Rejecting the Nippon Steel bid is a slap in the face to Japan

When is an ally not a partner? Apparently, when a Japanese company seeks to purchase an iconic U.S. corporation. There is little explanation other than raw politics and naked nationalism for the looming refusal of the U.S. government to approve Nippon Steel’s proposed takeover of U.S. Steel.

The failure of the Committee on Foreign Investment in the United States (CFIUS) to reach a consensus on the security risks posed by the purchase has thrown the $14.1 billion-deal into the lap of U.S. President Joe Biden, who has repeatedly said that he would block the merger. It is the wrong decision for many reasons. Nippon Steel, and Japan, have good reasons to be angered and aggrieved.

Nippon Steel announced that it wanted to purchase U.S. Steel last year. The deal made good sense. The Japanese steelmaker hoped to compensate for the limits of its home market, and the U.S., which has recorded the highest growth of all developed economies since the end of the COVID-19 pandemic, was an obvious choice for an investment.

Nippon Steel executives expected — naively it turns out — that the U.S. would welcome a multibillion-dollar investment that would not only protect thousands of jobs, but might even be the salvation of a once-iconic company that is threatened with bankruptcy. They also trusted U.S. warnings that global supply chains needed to be decoupled from China and thought that this deal would advance that objective.

They were wrong. Union leaders railed against the agreement, warning that it would imperil jobs as Nippon Steel sought to make more efficient its newly acquired asset. They added that Nippon Steel, like many foreign investors in the U.S., would undermine the company’s union, noting that the Japanese company first expressed interest in purchasing only U.S. Steel’s nonunion operations. In the most feverish claims, they argued that Japan could not be trusted to continue production in a crisis of a product that is critical to the defense industry.

To counter those changes, Nippon Steel promised no layoffs and no plant closings for at least two years and pledged to invest money into key U.S. Steel facilities. It consented to jurisdiction in U.S. courts if disputes arose.

The national security argument was challenged on two grounds. First, U.S. Steel has no defense contracts. More generally, there is former Secretary of Defense James Mattis’s remark when former President Donald Trump first imposed tariffs on steel and aluminum imports that just 3% of U.S. production of those items is for the defense industry.

Second, and more importantly, Japan is an ally of the U.S. In fact, we are told regularly that we are the U.S.’s most important partner in the Indo-Pacific. The idea that a major Japanese company, as a result of deliberate decisions by its management, could pose a national security risk to the U.S. renders those statements, reaffirmed every week by some American official somewhere in the world, meaningless. If serious, then the very notion of an alliance has been emptied of all significance.

A CFIUS review is intended to provide a definitive answer to those national security concerns. The committee, chaired by the Treasury Department, has nine members. Reportedly, those directly concerned with national security — the Departments of State and Defense, and to a lesser extent, the Treasury — acknowledge that the deal could result in lower domestic steel production which could constitute a national security risk. Nevertheless, they are prepared to let the deal go ahead with some mitigation measures; those include appointing U.S. citizens to top management and board of directors positions in the new company.

Opposition to the deal has reportedly been headed by U.S. Trade Representative Katherine Tai. She is said to be consumed with the domestic political consequences of the deal. The headquarters of U.S. Steel are in Pennsylvania, a battleground state in U.S. elections. Blocking the purchase was supposed to shore up union support for President Biden and Democrats. If that was the thinking, it was misguided. Trump won the state, besting Kamala Harris by 120,000 votes in the November ballot.

Her obstinacy meant that CFIUS’s Dec. 23 deadline to send a recommendation to Biden passed without agreement; the president now has 15 days to make his own decision. He is on the record as opposing the deal, with officials saying that rejection is “not whether but when.” (Biden could, also extend the deadline, to let Trump make the decision when he takes office. That would not change the outcome. Trump has said that he too opposes the deal and would overturn a decision to let it proceed if Biden had done so.)

Nippon Steel has not given up. It continues to lobby U.S. officials and steelworkers, insisting that the deal would “grow U.S. Steel, protect American jobs and strengthen the entire steel industry.” Alternatively, it could sue the U.S. government to fight a negative decision. The odds that the suit would succeed are very slim, however.

It’s worth wondering whether Japan’s political weakness contributed to this outcome. The deal was announced while Fumio Kishida was prime minister and the U.S. debate occurred as he prepared to leave office, his influence and status at an ebb. His replacement, Prime Minister Shigeru Ishiba, reportedly urged Biden to back the deal when they met at the Group of 20 summit in Lima, Peru, last month. While domestic political considerations would always prevail in a situation like this, a powerful and credible foreign advocate might have been able to influence Biden’s thinking. Neither Kishida at the end of his term, nor Ishiba today, is that advocate.

That thought exercise does not change the most pernicious and unsettling effects of this episode. The foundation of U.S. and Japanese national security policy is the strength of their alliance and the unbreakable bonds they share. They are united by values, interests, objectives and concerns. It is incomprehensible then that the CFIUS this week declared Japan to also be a potential national security threat. That is true only in the most abstract of ways and, when based on reasoning, is divorced from all practical considerations.

If an adversary of either country were to make such a declaration, both Tokyo and Washington would dismiss it out of hand as a laughable attempt to divide two inalienable partners. Trust has been greatly damaged and it is unclear what will be required to undo the harm. It is difficult to imagine a greater blow to the alliance — but now Japan must wonder if such a shock could be in its future.