Blocking The Nippon-US Steel Deal Would Undermine National Security

 

(Originally published at Forbes.)

After months of signaling disapproval of Nippon Steel’s $14.9 billion bid to acquire U.S. Steel, President Biden deferred his decision on the fate of that deal until after the election. Hopefully that buys him time to appreciate the enormous economic and geopolitical costs of blocking that transaction on national security grounds. An honest assessment will find the proposed acquisition does not threaten national security, but the president’s rejection of the deal definitely would.

One need not be hawkishly predisposed to notice that threats to U.S. critical infrastructure and our commercial and strategic interests are proliferating. It should also be obvious that those threats do not come from Japan, but predominantly from China, Russia, Iran, and North Korea. The governments in those countries are intent on undermining U.S. power and influence, and the institutions and alliances that reinforce that power and influence. It would be a colossal mistake to assist our adversaries in their efforts by carelessly poisoning our own relationship with Japan.

There is no national security threat from the proposed steel deal. There is a long-struggling, iconic U.S. steel company that made a series of bad investment decisions over the years, fell behind other domestic steel producers in terms of productivity, profitability, and the capacity to innovate and meet increasingly rigorous environmental standards. Once the world’s largest steel producer, U.S. Steel today ranks 24th in terms of production volume.

Fortunately for U.S. Steel’s shareholders and employees, there is a knight in shining armor. The world’s fourth largest producer, Nippon Steel, is offering a significant premium over market value to purchase the struggling company in order to produce, finish, and sell steel in the U.S. market, employing U.S. labor, paying U.S. taxes, and making capital improvements and greenfield investments in a variety of U.S. states.

These investments will generate business activity up and down domestic supply chains and reduce input costs for U.S. steel-consuming industries. Meanwhile, Nippon’s successful business practices, technological knowhow, and green steel production capabilities will be adapted to the domestic environment for the benefit of the U.S. economy. What is so threatening about all that?

Bogus national security rationalizations for economic interventions have become more common since 2017, when the Trump administration imposed across-the-board tariffs on imported steel and aluminum. The administration justified those trade barriers as imperative to national security because – it claimed – the U.S. economy had become too reliant on imported steel and aluminum and their solution was to incentivize domestic production by raising the cost of imports.

The like-minded Biden administration adopted that logic when it continued the tariffs it inherited, so it should be applauding Nippon’s offer. Instead, the deal has been under scrutiny as a possible risk to national security. Responsibility for such determinations falls to the Committee on Foreign Investment in the United States (CFIUS), which is composed of nine cabinet secretaries and chaired by the Treasury Secretary and was established by executive order in the 1970s before being codified as law under the Defense Production Act in 1988.

The transactions that typically come to the attention of CFIUS are those with narrow sets of concerns about protecting the defense industrial base and preventing adversaries or malicious actors from gaining control of critical infrastructure or accessing advanced technology with military applications. For example, in 2007, when the September 11th terrorist attacks were fresh in mind, the statute was strengthened after security concerns were raised when a company associated with a Middle Eastern country tried to purchase and operate certain port services in New York City. The law was revised again in 2018 amid worsening relations with China in order to counter Beijing’s evolving techniques for acquiring critical U.S. technologies.

A CFIUS review is a blunt instrument for a transaction as obviously benign as a close ally’s proposed investment in the domestic steel industry. Japan is a major trading partner and steadfast ally of the United States in a world where U.S. commitment to the rules-based trading system and its willingness to continue its traditional global leadership role are increasingly in doubt.

Blocking the deal would reinforce perceptions that the United States is turning inward and trigger contingency plans. It would further weaken incentives abroad to continue to honor the rules and maintain open markets. It would undermine already eroding trust in U.S. leadership. And it would invite discriminatory treatment of U.S. companies and investments abroad. As the world’s largest outbound foreign investor, its top destination for inbound investment, and a major importer and exporter, the United States (and its businesses) has much to lose economically.

Most concerning, that loss of trust would frustrate US-led efforts to counter China’s predatory, mercantilist practices by discouraging Japan and other allies in Asia from diversifying critical supply chains away from China’s coercive influence. Indeed, Washington may find that after several years of subtly (and not so subtly) pressuring third countries into choosing between the United States and China, it doesn’t like the choices they made.

Opposition to this steel industry transaction has nothing to do with national security and everything to do with domestic politics. Those fleeting politics put long-standing U.S. alliances and U.S. security at risk. Let’s hope the Biden administration connects these dots and comes to its senses.