The prospect that President Biden is ready to block a merger between Nippon Steel and U.S. Steel on national security grounds is stirring discontent in Tokyo, where some officials view the action as casting Japan, a key U.S. ally, as a threat.
Japanese officials have, in public, largely kept their distance from the deal since it was proposed last year. But now behind closed doors, some are bristling at reports that Mr. Biden intends to sink Japan’s $15 billion acquisition of U.S. Steel.
Japan’s economy ministry has sought meetings with and conveyed concerns to U.S. officials after news emerged of Mr. Biden’s intention to take executive action to stop the merger, said two people with knowledge of the outreach who spoke on condition of anonymity because they were not authorized to speak publicly.
The political storm risks straining relations at a time when Tokyo and Washington are working to deepen ties to counterbalance China’s growing economic and military influence in Asia. On the economic front, the United States has been pressuring Japan to impose additional restrictions on the ability of its firms to sell advanced chip-making tools to China.
“The U.S. has pushed Japan to not only follow but take more initiative in promoting rules-based order in the Pacific, and in recent years it has really stepped up,” said William Chou, the deputy director of the Hudson Institute’s Japan Chair.
If American politicians move to scuttle a close ally’s planned merger, “Japan may move to take more of a back seat, letting the U.S. take the lead and following only when it is clear on what the American temperature of the day is,” he said. “That will be a great loss.”
Even as Nippon Steel’s bid has caused some frictions between the United States and Japan, elsewhere big companies from both countries continue to collaborate on technology development.
The United States and Japan are “on very solid ground,” and they will continue to be top investors in each other, Rahm Emanuel, the U.S. ambassador to Japan, said in a statement. “The U.S.-Japan relationship is deeper, richer, and stronger than any single commercial transaction,” he said.
Japan’s economy ministry did not immediately respond to a request for comment.
Last year, when U.S. Steel put itself up for sale, Nippon Steel and Japanese officials saw an opportunity. The United States is a higher-profit market for steel makers because Washington has imposed tariffs that ward off low-cost Chinese steel.
The Biden administration has also worked to forge closer ties with Japan and other allies in an attempt to contain China and Russia.
After the steel merger was announced jointly by both companies last December, Nippon Steel cut ties with its joint-venture partner in China and pitched the combined U.S. Steel-Nippon Steel entity as a champion of free-market economies capable of taking on China, which produces more than half of the world’s steel.
Officials in Tokyo have been taken aback by the backlash in the United States.
Some politicians from both countries as well as industry analysts said Nippon Steel was essentially extending a lifeline to U.S. Steel, a one-time pillar of the American economy that has fallen behind rivals and lost market share. Nippon Steel has promised to invest billions of dollars in U.S. Steel facilities.
U.S. Steel and Nippon Steel “entered into this deal based on the idea that they could create a win-win relationship,” Akira Amari, a senior official in Japan’s ruling party, said in a recent interview. “U.S. Steel would be able to absorb Nippon Steel’s technologies, and its competitive edge would be strengthened.”
Japan “understands that U.S. steel is a symbol of America,” Mr. Amari said. “But discussions should be pursued in a calm environment about what kind of solutions Nippon Steel has to offer,” he said.
Analysts, politicians, business leaders and lawyers involved in cross-border deals have raised concerns that a decision by Washington to block the deal on national security grounds could make some foreign companies think twice about investing in the United States.
Japan is the largest source of foreign direct investment in the United States. After years of building up profits because of a weakened yen, Japanese companies have become more interested in making deals and looked to the United States in particular for potential opportunities.
In a statement on Friday, Japan’s chief business lobby, Keidanren, urged U.S. regulators to treat the deal with “utmost integrity and fairness” given that Nippon Steel’s planned acquisition had “garnered significant interest among Japanese companies, especially those considering investing in the United States.”
Japan’s Digital Transformation Minister, Kono Taro, who is in the running to become Japan’s next prime minister, said this week that U.S. government intervention in the Nippon Steel-U.S. Steel deal was not appropriate.
The most vocal opponents of the U.S. Steel acquisition are leaders of the United Steelworkers union, which is based in Pennsylvania. Recent public polling shows that Pennsylvania is essentially a tossup in the presidential contest between Vice President Kamala Harris and former President Donald J. Trump, making it critical to win the support of the steelworkers’ union.
Leaders of the United Steelworkers union have said they are unhappy with the terms offered to them by Nippon Steel and have argued that a foreign corporation’s purchase of an American steel company would endanger national security. Some in Japan contest those claims.
“It is very difficult to imagine Nippon Steel’s acquisition of U.S. Steel posing a threat,” said Takahide Kiuchi, an executive economist at Nomura Research Institute. “The U.S. government’s stance on blocking investments from Japan, an ally, could negatively impact the trust between Japan and the U.S., potentially leaving a lasting future problem,” he said.
In the United States, the Committee on Foreign Investment in the United States has been scrutinizing the bid over potential risks. Although the panel has raised concerns about the agreement with U.S. Steel, a White House official said this week that CFIUS had yet to make a recommendation about the transaction.
Nick Wall, a Tokyo partner specializing in mergers and acquisitions at the law firm A&O Shearman, said the steel merger engendered particularly complicated political calculations. Still, he added, its demise could send worrying signals.
“Sophisticated bidders will see it for what it is, a unique situation and very unfortunate timing,” Mr. Wall said. “But overall the message it sends about the U.S.’s openness is not good,” he said.
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