Nippon Steel almost acquisition of US Steel with Deborah Elms

In this episode of Geoeconomic Competition, Francesca Ghiretti talks with Dr. Deborah Elms, Head of Trade Policy at the Hinrich Foundation. The episode analyses the case and long adventure of Nippon Steel's acquisition of US Steel. Despite the lack of clear national security threats, the deal has been (temporarily) blocked by US President, Joe Biden. The episode analyses the importance of this case in the broader picture of how investment screening may be changing, the growing tension between national security and competitiveness and how the picture may change with the forthcoming Trump presidency.  

Link to book "Chinese investments and the economic security turn in Europe": https://bristoluniversitypress.co.uk/chinese-investments-and-the-economic-security-turn-in-europe 

Transcript

Copy Transcript Copied

SPEAKER_00 0:00

Happy New Year, everyone. I hope you spent great holidays. I myself managed to catch the flu again, and I'm only now coming out of it, so please bear with me if my voice is not the best. But I could not wait any longer to record this episode. Now, the episode is about Nippon Steel and US Steel deal. And so it's somewhat about FDI screening, which is why I take the opportunity to let you know that my book, Chinese Investments and the Economic Security Turn in Europe, published with Bristol University Press, is now out and it can be purchased. Now, on January 3rd, US President Joe Biden blocked the acquisition of US Steel by Nippon Steel. And the first time this deal was announced was at the end of 2023. Afterwards, it was placed under CIFUS review. CFUS, as many of you know, is the Committee on Foreign Investments in the United States. And, well, as the name suggests, it is in charge of vetting inbound investments in the United States, usually to make sure they don't pose threats to national security. In the case of Nippon Steel's acquisition of US Steel, CIFUS review was inconclusive, which is why Biden took an executive decision to block the transaction. And that decision spurred the two companies to sue the US government. And now Biden has delayed the order to end the deal until the end, sorry, until June 2025. The fact that leaving the final decision to the next president, Donald Trump. This is Geoeconomic Competition. I'm Francesca Kiretti, your host, and in every episode I dive into the intricacies of geoeconomics with other experts. Today, to unpack the story and implications, especially for partners of the US Steel Nippon Steel Adventure, I am hosting Deborah Elms, Head of Trade Policy at the Einrich Foundation. Welcome, Deborah. Thank you very much, it's an honor to be here. What happened with this acquisition that is making everyone follow it and talk about it?

SPEAKER_02 2:16

I think there's two reasons. So one has to do with the deal itself, which is sort of an interesting story all on its own. But then much more important in my view is the larger implication and the questions of whether this particular story is representative of the kinds of stories that we're going to see more. And so I think it's both an interesting story on its own, but also those sort of wider implications have made this a story that people outside of SPEL, not interested in competition, not that keen on overseas investments, et cetera, are suddenly paying attention to.

SPEAKER_00 2:57

This has been an unusually long and unusual process for an acquisition, and it has created a lot of uncertainties around the process of investment screening in the United States, if ultimately the president can take the decision without any proper evidence that a national security risk exists in a transaction, an investment transaction. So let's start from these. Why would the acquisition of a steel manufacturing company pose a national security threat or even raise the national security question?

