U.S. President Joe Biden’s administration is examining Nippon Steel’s connections to China, people familiar with the matter have said, in a potential stumbling block for the Japanese giant’s politically contentious deal to acquire American rival United States Steel.

The administration sees its priority as protecting U.S. industry and is worried about Nippon Steel’s exposure to China, the people said, speaking on condition of anonymity to discuss the thinking. Biden has maintained tariffs on Chinese goods implemented by former U.S. President Donald Trump under Section 301 of the trade law and may consider future tariffs on steel and aluminum from China, the people said.

The complication for Nippon Steel is that regulators may look unfavorably on whether its acquisition of U.S. Steel could allow more access to U.S. markets for Chinese-sourced steel, while the administration uses tariffs and other measures to keep steel from being dumped on the American market.

Nippon Steel’s plans to purchase U.S. Steel, an iconic American firm based in the election battleground state of Pennsylvania, has already touched off a political firestorm in the United States, where it is undergoing a review by the Committee on Foreign Investment in the United States (CFIUS).

It is not clear whether the China assets will be an explicit part of the CFIUS review. Still, scrutiny over Nippon Steel’s China holdings threatens to add another complication to the transaction as Biden considers tougher trade measures against Beijing.

Shares in U.S. Steel dropped as much as 1.2% Thursday and Cleveland-Cliffs, which was edged out in a bid for the company, rose as much as 2.9%, after the news was reported. U.S. Steel closed the day at $46.52, below the $55-a-share offer Nippon made in December.

Cliffs CEO Lourenco Goncalves said earlier this month that his $54-a-share cash-and-stock bid for U.S. Steel is gone and won’t be a backup if Nippon Steel’s offer, accepted by the American steelmaker, falls through.

The U.S. Steel takeover faces opposition from organized labor, and Trump — the front-runner for the Republican presidential nomination — has threatened to block it if he wins a second term in November. The Biden administration has indicated that it wants to protect union jobs and the domestic steel sector, but has stopped short of making those conditions of an approval.

"Nippon Steel’s operations in China are very limited — representing less than 5% of our global production capacity — with only downstream business and no upstream facilities such as blast furnaces or electric arc furnaces which constitute a major portion of investments in the steel industry,” a company spokesman said in a statement. "Our operations in China — including joint ventures with Chinese partners — have no control over our operations or business decisions outside of China, including in the U.S.”

The spokesman said that the company’s "goal is to enhance U.S. Steel’s competitiveness in the global steel market and address the industry’s overproduction and overcapacity issues — largely driven from China.”

The White House and Treasury Department declined to comment.

Nippon Steel has nine facilities in China among its global production base, according to its 2023 integrated report to shareholders. The company added the facilities to its asset portfolio between 2001 to 2013, a key period of unprecedented growth in Chinese steel demand.

That era has been long criticized by American steel producers as the time during which China massively overproduced the alloy and dumped excess metal in the U.S. and the rest of the world, tanking global prices and leading to the unprofitability of many once-dominant American steel companies.

While Nippon’s total production from these facilities is quite small when compared to its global output — just 3.6 million metric tons of capacity per year out of a total 66 million — it presents a challenge the company may need to overcome to receive approval.

Political backlash to the loss of manufacturing jobs in steel and other sectors is a potent force in American politics, and rebuilding the sectors is a key pledge of both the Biden and Trump campaigns.

The last two decades have seen China’s rise as a global steel and economic power. In 2000, China produced 127.2 million metric tons compared to the U.S.’ 101.8 million. The gap has widened, with China now producing more than 1 billion metric tons of steel in 2022 to 80.5 million for the U.S. Simultaneously, the U.S. saw Chinese steel imports rise steadily, topping out at nearly 3 million metric tons in 2014.

The surge of imports weighed on domestic producers as U.S. benchmark steel prices tumbled below $400 a metric ton. It caught the attention of former U.S. President Barack Obama's administration, which oversaw a raft of trade cases that resulted in tariffs on imports from China and other countries.

That aggressive approach saw Chinese imports plummeting 72% by 2016. Barely a year into his presidency, Trump passed Section 232 tariffs on steel that effectively eliminated most imports from China. Chinese imports totaled just 400,000 metric tons in 2020.

Producers and U.S. lawmakers, though, are now warning about Chinese steel shipped through neighboring countries such as Mexico.