Should Biden Block the Japanese Takeover Bid for U.S. Steel?

The Japanese company Nippon Steel has made a $14.1 billion takeover bid for the American company U.S. Steel. That deal is now under review by the Biden administration, which finds itself under pressure to block the takeover out of national security concerns but also on broader economic grounds—at the potential expense of its own economic principles.

LISTEN HERE: For the entire conversation, and episodes in the weeks ahead on this subject and others, follow Ones and Tooze wherever you get your podcasts.

What is the national security argument for blocking a takeover? What do U.S. labor unions have to fear from a Japanese owner? And what does this debate reveal about the Biden administration’s strategy of “friendshoring”?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: So, Adam, maybe just a basic question first. Why is Nippon Steel in the position to take over U.S. Steel in the first place? Why is it the stronger company? What has it been doing right, versus U.S. Steel?

Adam Tooze: Yeah, I mean, it’s a basic question, but also it’s the kind of question that feels as though it comes a little bit out of a time warp, because Nippon Steel has probably been a stronger company than U.S. Steel for maybe half a century. The surge in Japanese steel production in the 1960s is one of the great epics of modern industrialism. It’s what the original Asian scare was fundamentally driven by. It then, of course, spills over into auto-making and shipbuilding and so on, but it starts with a huge surge in Japanese steel production half a century ago. In fact, 60 years ago. By the late 1960s, eight of the 10 largest blast furnaces in the world were already located in Japan. By the 1980s, the average size of a Japanese blast furnace was twice that of its European or American counterparts. And this matters because steel is a volume business, and the larger your plant, the greater economies of scale that you get. And the Japanese just blew everyone out of the water. And they blew everyone out of the water not recently—this isn’t some China shock story, you know—but half a century or more ago. Today, just to put things in perspective, of the top 15 global steel producers, there is only one American, and it’s in the 15th position. And it isn’t U.S. Steel; it’s Nucor. U.S. Steel ranks at the 27th position in the global hierarchy of steel makers. Nippon Steel is in fourth position. All of the rest of the top 15 are Chinese, overwhelmingly, South Korean, Japanese, or ArcelorMittal, which is a European-Indian conglomerate dominated by Indian capital.

So for America to be suddenly waking up in a panic and discovering that its storied “steel industry” is the object of a kind of casual takeover by the Japanese—what have you been doing the last half-century? Of course. America’s steel producer is essentially just flotsam in the larger scale. And we’re talking huge differences. The top Chinese producer produces 10 times as much steel as U.S. Steel. Nippon Steel produces four times as much as U.S. Steel. The question we should really be asking ourselves is: Why on earth is Nippon Steel interested in buying in the global steel industry?

And I think it’s a complicated calculus.

The U.S. market is interesting. The U.S. market is a very large market for high-quality steel. They see the subsidies that are available for making steel in the United States. And Nippon is playing on the global level, and in the global level, the U.S. market is just part of its global puzzle. It’s increasingly difficult for them to export to China. They fear carbon taxes in China. They use a lot of coal in making steel in Japan. They haven’t found any good solutions for that yet. They’re looking for alternative ways to position themselves. They’re in a much, much more important strategic alliance with ArcelorMittal, with the Indian producer, which is really where they see the future. And this American play is kind of hedging their bets.

So no one should exaggerate the significance of this for Nippon as well. The offer they made was twice as good as the competing offer made by an American competitor. So they’re valuing the assets quite highly.

CA: What do you make of the national security argument that’s being made in the United States for preventing this takeover? What role does ready access to steel even play in national security in the first place?

AT: Yeah, I mean, the administration is playing this hard. Lael Brainard—who’s the national economic advisor, and she’s a very, very, very smart economist—said, “The president believes U.S. Steel was an integral part of our arsenal of democracy in World War II and remains a core component of the overall domestic steel production that is critical to our national security.” And you really have to ask yourselves, you know, have you no shame? I mean, seriously, have you no shame? It’s an absurd, on its face, risible argument, being invoked for evidently political reasons in the current situation. Because they’re desperate for the labor vote, they’re unwilling to make an offensive case for this partnership. But think analytically about this: What actually does Japanese ownership of a U.S. steel producer threaten? I mean, there were presumably two issues that you would worry about. One is access to steel, and the other one is some sort of technological argument. But no one in their right mind could imagine that U.S. Steel has anything to teach Nippon Steel about making steel, right? I mean, if there’s anything at stake here, it’s a technology transfer from Japan to the United States, which might conceivably heave this relatively backward American producer into the 21st century and certainly has made much more aggressive moves, say, on green steel under pressure than the U.S. producers have. So the technology argument is impossible to make.

So talk about quantities of steel. Part of what makes this plausible right now is we’ve got this war in Ukraine and so people are talking about ammunition and about tanks. And so this conjures up all of this talk about the arsenal of democracy. And presumably for an arsenal you need steel. And in World War II, when we were doing a total war at a global scale and America was supplying heavy equipment to the entire world, U.S. steel production was indeed stretched and was a backstop. But think about the dimensions of this right now. So 155 mm NATO standard artillery shells are the big bottleneck right now. And we’re talking about Ukraine needing hundreds of thousands of them. Ideally, it would have 1 or 2 million. So how much steel goes into one of these? I did the math on this. A 155 mm artillery round weighs 43 kilos. If you subtract the explosive, the fuse and everything else, I think you’re probably on the high side if you think it needs 30kg of steel per shell. So assume you made a million rounds, which is far more than anyone in the West is immediately thinking about being able to do—they’d love to do many millions, but right now a million would, say, for the Europeans, be an ambitious target—that’s 30,000 tons of steel. Now Nucor, which is the surviving American producer, the big one, produces 20 million tons of steel. So is there going to be a shortage of steel constraining our ability to make artillery rounds for Ukraine? No, 30,000 tons is boutique steel production.