SPEAKER_02 3:35

Well, if we if we go back, this is actually an acquisition that was discussed earlier than 2024. So this has been in the process of happening since formally since 2023. So it's it's it's several years in the making. And the the genesis for the uh the bid to buy US steel is that the US steel manufacturing companies uh um have struggled. Uh, I think it's fair to say, at least have struggled for a variety of reasons, not the least of which is that they are less competitive. They are often using especially older technology. They are producing steel that ends up being quite expensive as a result, especially of the technology plus the amount of labor and the cost of labor in the United States. And so US steel has been losing money for quite a long period of time. And the question was: could they be acquired by someone? And if so, would that potential acquirer come in with more technology and more uh investment to rebuild US steel into something that, you know, would be profitable? And especially from the perspective of US Steel, would be eligible for a lot of government grants in the United States that have to stay in the US for a variety of reasons, especially government procurement contracts and so forth that have been written over the last couple of years to ensure that American companies have a leg up in these kinds of awards. So US Steel, fairly uncompetitive, puts itself up for sale, a couple of bids come in, but the by far the strongest bid came in from Nippon Steel, which is one of the U one of Japan's largest and most successful steel companies who offered an frankly amazing price with a whole lot of guarantees attached to it. And so it looks like both Nippon Steel and US Steel thought this deal would go through without much of a problem because they were offering, again, a price well beyond any other bidder, promising to keep jobs, promising to make investments, etc. And yet the deal got blocked. It got blocked very early on, and then it got put into the Cipheus, the the Cipheus review, which is where the various US government agencies have to look at uh a potential inbound investment and see whether the coaches any risks to the United States. The Cipheus process was extremely long and drawn out, in part because, as you saw from the final, there was a strong difference of opinion on whether or not this potential acquisition did represent a threat. And if it represented a threat, what kind of a threat? So this deal that looked from a commercial perspective like a relatively easy thing got tied up in a lot of other issues, not the least of which was domestic US politics and then larger geopolitics uh beyond the water's edge. So if I talk for just a second about the domestic politics that matter for US steel in particular, I think part of the problem here, literally, is that we have two companies called U.S. Steel and Nifon or Japan Steel. If they had been called, I don't know, ACMI Steel and Beta Steel, we might not have this debate. But because it was called U.S. Steel and located in Pennsylvania, a key swing state for the U.S. election, and because the U.S. was heading into a very contested election, the acquisition of U.S. steel by a foreign company, forget who owned it, but a foreign company became a political football. And as a result, there were a lot of people who would otherwise not have paid any attention, who were providing advice and input one way or the other. There was a lot of interest in whether or not the unionized workers of US Steel would support this deal or not support this deal. And that mattered for politics and for the election. The Biden administration and Biden himself has very proudly claimed to be the leader of labor for a very long time. And so he felt that his own reputation was on the line here with this particular deal, especially when the union came out against this particular acquisition. And so that made what was already challenging a much more challenging uh domestic problem. And the the drawn-out nature of the Scytheist process in part was designed to get through the election and see what happened in case that made a difference. So who got elected might have made a difference. Um in the end, it may or may not. We actually still don't know whether the election and the scytheist ruling is going to make a difference on the potential acquisition of US deal by Nippon Steel.

SPEAKER_00 8:32

And don't know if that would have made a lot of political sense had Biden blocked the deal ahead of the election. Um, stopping a foreign national champion to acquire a local former national champion works very well politically. But why blocking it after his party lost the elections?

SPEAKER_02 8:52

Well, that is really the the reason, again, why this is in the the uh public eye so much is because when the Cypheist group got together, the Cypheist group, again, is all the different agencies in Washington. When they got together and they looked at this, um the the key agency in this instance, especially the Defense Department with the Pentagon, the Treasury Department, and the State Department, they all looked at this and said, there is no risk to the United States from the acquisition of this particular company by Meepong Steel, because very little U.S. steel is used by the defense industry. And the defense industry's uh participation in U.S. steel is less than 3%. And so you US defense is covered 97% by other steel producers. So it's this is such a small amount and it's not specialized, it's not something that no one else could replicate. So Defense Department said not a security issue. The Treasury Department said not an issue because it's Japan and we feel pretty confident that they will follow through with their um planned approach. The State Department said this is a friend. Japan is a friend, long-term historical ally. We really don't, as the United States, have a lot more friends who are friendlier than Japan, frankly. So, you know, don't block it on the count of, you know, who your friends and enemies are. And so actually, when you look at who objected, it appears that most of the objections of the Cytheus Committee boiled down to the U.S. trade representative, Catherine Ty, who, again, puzzling, why it is that Catherine Ty decided that this was going to be uh the line in the sand that she was not going to cross. In part, it seems to be that she really, either personally or because of her job, believed she was defending Biden's personal interest, that Biden wanted, for again, for the labor reason, wanted US deal to remain in American hands, and that for labor reasons, she should object. Um, and so she objected with a split decision in Scythias. The president could have said there is no clear national security threat. I will allow the sale to go through, but he did not. He, in fact, said, no, I think this deal should be blocked for national security reasons. Now that's very puzzling, as you pointed out, partly because, of course, the election is over, and partly because the people who care about national defense said this is not a defense issue. So now we have the sort of puzzling why did Biden block this now? And it appears that if I were to guess, I would say Biden has a very strong personal connection to this particular case. And he did not want to leave office without doing what he could to keep the U.S. Steel Company in Pennsylvania in American hands. And so he therefore said no to this opposition, even though the timing politically makes no difference. He's obviously reading office, he's not going to run again. Uh his party just lost, uh, including losing Pennsylvania, by the way. So this didn't actually secure the votes for them in Pennsylvania either. Um, and that's left us with the sort of again, the sort of interesting puzzle of why, why now? But also left us with a much more fascinating, from my perspective, longer-term challenge, which is does this mean that friends cannot invest in the United States? Is this all friends? Just some friends? Is it good friends, but maybe not such good friends? Well, like, what does this say about investment in the United States if you are blocking a Japanese company with, again, very deep pockets and very strong commitment to doing the kinds of things you asked them to do? Can anyone invest in the United States? And is this policy of saying no on national security grounds going to continue in the next Trump administration? And so that for me is the much more interesting longer-term problem that this case sort of flags.

