Nippon Steel’s takeover of US Steel would serve US interests – The Diplomat

Since news of the sale of US Steel to Japan’s Nippon Steel Company (NSC) broke in December 2023, the deal, which is still ongoing, has stirred up a fair amount of controversy. Among the critics was none other than President Joe Biden, who said in a statement that US Steel “has been an iconic American steel company for more than a century, and it is important that it remains an American steel company, domestically owned and operated.” At first glance, Biden’s reaction is understandable, but it misses the potential benefits of Washington’s strategy in the Indo-Pacific.

In addition to President Biden’s opposition, prominent members of Congress, namely Senators J.D. Vance (R-OH), Josh Hawley (R-MO), and Marco Rubio (R-FL), opposed the deal, sending a letter to Treasury Secretary Janet Yellen stating that the sale “has catastrophic consequences for the United States’ industrial base.”

But U.S. Steel has long been inefficient and uncompetitive internationally. As Scott Lincicome of the Cato Institute points out, the company has struggled with mismanagement and stagnation for decades, employing just 20,000 people, fewer than the number of manufacturing jobs the U.S. economy gained in November 2023 alone. While more protectionist policies and government intervention won’t save U.S. Steel, NSC is poised to make significant improvements to its manufacturing processes. The company now has a global crude steel capacity of about 66 million tons, up from the 22.4 million tons U.S. Steel produced in 2022. In addition, NSC has pledged not to outsource and will honor existing contracts.

Moreover, in a recent interview with Semafor, a Nippon Steel executive explained that blocking his company’s takeover of US Steel would be a “nightmare” for unionized workers. “The biggest risk in the steel industry today is oversupply from China,” he said. A leaner, more financially efficient US Steel “under US and Japanese control” would be more competitive with Beijing, he added. NSC Chairman Hashimoto Eiji further justified the deal by stating that one of the reasons for the takeover was “to create a champion of the free world in an industry dominated by China.”

The market is showing that the deal is likely headed in the right direction. In June, Cleveland Cliffs (CC), the largest producer of flat-rolled steel in North America, had its shares downgraded twice by J.P. Morgan analyst Bill Peterson. After the announcement, CC shares fell about 3 percent to $15.18 in premarket trading. The two main reasons for Peterson’s downgrade were lower steel prices and higher operating expenses, both of which have sucked cash away from shareholders. In addition to Peterson’s analysis, GLJ Research analyst Gordon Johnson downgraded Cliffs shares from Buy to Sell, citing the economic slowdown and more new steel capacity that threatens to disrupt the supply-demand balance in the industry.

Rather than criticize the sale of U.S. Steel, national security practitioners and free-market advocates should celebrate the fact that a key U.S. ally that largely shares Washington’s security concerns in the Indo-Pacific region can leverage its technological capabilities to bolster the nation’s defense production, thereby serving U.S. interests. Japan, the world’s third-largest steel producer, is an essential partner in Washington’s eventual “pivot to Asia” and its efforts to deter China’s invasion of Taiwan.

The acquisition has the potential to strengthen Japan’s defense sector in countless ways, but shipbuilding is the most visible. China has a huge advantage in shipbuilding capabilities over the United States. As a result, the U.S. Navy is seeking help from Japan and South Korea in building new warships. The U.S. Department of Defense and Japan’s Ministry of Defense have signed bilateral agreements on technology and security of supply, while Japan is significantly increasing its defense budget, focusing on shipbuilding and the like.

Japanese Prime Minister Kishida Fumio’s visit to the White House in April made Japan the first outside country to cooperate with the trilateral AUKUS framework since its inception in 2021. Japan and the United States also concluded 2023, opening another door to defense-industrial cooperation. This more open policy will allow the Japanese government to relax regulations on defense exports, enabling integrated logistics between the two allies. Crucially, Japan’s shipbuilding achievements will benefit AUKUS, which includes the United States, the United Kingdom and Australia.

Australia has also signaled that increased defense cooperation with Japan is on the table. Australian Defense Minister Richard Marles said in an interview in February that Canberra wants to “work more closely with Japan” on technological development, recognizing that the Asian country is a “place of innovation” and is “at the forefront of technology.” Despite its continued reluctance to include Japan as an AUKUS member, Tokyo could be a valuable partner for the developing Pillar 2 of the AUKUS framework.

The goal of Pillar 2 is to “develop a range of advanced capabilities to share technology and enhance interoperability” among members. Despite this, there have been suggestions to expand AUKUS Pillar 2 activities on an ad hoc basis to countries such as Japan. With a strengthened steel sector and industrial base, especially after the eventual acquisition of US Steel, Japan has the potential to contribute significantly to Pillar 2.

A strong Japanese steel industry will be crucial for Tokyo’s allies, as China’s steel industry far outshines its competitors with competitively priced materials, and rising steel demand provides a strong base for Chinese exports. There have been concerns in the past that both the United States and Europe could become dependent on China for stainless steel, given China’s dominant share of global production. So strengthened friend-shoring with Japan, a country with a history of steel industry prowess, could help its partners hedge against China.

Especially considering the name of the American steel producer, the sale of US Steel can be seen as a painful loss and a signal of the decline in the production capacity of the US industry. However, Americans should not be discouraged, because the future of the country’s steel industry is not entirely bleak. Supporting US Steel with artificial protectionist measures is doomed to failure. Instead, Americans should appreciate how the Japanese acquisition can benefit the US in the long run.