A steel deal that’s good for Japan and the U.S.

Nippon Steel’s announcement that it plans to purchase U.S. Steel has triggered an uproar in the United States.

Even though the offer is a sweet deal for the U.S. company’s shareholders, several politicians have pledged to block the sale, arguing that it undermines U.S. national security.

This is an important test for the Biden administration. There is no reason to prevent the acquisition. Allowing it to proceed will be proof of the U.S. government’s commitment to collective action to safeguard supply chains in critical products. Failure to do so would indicate that Washington’s concern is protectionism, rather than genuine national security. It would antagonize and alienate a critical partner. It would be a mistake.

Throughout the 20th century, there was a belief that “steel is the nation.” That reflects the central role that the metal plays in the industrial economy and the sheer size of the industry. The annual value of global steel products has been estimated to reach $2.5 trillion, added value is reckoned to total $500 billion, and it provides employment for more than 6 million people.

Founded in 1901, U.S. Steel was once the world’s largest steel producer, the world’s largest corporation and the first billion-dollar corporation. At its peak, it employed 340,000 people. An original member of the S&P 500, it was removed from that index in 2014 as it was overtaken by other companies. Today, it is the world’s 27th largest steel producer, trailing several other U.S. makers.

Nippon Steel offered ¥2 trillion ($14.9 billion) to purchase the company, a 40% premium over the share price last Friday afternoon. The acquisition would increase its crude steel production capacity from 66 million tons a year to 86 million — its goal is 100 million tons — and make Nippon Steel the world’s third largest steel producer; it’s currently number four. Significantly, it would provide the purchaser with a base for production for the U.S. auto market, especially as production of electric vehicles ramps up in the U.S.

This would be a vital gain as Japan’s own market dwindles in size. Nippon Steel plans to cut domestic capacity by 20% between 2019 and 2025.

U.S. Steel executives approve of the deal, as do other U.S. steel makers. They see it as an investment in U.S. capacity and ongoing production. Several U.S. politicians disagree, however. Three Republican senators have written a letter to U.S. Treasury Secretary Janet Yellen, calling on her to use the Committee on Foreign Investment in the United States, which she chairs and which reviews business transactions with national security implications, to block the sale. They argued that "The transaction marks a turning point for an icon of American industry and has dire implications for the industrial base of the United States.”

That is nonsense. The idea that the purchase of a U.S. business by a Japanese company is a threat to national security reflects a wildly outdated notion of the Japan-U.S. relationship. It is rooted in a brief moment of a cold war-like trade rivalry, during which it was believed that Japan and the U.S. were competitors, a mindset that, if ever true, has long since passed.

Instead, Tokyo and Washington are working together through a variety of mechanisms to safeguard and secure global supply chains. The two governments have institutionalized a number of economic security dialogues that are premised on their shared goals and interests. The concept of “friendshoring,” which has been championed by Secretary Yellen, demands the active cooperation of the U.S. and its key partners and allies in vital industrial sectors.

This acquisition advances that goal. To suggest that Nippon Steel somehow represents foreign interests that are inimical to those of the U.S., as the senators’ letter does, defies reality. A far more accurate assessment of Japanese investment was provided by the House Select Committee on China, which recommended last week that Japan be put on the “whitelist” of countries automatically approved to invest in the U.S.

Those senators should be applauding the sale as a way of injecting new life into U.S. Steel and better positioning it to address 21st-century challenges. The premium for shareholders is a vote of confidence, a signal of intent and a reward.

There is also opposition from Democratic politicians who complain that the steelworkers union was not consulted before the deal was reached and fear that the takeover could cost some of the company’s 23,000 steel workers jobs and imperil President Joe Biden’s prospects in the 2024 election. U.S. Steel has plants in Pennsylvania and Michigan, two key battleground states in next year’s ballot. Layoffs are unlikely if demand is expected to increase and given the tendency of Japanese companies to be more respectful of labor than their U.S. counterparts.

It is a common complaint of activist investors in Japan and their supporters in the U.S. that Japanese management is too solicitous of stakeholders, which would suggest that fears of widespread layoffs are unfounded. Nippon Steel has also promised to honor existing collective-bargaining agreements and other worker commitments. The company's president, Eiji Hashimoto, said that the firm “would like to engage in dialogue with the labor union in a respectful manner.”

The U.S. should be encouraging such investment, not fending it off. Japan is the largest foreign investor in the U.S., with a cumulative stock of $721 billion in 2021, 14% of the total. Those funds provide a substantial boost to U.S. economic activity. Japanese companies underwrite 860,000 jobs in the U.S. and their subsidiaries and affiliates exported over $75 billion in goods in 2020, about one and a half times that of Germany, the number two investor.

Those investments are signals of trust and faith in the future of the U.S. They are proof of the solidarity and vision for the future that Japan and its ally share. Deeper integration not only provides an economic boost but it enhances security and deterrence as well.

The more tightly coupled our economies, the greater the certainty that the U.S. will act in defense of its ally and partner. Steel remains critical to both economies and their defense industrial bases. This deal makes economic and national security sense. It should proceed.