Domestic Politics Not Security Or Economics Sabotage US Steel’s Japan Deal – Analysis

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By Anthony P D’Costa

Both outgoing President Joe Biden and President-elect Donald Trump have vowed to prevent Nippon Steel’s purchase of US Steel to protect jobs, support local economies and maintain national security. These may be worthy goals. But Nippon Steel’s offer of technology transfer, investment funds for facility upgrades and US-government veto power over any would-be capacity reduction of US Steel mean that these goals could still be met.

Nippon Steel has also pulled out of its partnership with Chinese company Baoshan Steel. While this decision was motivated by Nippon’s business logic, in the game of geopolitics, the move further cements Japan’s relationship with the United States.

The rift between the US and Japan over the proposed purchase of US Steel is emblematic of the long history of politics of the American steel industry and the evolution of global industrial production.

Pittsburgh, Pennsylvania in the 19th and early 20th centuries was the epicentre of global steel production. It housed US Steel, the world’s first billion-dollar company, established in 1901. At one point it controlled over 60 per cent of the American market. 75 years later, the American steel industry, along with auto and other heavy manufacturing industries, was in a deep crisis. The process of ‘deindustrialisation’ had begun.

The United States phased out nearly 46 million metric tons (mt) of steel capacity between 1978 and 1988, with Pittsburgh bearing a third of these losses.

By the 1980s, Nippon Steel had displaced US Steel as the largest steel producer outside the Soviet Union. In 2023, China’s Baowu Group leads global production with 131 million mt, followed by Arcelor-Mittal at 69 million mt. Nippon Steel ranks 4th with 44 million mt, while US Steel is ranked at 23 with 16 million mt.

National steel production had its moment of glory in an earlier economic structure when heavy manufacturing was the bedrock of economic growth, jobs, regional development and innovation. There was also an ideological convergence between mill owners and workers when the competition got rough, despite the historically antagonistic labour–management relations in the industry. That convergence is harder to maintain under globalisation, though geopolitics and anti-foreign provincialism periodically unite the two contending parties.

China has become the manufacturing workshop of the world, while the US still holds its technological and services sector advantage in high tech. The relative importance of steel to the economy is no longer what it was.

High tech, big tech, bio tech, electric vehicles, e-commerce, information technology, semiconductors, rockets and satellites are the new drivers of economies. Not bulk steel. While steel is relevant to national security, particularly during conflict, large global capacity and multiple producers reduce supply risks.

It is the politics of swing states in America like Pennsylvania that compel the need to hold onto the last few high-wage blue-collar industrial jobs and maintain a semblance of social harmony. These same sentiments were on display, although more keenly during the Jimmy Carter and Ronald Reagan years, when deindustrialisation was in full swing.

The 1968 Voluntary Restraint Agreements — which saw quantitative limits placed on steel imports — sought to counter alleged unfair trading practices from Japanese and Western European producers. With the collapse in the US steel market and the subsequent financial distress of several companies, the Carter administration introduced the Trigger Price Mechanism. This policy established a minimum floor price for imports to protect domestic steel producers against so called Japanese ‘dumping’.

These protectionist policies turned out to be stop-gap measures. Mill closures continued to lead to job losses, while supply shortages hit the automotive industry and raised domestic prices, compelling consumers to seek cheaper steel from abroad and foreign producers strategically shipping higher-grade steel to America. The industry lost 300,000 jobs after 1980 due to restructuring despite these attempts to protect it.

While foreign ownership raises legitimate concerns about the rationalisation of global production and net losses in output and employment, Nippon Steel already has operations in the United States. Many Japanese and domestic auto companies in the United States rely on US-based Japanese steel producers, highlighting the intersectoral links between producers and business consumers.

Unlike small developing countries, the United States also maintains significant leverage over multinational corporations. The US government under eminent domain could always resume direct control of US Steel should there be a national security scare. Besides, the US$15 billion transaction is no mean offer for US Steel, given its share price, which is considerably lower than Nippon Steel’s. Given that it was the US with its ‘free trade, free market’ slogan that ushered in globalisation, playing the victim now is bad for optics.

In the end, it is all politics, and that is not all bad if the public is to be served well. But the distinction between friend and foe and between short- and long-term outcomes must be clear. Japan is a reliable ally and the US has been a beneficiary of Japanese manufacturing and innovations, just as Japan has gained from US technological, cultural and services sectors.

A temporary reprieve by not selling US Steel is no panacea for saving American steel production. If history is any guide, it was US Steel that diversified its assets to Marathon Oil because its business was not to make steel but profits.

A more thoughtful industrial policy focused on investments in plant and equipment, worker training, skill development and research and development would better serve long-term industrial competitiveness. Achieving these goals requires open markets, strategic collaboration with allies like Japan and competitive capacity, not just national ownership.

East Asia Forum

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