Outgoing U.S. President Joe Biden’s eleventh-hour block of the nearly $15 billion bid by Nippon Steel to purchase U.S. Steel, while long expected and now challenged in court, has dealt a blow to the U.S.-Japan alliance, could threaten the appeal of foreign investment in the United States, and makes the future of the iconic steel producer even murkier.
It’s little wonder that experts question the wisdom of Biden’s block, especially the national security justification.
So what are the ultimate implications of a move that Biden flagged last spring—a naked political maneuver when he was still running for president—and only announced in January, after his torchbearer failed to ride hostility to the deal to a victory in Pennsylvania?
In Japan, the first presidential block of a proposed Japanese acquisition of a U.S. firm, on alleged national security grounds, was seen as a slap in the face of the United States’ key ally in the Pacific. “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,” the Japan Times wrote before Biden formally blocked the bid.
Japanese Prime Minister Shigeru Ishiba called for a clear explanation of the alleged national security risk involved in Japanese ownership of a single U.S. steel company, and he hinted that Japanese firms might rethink planned investments in the United States. On Jan. 7, Ishiba met with the head of the Japanese investment company SoftBank, who had pledged to invest $100 billion in the United States over the next four years.
It’s no surprise then that U.S. Secretary of State Antony Blinken headed to Tokyo after his short trip to South Korea, making the rounds in the Japanese capital and underscoring both the health of the bilateral alliance and, more surprisingly, “the United States’ commitment to continuing to deepen our strong economic and trade relationship.” In his meetings with Japanese officials, especially his direct counterpart, Blinken heard the same complaints but stressed the importance of the U.S.-Japanese alliance at a time of rising Chinese provocations in the Asia-Pacific region.
Ultimately, as Blinken noted in his meetings, Japan is hardly likely to weaken ties with, let alone jettison, its primary security partner at a time when North Korea is emboldened, South Korea is in disarray, and China is on the prowl.
Howling editorials aside, the particulars of the blocked deal—a symbolic industry with union workers in a swing state in an election year—make its impact on the broader alliance possible to dismiss as a one-off affair. And that might also hold true for future Japanese investment in the United States, despite Ishiba’s veiled threats and vague warnings from experts in Washington.
For the last five years, Japan has been the biggest source of foreign investment in the United States, and, if President-elect Donald Trump’s tariff threats are to be taken at face value, will continue to be, because investing in U.S. manufacturing facilities is the easiest way to sidestep the impact of import taxes.
And Japan has few alternative investment destinations that are quite as attractive—certainly not China—and SoftBank’s $100 billion promise remains on the table.
“I would be hesitant to be Chicken Little in this situation,” said Sarah Bauerle Danzman, an expert on foreign investment and investment screening at Indiana University. “I think there is a risk of overlearning from this example, with its very particular circumstances. Where else will they go? China is not an alternative, and Europe has its own problems.”
The more pessimistic vision comes from the sheer political nature of the United States’ decision, coupled with the imminent change in presidential administrations.
“If you are a Japanese investor, you are going to think about this, right? So let’s hope it becomes an outlier,” said Doreen Edelman, an expert on investment and trade law at Lowenstein Sandler LLP, a U.S. law firm. The risk is that now, thanks to Biden’s block, the full politicization of what used to be a technocratic screening process leaves everyone guessing—especially after Inauguration Day on Jan. 20.
“It set the precedent for a president to now do whatever he wants, to use his discretion in a political manner, and that could end up affecting foreign direct investment,” Edelman said.
Another apparent loser from the blocked bid is U.S. Steel itself. The reason both companies were so in favor of the deal, and why both companies rushed to file lawsuits against Biden’s decision, is because it would have made both of them stronger.
Nippon Steel would have become the world’s third-biggest producer of steel, well positioned in a major market that China and its cheap floods of steel hardly affect. Additionally, a big U.S. foothold would have allowed Nippon Steel to feed the ravenous appetites of Japanese auto plants in the United States through domestic sources of steel, rather than through imports.
U.S. Steel would have received deep pockets to boost its lagging productivity, save its old legacy blast furnaces, and accelerate its transition to cleaner, more efficient mini-mills like the newest jewels in its crown, which would have enabled it to supply the energy transition with greener specialty steels—a higher-value market insulated from Chinese competition.
Without Nippon Steel as a sugar daddy, and with any renewed bid by fellow U.S. steel firm Cleveland-Cliffs unlikely (U.S. Steel rejected its first offer and has now sued it for colluding to torpedo the Japanese offer), U.S. Steel faces an uncertain future. The likeliest scenario in the short run would be redoubled attention to the cleaner, more-efficient mini-mills, which would mean a decline in overall steel production (and in union jobs, ironically).
That would be an odd result for a decision allegedly predicated on protecting U.S. national security. Biden made the ultimate call himself after the Committee on Foreign Investment in the United States (CFIUS), an interagency group led by the Treasury Department, was unable to reach a consensus on the security risks of the transaction.
But neither Nippon Steel nor U.S. Steel (nor many observers) believe the block was made on genuine national security grounds. Biden, like Trump before him, was already publicly opposed to the deal before CFIUS even began looking at the proposed transaction and had promised to block it when winning union votes in Pennsylvania seemed more important than wooing an ally. That is at the heart of the first of two legal challenges filed by the steel companies, which allege that the U.S. government never seriously addressed any questions of national security that arose from the proposed takeover.
In the past, presidential determinations of national security interest after CFIUS reviews have always prevailed, even when courts determined that the U.S. government didn’t give prospective buyers an entirely fair shake. The 2014 ruling in Ralls v. CFIUS, regarding a Chinese-owned firm tried to buy a wind farm near a U.S. Navy test range, deferred to presidential judgments of national security but said CFIUS had to at least explain what it was doing and why. This latest challenge is one that might actually have a chance.
“Since the Ralls ruling, it has been widely understood that parties are not going to get far complaining about specious national security claims, though if there were ever a case where a judge might be willing to revisit it, this might be the case,” said Bauerle Danzman, who previously advised the State Department on CFIUS transactions.
This brings us back to Trump, who was against the U.S. Steel takeover even before Biden was, in much the same way he was opposed to TikTok, a Chinese-owned social media platform, operating in the United States—until he wasn’t.
There are rumblings that Trump’s advisors see a way to turn Biden’s last-minute and much-criticized decision into an opportunity; many Republicans, such as Sen. Rand Paul, are critical of Biden’s blocking of the deal despite its apparent syntony with Trump’s stated views.
“There is going to be a new CFIUS committee coming in. So the government might decide, rather than defending those lawsuits, to have a new filing with different findings or a different mitigation plan proposed,” Edelman said, which would give the incoming administration a way to save face and the steel industry.
After Trump’s inauguration, he could potentially reverse the block and seek a new takeover deal that would ensure a stronger domestic steel industry and Japanese investment, all while taking aim at his predecessor’s decision, even if it was the same one he had vowed to make.
“The pathway to revitalizing U.S. Steel is going to be longer than it otherwise would be, but they have not given up on this transaction,” Bauerle Danzman said. “If Trump’s advisors can tell him a story about how he would be a savior by reversing this decision, he would be very happy to take that.”
The post Biden May Have Scuttled More Than Just A Steel Takeover appeared first on Foreign Policy.