SPEAKER_00 13:07

We're going to come to what may happen in the next few months in a moment. But first, let's discuss the uncertainty this creates in investors. This transaction triggers the question of whether certain investments are simply off-limits. They're becoming off-limits in the United States, regardless of whether the investor comes from a partner and whether the offer brings any positive spillovers. And if so, what are these? Like companies with the US in their name, renowned national champions? And most importantly, it raises the question of alternatives. Can US still stay and prosper in American hands? Does it have an American acquirer? And if so, how does that offer compare to that of Nippon Steel? In other words, how much nationalism may hinder prosperity in the United States?

SPEAKER_02 14:04

I think that is a great question. Now, there is another bid that was out there before from uh from Cleveland Steel, um, which was less was a less attractive offer and it involves a lot less investment and a lot less upgrading of technology to make U.S. steel competitive in the longer run. But it's an American company. And so there is a discussion, and in fact, both the management of U.S. Steel and Nippon Steel have filed lawsuits against a variety of actors in this case to argue that there appears to be some unfair practices. We could get into the legal terms, but that's not my area. So there's some unfair practices that have interfered with what should have been a pretty straightforward process in which Nippon Steel and U.S. Steel, the management at U.S. Steel, did all the things they were supposed to do. They filed all the right paperwork, they met all the timelines, they did all the things they were supposed to do, and yet they were denied this acquisition. And so again, the question now is if you're if you're not going to allow a foreign company to buy US steel, does that then become the default is Cleveland Steel or another US steel company? And as you just pointed out, is that actually helpful in the end? Or do you have you just taken a company that you've just argued is national security critical and turned it into an uncompetitive long problem that, you know, is going to remain uncompetitive but national security vital? And that really raises a lot of questions.

SPEAKER_00 15:40

Exactly. We talked a lot about US domestic politics, but in the global context, to production from China and China's global market shares, plus the ongoing competition between the US and China, well, considering all of these, one would think competitiveness would be the priority number one. And if collaboration with partners brings more competitiveness to the United States, then it should be extremely welcomed. But we're seeing everywhere, I don't know if you agree, not only in the US, we're seeing a struggle between the desire for more competitiveness and a nationalistic drive to protect national champions from what is foreign, no matter what. Do you agree? And if so, do you see this trend continuing in 2025?

