Blocking the Nippon Steel Acquisition: Politics Versus Policy

A regular series on the choices faced by international economic policymakers

Reports that President Joe Biden has decided to block the proposed acquisition of U.S. Steel by Japan-based Nippon Steel have created a stir in Washington. If true, a decision to block the deal would be widely understood to be a political move to appeal to voters in Pennsylvania and the industrial Midwest. Politics matters, but so does policy, and neither would be well served by this action.

It is difficult to see what U.S. policy objectives would be advanced by a decision to block the Nippon Steel transaction. Indeed, the move would do damage to three of the Biden administration’s own policy priorities: First, it would weaken U.S. economic competitiveness and supply-chain resilience. U.S. Steel has been unprofitable for most of the past fifteen years, and the billions of dollars that Nippon Steel proposes to invest in modernizing U.S. Steel’s plants in Pennsylvania and Indiana would likely save American jobs and help make the company more competitive against China’s now-dominant producers. Blocking the deal could have a chilling effect on other prospective foreign investment into the United States, which the administration has touted as strengthening the U.S. economy and reducing vulnerabilities caused by far-flung supply chains.

Second, the decision would undermine the Biden administration’s efforts to win support from allies in advancing a range of U.S. interests. Japan has been a close partner not only on critical national security issues, from limiting North Korea’s weapons development to pushing back against China and Russia’s territorial expansionism, but also on the very elements of economic security that the Nippon Steel transaction could advance, such as friendshoring and de-risking from China. If Japan’s Prime Minister Kishida Fumio were not stepping down this fall, the decision would be seen in Tokyo as a slap in the face to one of Biden’s closest partners. The move would make it more difficult politically for any Japanese government to follow the U.S. lead.

Third, and most important, the decision would weaken a critical tool of national security. The transaction has been under review by the Committee on Foreign Investment in the United States (CFIUS), the Treasury-chaired body mandated to screen foreign direct investments into the United States for potential national security threats. The Nippon Steel acquisition poses no credible national security threat: Japan is a close ally, Nippon Steel has other existing investments in the United States, and the Defense Department currently buys little or nothing from U.S. Steel. (When a former U.S. steelworker interviewed on RealEcon’s listening tour earlier this summer was asked if he thought national security was a reason to block the Nippon Steel deal, he put on a quizzical face and said, “That’s a stretch.”) Forcing CFIUS to say that the deal is a threat, when it clearly is not, would blunt the credibility and usefulness of this critical tool of U.S. national security. Moreover, it would give license to other countries to use national security as an excuse for taking protectionist actions.

All of those policy drawbacks could be worthwhile from the White House perspective if the politics of the decision were good, but even that is hard to see. Both Biden and Vice President Kamala Harris have already publicly signaled their concerns with the Nippon Steel acquisition, and it seems unlikely that a formal decision to block would swing a single vote in the November elections. A smarter move would be to allow Nippon Steel to withdraw its CFIUS filing until cooler political heads prevailed.

The trade-offs explored in this series typically involve difficult choices that policymakers face between conflicting policy objectives: responding to unfair trade practices with tariffs versus fighting domestic inflation, or de-risking from China versus accelerating the clean-energy transition by importing more Chinese-made electric vehicles. In the case of Biden’s reported decision to block Nippon Steel’s proposed acquisition of U.S. Steel, the trade-off perceived by the White House is apparently between good politics and good policy. In fact, both would likely lose.