So say you want to build an aircraft carrier. How much steel goes into the aircraft carrier? Seventy thousand tons go into an aircraft carrier. Again, rack that up against production levels and you see just how fatuous the idea is that some lumpy piece of military equipment that you might need would somehow mean you’d run out of steel in the current configuration. Tanks, right? Another heavy armaments thing, which obviously contains a lot of steel. An M1 Abrams tank, 50 tons of steel. So the United States right now has a fleet of 2,000. It doesn’t actually make any new ones. The hulls are essentially made to last; they just refurbish them over and over again. But say you did want to build a fleet of 2,000 tanks to deliver to the Ukrainians. It would take 100,000 tons of steel. Add all this up—at some kind of maximum, cranked-up level of heavy armaments production, World War II-style—and you might need 2 or 3 million tons, which would be a fraction of one of America’s current steel producer’s output.

Now, some of this steel will be quality steel, and for that there may be shortages, but they’re not making that argument in this case. It’s not about specific kinds of steel. It’s just some general concern. The fundamental constraint would be that all of this would take far too long, right? It would take maybe a decade to build an aircraft carrier. Two years to build a tank is the current speed of production. So steel is just not—it’s a fantastical kind of chain-of-association-type thing where you say, “We’re in a tough new world in which we’ve been fighting conventional wars, so therefore we’re going to need arsenals of democracies, and arsenals need steel.” It’s really sloppy, rhetorical kind of reasoning that’s going on here.

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 CA: I noticed how various U.S. officials are arguing that, quote, “good union jobs” at U.S. Steel are potentially threatened by the takeover by Nippon. And I’m curious: How do union jobs at U.S. Steel even bear on this transaction, one way or the other? I mean, would a Japanese-owned company, according to this theory, be less likely to cooperate with or support U.S. unions or invest in U.S. jobs?

AT: I think it’s probably fair to say that American firms don’t think of themselves first and foremost as investing in U.S. jobs or supporting U.S. trade unions. That’s not what they do. Like whoever owns them, they’re profit-making businesses and they invest in capital equipment. And they do certainly invest in their workforce, but not because they support trade unions or good jobs per se, but because whatever strategy they’re pursuing turns out to be optimal for them. So if you’re in the business of retaining highly skilled workers, as U.S. Steel sometimes is, they will make concessions to their workforce, as they did in 2019. I looked it up. They have relatively generous family leave provisions, for instance, actually comparable with Nippon Steel’s, because I thought this would be the obvious thing to pick out, that no doubt Nippon Steel has much more generous paternity and paternity rights than U.S. Steel. It turns out in 2019, U.S. Steel had to concede those as a strategy for retaining its workforce. This is the sensible way to think about this, beyond the political rhetoric about, you know, American firms supporting American jobs. Firms don’t support jobs. Firms hire people for the purpose of making profit with their workforce in which they invest depending on a calculus of profitability for the firm. They can arrive, of course, at other sorts of compromise, but it will always be supervened by the question, first and foremost, of whether or not this is profitable.

If you look at Nippon Steel’s labor relations record in Japan, as far as I’m able to ascertain it, what’s interesting about it is that the steel sector in Japan is not a cozy, corporate union kind of situation in the way that some of the Japanese manufacturing is. So famously the auto industry has extremely compliant labor unions, or had for a very long time. The Japanese steel sector isn’t like that. The Japanese steel sector for a long time had one of the more confrontational, heavy industrial unions. Its union leaders from Nippon Steel have been on the more progressive wing of the Japanese labor movement and have supported in the past the opposition left-wing Japanese party, which occasionally has been allowed to hold power in Japan, much to the discomfort of hawkish American observers of the Japanese scene. So if anything, it would seem that Nippon Steel has a track record of living with a relatively assertive, aggressive Japanese trade union movement that will stand up to comparison with anything in the U.S. So, I mean, it is true, of course, that certain Japanese automakers operate nonunion plants in the U.S., but they do so at the invitation of Southern U.S. states, which guarantee them that they won’t have to deal with the United Auto Workers. That’s part of the deal. And those firms in Japan, as well, are much more used to dealing with compliant corporate unions, so they opt for that choice, as do European producers, which back home in Europe have elaborate labor representation.

CA: Finally, I want to ask how this entire potential takeover and the politics around it fits in with the Biden administration’s overall economic strategy of friendshoring—the idea of turning away from open globalization and toward setting up supply chains with countries that are geopolitically allied with the United States. This particular deal seemed to be an example of friendshoring in practice, so why all the controversy? Does this situation reveal that the concept of friendshoring has always been more fragile than it seems?

AT: I think the short answer is yes. I mean, it just reveals the whole thing to be fundamentally inconsistent. And it’s remarkable the Biden administration is not actually willing to stick up with this one principle that it’s outlined with regard to international economic policy. I mean, it hasn’t, of course, yet moved toward blocking this. As far as I know, there hasn’t even been a decision to formally place it before the Committee on Foreign Investment in the United States. So it’s in suspense. But the Biden administration is indulging this talk rather than slapping it down.

I think what this indicates is that American policy debate about this is thoroughly irresponsible and unprincipled. We’ll see how this ultimately plays out. The owners of U.S. Steel are very happy to sell this firm to Nippon Steel at an extremely attractive price. And Nippon seems quite committed to the deal. It makes sense to them from a strategic point of view. But it’s a pretty extraordinary display of the just sheer incoherence of American economic nationalism when the rubber hits the road. Let’s just not exaggerate this as a deal. It’s not like the Japanese are trying to buy Apple or something. Like it’s not even America’s no. 1 steel producer.