SPEAKER_02 16:30

I think it's a fascinating question. And in fact, I've got this piece coming out uh with the Heinrich Foundation in in this month of January on who is us. And it was prompted in part by the this particular case, but I think it's a lot of other things as well, which is what is an American company? How American do you have to be? Is it ownership? Is it investment? Is it production location? Is it board of directors? What what is it that makes a company American? What is it that makes it Japanese? What is it that makes it Chinese? And this becomes really critical as we go forward and we're starting to look at not just the manufacturing of a specific thing at a specific plant, which is hard enough. But when you start looking at globally competitive and connected firms like automobile, you know, who is an what is an American company in autos? What's an American, what's a Chinese company in autos? What is it if you're looking at hardware and software now? So now we're looking at not just the production, but also all of the software, the data flows, etc. We need to figure this out because you can't possibly argue that national security will either help or hinder firms from going forward if you can't be much more clear about what constitutes an actual national security threat. What is it just any degree of foreignness? Is it again, is it some level of ownership, 100% ownership? Is it who owes it? It because you could I could imagine, I mean, I, you know, I could imagine some kind of hostile takeover with a bunch of people with American passports, let's say. And their objective is to ultimately take this company, whatever the company is, offshore. Now, they're still American. So, you know, this gets super complicated very quickly. And we're we're reaching the point now, especially um given the general hyperventilation over geopolitics and the mingling of national security with economic issues, such that we actually have to think about these questions in ways that we never did before. Because if you don't fix them, if you can't figure out for sure, this is an American company, this is a Japanese company, these things are allowed, these things are not allowed, then it's gonna be very difficult to figure out how business goes forward. And we're going to snarl up whatever kind of FIPIAS-type process we have. It's not going to do a good job of capturing the challenge. It's going to let through some investments, presumably inbound and even outbound, that otherwise should be encouraged. It gets super complicated. And I think, again, that's why there's so much focus on this particular case of the US steel nippon steel, because it gives you a window into some of those issues. And in particular, for this case, the steel case, if this is an alleged national security threat and you can't clearly demonstrate what it is about this that creates a national security threat, that's deeply problematic because it suggests that anything is a national security threat, at which point nothing is a national security threat. And that is, again, very problematic. So how do we define who who is us, but then also what is national security? What are the threats we're willing to accept? What are the threats we're not willing to accept? It gets super complicated.

SPEAKER_00 19:57

It is, especially because it injects a higher degree of arbitrarity into the economic relations compared to past years. 2024 has seen a real acceleration there. At the same time, it deprives the system of even minimum levels of predictability and that is needed for businesses to be able to operate. Now, I'm not one of those who argues that the state is responsible to create a fully predictable system for businesses. Unpredictability is part of the business game, but here we're taking away even the most fundamental information needed to operate. If an individual can take a decision without any basis or evidence, then how can business work? And here we come to the point of partners and friends that you raised. I've had many conversations around the idea of what is an economic ally or an economic friend, and we've largely been unable to find an acceptable answer. So very much looking forward to your article. So now I think I've departed a little bit from the main scope of this episode. Let me bring back to, let me refocus a little bit. Now that US Steel and Nippon Steel have sued the US government, what can we expect next?

SPEAKER_02 21:17

Well, I think there are among some, there is a hope that as Trump gets inaugurated here in a very short amount of time, that he might be motivated to make a different decision and that he could potentially revisit the case or revisit the question. But that's I think it's possible, certainly. However, he has come out on record saying that he, Donald Trump, also disagrees with allowing Nippon Steel to buy up US steel. So it's not obvious that a different in this case, the difference between Biden and Trump is going to result in a change decision on US steel and Nippon Steel. I mean, my own guess, again, this is just a pure guess. My own guess would be that US steel simply ultimately goes out of business because it's uncompetitive. It does not have the money to invest on its own. It is unlikely to find a domestic partner who would invest like Nepon Steel was prepared to do. And it will ultimately go out of business or, you know, merge with some other company, but ultimately be the furnaces that they have, for example, will shut down. And so, in a keep the colossal irony, if that happens, you will have allowed objections over worker jobs to torpedo a deal that would have maintained worker jobs in favor of no jobs for workers. And so again, like it it's, I think another reason why people have been following this so carefully is that if that story comes true, the ironies are, you know, uh unbelievable. And you you you do have to start questioning like, again, what is politics for? What are these processes supposed to secure? How are we going to make competitive firms? How do we allow innovation to take place if we're going to continue to have loss-making firms and acquisition is blocked? I mean, there's so many questions that come out of this. Um, and again, lots of fascinating insights that come from this. And I assume that this particular story will end up being, you know, the subject of many PhD dissertations in the future.

