreign holder of US Treasury securities," said Hidetoshi Tashiro, chief economist at Japan's Infinity LLC. "At the same time, it reveals that Japan is not permitted to freely invest in the US. This highlights the inequitable nature of the Japan-US relationship and renders its continuation unsustainable."

Even Japanese companies – despite Japan hosting a US military presence for around 80 years – face political barriers to acquiring US companies, leaving struggling US enterprises with little option but extinction, Tashiro said.

In December 2023, Nippon Steel secured a deal to buy US Steel for $14.9 billion. The Committee on Foreign Investment in the United States, or CFIUS, was unable to reach a consensus regarding the proposed acquisition's impact on US national security, ultimately leaving the final decision to Biden.

Concerns within CFIUS centered on the potential for Nippon Steel to eventually reduce steel production in the US.

For months, Nippon Steel has been working to convince CFIUS that its acquisition of US Steel does not threaten US national security. However, the United Steelworkers union has countered, asserting that the Japanese company cannot be trusted and might relocate steel production overseas, Nikkei Asia reported.

According to The Washington Post, CFIUS submitted its final evaluation of the transaction on Dec 23, cautioning that Nippon Steel's acquisition of US Steel could potentially reduce domestic steel production, thereby posing risks to the national security of the US.

The panel reportedly warned that a decline in US Steel's output could result in supply shortages and delays, potentially affecting industries vital to national security.

Biden has expressed opposition to Nippon Steel's proposal to acquire US Steel since the last presidential election campaign. Similarly, US President-elect Donald Trump has unequivocally stated that he would not approve such an acquisition.

"The rationale behind this opposition is straightforward: the steelworkers' union strongly resisted the deal," explained Kazuyuki Hamada, an international political economist and a former parliamentary vice-minister for foreign affairs in Japan. "In the run-up to the November 2024 presidential election, both candidates sought the union's support and justified their stance by emphasizing the protection of union members' jobs."

Despite the challenges, Nippon Steel's bid received approval during US Steel's annual shareholders' meeting, largely due to lobbying efforts by pro-sale management and Wall Street investment funds.

However, the United Steelworkers union remained steadfastly opposed, citing concerns that large Japanese corporations have a history of suppressing workers' rights.

"Nippon Steel's misstep was in timing the acquisition during a US presidential election year – a move that backfired," Hamada said. "While a Biden decision could potentially be reversed under a Trump administration, neither leader can afford to approve such a proposal lightly, given its profound implications for a core American industry."

Hamada emphasized that the proposed deal was more than just a business transaction.

"This case is deeply intertwined with political considerations," he said. Steel, as a strategic asset, is critical for US national defense and maintaining leverage in international conflicts. Among US policymakers – particularly in defense circles – there is lingering concern that even close allies like Japan could have commercial ties with adversarial nations under the guise of civilian technologies.

This raises questions about Japan's ability to resist pressure from powerful countries to abandon or compromise the Japan-US Security Treaty. Japanese ownership of US Steel does not necessarily guarantee the security of the bilateral defense alliance, Hamada said.

He urged the Japanese government and Nippon Steel to swiftly address the deeply rooted skepticism toward Japan in the US.

Unfortunately, Japan's non-intervention stance on private mergers and acquisitions has allowed Nippon Steel to conduct its negotiations with US Steel without adequately engaging with labor unions. Instead, the company relied on dismissive legal representatives, overlooking critical labor perspectives and ultimately inviting US government intervention, Hamada said.

"Nippon Steel must now take a more sincere approach with labor unions, clearly explaining its proposals and working consistently to gain their understanding," he said.

Despite the setback, Nippon Steel has not abandoned its acquisition plan and the company has entered into a consulting contract with former US secretary of state Mike Pompeo and begun lobbying behind the scenes. By presenting a scenario to revitalize US Steel – a once-prestigious company that has faltered due to outdated facilities – Nippon Steel could still turn the tide in its favor, Hamada said.

If the deal falls through, Nippon Steel will need to reassess its global strategy as it seeks to establish a strong foothold in the US market. Meanwhile, US Steel, which is currently undergoing operational restructuring, could face an existential crisis without investment from Nippon Steel, according to The Asahi Shimbun.

Tashiro, from Japan's Infinity, said Nippon Steel might turn its attention to acquiring a less prominent US steel company with a more ordinary name than US Steel.

"However, if such attempts continue to be blocked on political grounds under the pretext of national security, Nippon Steel may seek to build state-of-the-art facilities independently, in China, similar to Tesla," he said.