In an April 17 address to United Steelworkers in Pittsburgh, President Joe Biden vowed that his administration would “thwart the acquisition of U.S. Steel by a Japanese company,” Nippon Steel, telling the assembled union members that U.S. Steel “has been an iconic American company for more than a century and it should remain totally American.”
Aside from the impropriety of apparently prejudging a proposed combination currently under investigation by the U.S. Justice Department (DOJ), would blocking this merger make any sense on national security or economic grounds? The answer is no.
National Security: CFIUS Investigation
As the U.S. Treasury Department explains, the Committee on Foreign Investment in the United States (CFIUS) “is an interagency committee authorized to review certain transactions involving foreign investment in the United States . . . in order to determine the effect of such transactions on the national security of the United States.”
CFIUS’ authority has grown substantially since it was created by executive order in 1975. Congress in 1988 gave the president power to terminate acquisitions by foreign entities given “credible evidence” of a national-security threat. Congress also specified that this power to terminate “is not subject to judicial review.”
In 2018, Congress further enhanced CFIUS’ funding and expanded the president’s authority to investigate foreign transactions. President Biden issued an executive order in 2022 broadening the factors for CFIUS consideration to include supply-chain resiliency, U.S. technological leadership, cybersecurity, data security, and industry investment trends.
Although many transactions have been investigated under CFIUS—and a fair number have been abandoned by the parties—few have actually been prohibited. Various acquisitions have been allowed to proceed, subject to measures to mitigate national-security concerns through behavioral remedies or targeted divestitures (analogous to antitrust merger remedies). The six closed transactions that were blocked in the 2017-2022 period (in the medical, software, and aerospace sectors) involved Chinese acquirers.
Blocking the Nippon Steel acquisition through CFIUS would have serious negative implications for U.S. international economic policy, according to Center for Strategic and International Studies trade expert (and former Commerce Department Undersecretary) William Reinsch:
Preventing the acquisition would send a dubious signal to Japan, a treaty ally that provides more foreign direct investment to the United States than any country in the world. . . .
Blocking this acquisition, particularly after Nippon already exhausted considerable resources finalizing the deal itself, would no doubt cool Japanese enthusiasm for investing in U.S. firms operating in other politically sensitive yet critical industries like aerospace, information technology (IT), and communications.
Halting the deal may also cause broader uncertainty among U.S. allies regarding future CFIUS intervention. To date, M&A blockages by the president have had an obvious national security rationale. In 2012, for example, President Obama prevented a Chinese firm from acquiring wind farms near a top-secret U.S. Navy facility in Oregon. Other blockages have involved the acquisition of an aircraft component manufacturer, a semiconductor investment fund, and a prominent IT firm.
While the Trump administration decided steel was a national security imperative after applying protectionary tariffs in 2018, blocking a transaction in this industry would be unprecedented and signal an expansion in CFIUS’s approach to its mandate. With CFIUS’s influence magnified, foreign investors may think twice before executing a deal with a U.S. counterpart, or even scrap profitable deals altogether if they deem the risk of government intervention too great.
Antitrust: DOJ Merger Investigation
Nippon Steel’s proposed acquisition of U.S. Steel would be procompetitive, not anticompetitive. Thus, a DOJ antitrust challenge to the merger would be ill-advised.
U.S. Steel approved the $14.9 billion acquisition earlier this month. (The premium paid may have reflected, in large part, the benefits to Nippon of avoiding high U.S. tariff barriers to steel imports.) Following the vote, Nippon Steel described the merger’s benefits to the U.S. economy:
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.
These benefits have also been echoed in commentaries by Wayne Winegarden of the Pacific Research Institute and Sarah Bauerle Danzman of Indiana University and the Atlantic Council.
Given that the U.S. steel market is characterized by a rising focus on sustainability, innovation, and R&D, the addition of a leading (perhaps the world’s leading) steel-industry innovator, Nippon Steel, would appear to be a boon to innovation. It would tend to make other American producers “up their game,” invigorating efficiency-driven competitive intensity.
U.S. Steel is not an innovator. It also has lagged as a steel producer in recent decades. It was one of the top 10 U.S. firms in the Fortune 100 listings in 1960 but, by the year 2000, it had fallen out of Standard & Poor’s index of the top 500 U.S. firms. U.S. Steel is no longer even the largest American steel producer.
Moreover, the U.S. steel industry is very unconcentrated, with U.S. Steel holding a market share of just under 7% in revenue terms. The largest U.S. producer, Nucor, holds a roughly 13% share. What’s more, no U.S. company is among the world’s 10 largest crude steelmakers (seven of the 10 are Chinese). Nippon Steel is the third or fourth largest.
Because of U.S. tariffs and other company contractual commitments, only a very small portion of Nippon’s current market share can be attributed to the U.S. market. (Nippon is essentially absorbing U.S. Steel’s market share.) In essence, the Nippon Steel acquisition would have, at best, a minor (if not zero) effect on market concentration in the unconcentrated American market.
Based on that information, it is hard to envision what antitrust risks or theories of harm based on “increased concentration” (a major concern of the Biden administration) could be concocted.
Politico reports that the DOJ has focused on issues posed by a manufacturing plant jointly owned by Nippon Steel and Luxembourg-based ArcelorMittal. That plant apparently competes directly with U.S. Steel for auto customers. If that is, indeed, the case, it would appear that a narrowly targeted remedy—such as Nippon Steel’s sale of its joint-venture interest—could be crafted. (This assumes that, without a remedy, competitive harm would be deemed likely.)
In sum, based on what is known publicly, Nippon Steel’s acquisition of U.S. Steel holds the prospect of invigorated American steel-industry competition—something that industry badly needs. Such heightened competition would bring with it welfare-enhancing benefits to consumers and producers. As such, a DOJ antitrust challenge to the merger is uncalled for; it likely would represent a wasteful misuse of limited prosecutorial resources to advance an anticompetitive end.
Conclusion
Blocking Nippon Steel’s acquisition of U.S. Steel would undermine U.S. competitiveness, harm competition, and potentially introduce a bit of unnecessary strain into U.S. relations with a key ally, Japan. Regrettably, however, these unfortunate policy outcomes appear inevitable, given the president’s recent public pronouncements.
As a legal matter, using CFIUS to block the deal would be easiest for the administration, because it would eliminate substantial antitrust risks that would attend a DOJ antitrust challenge. Invocation of CFIUS, of course, would have its own risks for Biden. In addition to proving politically embarrassing, it would generate new legal uncertainty for potential foreign investors in the United States, to the detriment of American economic dynamism and efficiency. Perhaps the administration will seek to avoid these problems by convincing the Japanese government to have Nippon Steel “pull the plug” on its potential acquisition.
If the deal is killed, the biggest losers would be American consumers and producers, who would be denied the benefit of enhanced competition in the U.S. steel industry.
One may hope that future leadership in the executive branch and in Congress will take note. Basing antitrust enforcement on sound economics and consumer welfare, and avoiding protectionist restrictions on U.S. trade and investment, are always the best policies.