SPEAKER_00 23:30

Yeah, I wish I could rewrite my PhD. It was on the securitization of FDI screening. And this would have been a great case to discuss in it, especially because for a while now I have been thinking whether we've been over-securitizing the economy. What I argue in my book, for example, is that investments tend to be sort of the canary in the mind of economic securitization. So looking at this case, I'm sort of wondering if the same applies to over-securitization. Is US still and in Nippon still a case of a cannery in the mind of over-securitization? The debate around economic security is a good one and it is still much needed. But we seem to have lost sight of what the end goals are. If economic security does not bring more security, prosperity, or social stability, then what is economic security for? Or in this case, what are we screening investments for? That is what makes the case, this case, so interesting. It shows the pitfalls of the current debate around economic security. So, Deborah, coming to the last question, what are a couple of things to watch out for in the next few months?

SPEAKER_02 24:50

Well, that's a very long list, but I would I would start with one that goes right off of your last comment, which is it is unclear as we transition to Trump too, how much national security will be part of the conversation. It could be much more pronounced, but it may not be, because Trump himself is, I think, less interested in national security uh than others. He's much more interested in using different kinds of tools. He may, like Biden did, claim national security, but that's sort of different from trying to really think about what is a security risk. And so this sort of small yard high fence analogy that the Biden administration has been using is out. But the question is, is it going to be replaced by either a new phrase, same concept, new phrase, or simply out? Uh and I think we we will have to watch and see how the incoming Trump administration wants to define the security economics nexus. And it it it may be, I set, I suspect it will be quite different. Whatever it is that the Trump administration does, it might be quite different. I think it's going to be more China, potentially more China focused and a little less focused on others. Although, again, you never know. I mean, all of a sudden, you know, we've got a fight going on over Greenland and Canada. So, you know, anything is possible in the Trump 2.0 administration. But uh, but I would say that this who is us question is becoming more pertinent in questions around investment. What are acceptable inbound investment? And big one coming up will be is there any level of inbound Chinese investment? Again, however we define Chinese, inbound Chinese investment that would be acceptable to the Trump administration. Because I could make an argument that Trump himself would be agnostic about whether or not the investment with Chinese, Filipino, or anybody else, as long as they're making jobs in the United States. On the other hand, there will be an awful lot of people in Washington who would say, no, no, no, Chinese investment is simply out of bounds. We are not allowing Chinese companies to come in, no matter how many jobs they say they're going to uh create. So I think this sort of where are we gonna go with inbound investment is an interesting one. And where are we gonna go with outbound investment? Equally interesting. If there's some sort of, you know, you can only as a as an American company, again, I don't know how we define it, but as an American company, you may not invest in the following sectors, industries, firms, countries. You know, this is again, it's gonna get super complicated. And I think the intention, or what appears to me, the intention of some in the incoming Trump administration is to slice and dice this even more narrowly. So it's not just about, you know, investment in China, but it could be investment in Vietnam that may also have Chinese investment in Vietnam. And that is something that we're all gonna have to watch because that gets, again, extraordinarily complicated. And I think the only people who are really gonna do well in this next administration are folks like lawyers, the trade compliance people, um, the due diligence and economic sanctions folks are doing a roaring business already. So I can imagine that they will have their dance cards full for the next four years. Uh and for businesses, your average business that's just trying to make a thing or sell a service is going to have increasing difficulties ahead because the complexity, the nuances, the uncertainty is going to paralyze a lot of firms from doing what they otherwise would have done.

SPEAKER_01 28:22

Thank you so much for taking the time to talk to us and to talk about this very fascinating case. I know you come from a long fly and at a very different time uh sorry, time zone than I am in. So I'm especially grateful to you, Deborah. Thank you so much. Thank you very much.