WASHINGTON, DC – Late last year, Japan’s Nippon Steel announced that it had reached a deal to acquire US Steel Corporation for $14.1 billion – a move that would make it the world’s second-largest steel producer by capacity. Nippon Steel agreed to retain US Steel’s name, keep its corporate headquarters in Pittsburgh, Pennsylvania, honor all contracts with union-represented workers, and preserve its manufacturing facilities, which will get a technological upgrade to raise productivity closer to Japanese levels. And Nippon Steel has pledged not to move existing production facilities or jobs overseas. It is a good deal.
The announcement, however, was met with a powerful bipartisan political backlash. Republican Senator J.D. Vance said the deal amounted to “auctioning off” a “critical piece of America’s defense industrial base” to foreigners “for cash.” Democratic Senator Joe Manchin called it a “direct threat” to US national security. Democratic Senator Sherrod Brown urged US President Joe Biden to “explore all options to protect the American steel industry, American steelworkers, and our national and economic security.”
The White House has now called for “serious scrutiny” of the deal, which will include a review by the US Committee on Foreign Investment in the United States (CFIUS) to determine whether it is compatible with US security interests. The United Steelworkers union has also come out against the acquisition.
All this opposition is practically incomprehensible – and not just because the United Steelworkers have assurances that employees will be retained, and union contracts honored. In fact, political leaders should be welcoming the agreement, which promises far-reaching benefits for America’s economy and its workers, and possibly even for US foreign policy and security.
Biden has established three key economic-policy objectives: increasing the number of “good jobs,” partly by encouraging foreign direct investment; strengthening US manufacturing and local production; and accelerating the adoption of modern technology. Biden has also sought to shift more trade, especially imports of critical goods, toward US allies – so-called friend-shoring. The steel merger will advance all of these goals, while potentially reinforcing ties with a key US ally.
To understand why, let us start with some background. When World War II ended, Japanese steel companies were far less productive than their American counterparts, including US Steel – then an icon of American industrialization. But, over the ensuing decades, Japan’s steel industry made rapid progress, with productivity surpassing that of the US steel industry in the 1970s. Unable to compete on cost, American producers have long sought – and usually received – tariff protection. But not even protectionism could close the gap: American steel is among the world’s most expensive.
Over the years, employment in the US steel industry has plummeted, from over 180,000 in 1987-91 to 87,100 in 2010 and 83,200 in 2022. But this cannot be blamed on foreign competition; after all, US steel production and consumption increased over this period. Instead, declining employment is largely the result of technology-enabled productivity gains: it now takes just 1.5 man-hours to produce a ton of steel in the US, compared to 10.1 man-hours in the 1980s. Holding employment steady amid such large productivity improvements would have required steel consumption to rise more than twofold.
One key innovation – which Nippon Steel has embraced – was the electric-arc furnace, which uses scrap as raw material, relies on electricity for fuel, can be turned off when not needed, and requires a limited amount of labor. But US Steel remains more reliant on higher-cost and older, more labor-intensive blast furnaces, which use iron ore and coal.
As a result, US Steel’s costs are particularly high, even compared to other American producers. When the acquisition was announced, US Steel had been losing market share nationally and globally almost continuously since the 1970s – falling from eighth place in 2008 to 27th place in 2022 – and was the least profitable of the large US steel manufacturers.
US Steel’s acquisition by Nippon Steel – and the associated technological upgrading – should reverse this decline. The terms of the deal mean that the acquisition will most likely result in higher productivity in the US steel industry. As the prices of US steel fall, the incentive to import steel will decline, and American manufacturers of goods like refrigerators and automobiles will be able to reduce costs, thereby becoming more competitive. All of this will strengthen America’s manufacturing sector and technological base, and ensure the continued provision – and possible creation – of “good jobs” in the US.
Not many big corporate deals advance all three of Biden’s biggest economic-policy objectives. All Americans – including steel workers – should be hailing this one, which represents a real opportunity to reverse US Steel’s fortunes and improve the American steel industry’s prospects. The alternative is bleak: if the acquisition is not approved, the US steel industry will keep depending on protective tariffs, and other US industries will continue to lose competitiveness as they are forced to pay higher prices for steel.
Meanwhile, foreign actors will be discouraged from pursuing productive investments in the US. If a Japanese company cannot own manufacturing facilities in America – while introducing modern technology and retaining workers and plant capacity – without jeopardizing America’s national and economic security, can any foreign-owned company produce anything on US soil?
Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University.
Copyright: Project Syndicate, 2024.
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