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Reports that President Joe Biden has decided to block Nippon Steel’s proposed acquisition of U.S. Steel are creating an uproar in Washington. If true, the decision to block the deal will be widely understood as a political move to appeal to voters in Pennsylvania and the industrial Midwest. Politics is important, but so is policy, and this move will not end well for either party.
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It is unclear what U.S. policy objectives would be advanced by the decision to block the Nippon Steel deal. Indeed, the move would damage three of the Biden Administration’s own policy priorities. First, it would weaken U.S. economic competitiveness and supply chain resilience. U.S. Steel has been in the red for most of the past 15 years, and the billions of dollars that Nippon Steel proposes to invest in modernizing U.S. Steel plants in Pennsylvania and Indiana would help protect U.S. jobs and make the company more competitive against currently dominant Chinese manufacturers. Blocking the deal could have a chilling effect on other potential foreign investments in the United States that the Administration touts as strengthening the U.S. economy and reducing vulnerabilities caused by its extensive supply chains.
Second, the decision will undermine the Biden administration’s efforts to gain support from allies to advance a range of U.S. interests. Japan is not only a close partner on key national security issues, from limiting North Korea’s weapons development to countering Chinese and Russian territorial expansionism, but also on the very elements of economic security, such as friend-shoring and risk aversion from China, that the Nippon Steel deal could advance. If Japanese Prime Minister Fumio Kishida does not step down this fall, the decision will be seen in Tokyo as an affront to one of Biden’s closest partners. The move will make it politically difficult for the Japanese government to follow the U.S. lead.
Third, and most important, this decision weakens an important tool of national security. The deal is under review by the Committee on Foreign Investment in the United States (CFIUS), an agency chaired by the Treasury Department that reviews foreign direct investments in the United States for possible national security threats. The Nippon Steel acquisition is not a credible national security threat. Japan is a close ally, Nippon Steel has other investments in the United States, and the Defense Department currently buys little to nothing from U.S. Steel. (When asked this summer whether he thought national security was a reason to block the Nippon Steel acquisition, a former United States Steelworkers interviewed on a RealEcon hearing tour said quizzically, “No way.”) Having CFIUS say the acquisition is a threat when it clearly is not would dull the credibility and usefulness of this important tool of U.S. national security. Moreover, it would allow other countries to use national security as an excuse for protectionist actions.
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These policy shortcomings might be worthwhile from the White House’s perspective if the decision were politically sound, but even that is hard to see. Both Biden and Vice President Kamala Harris have already publicly expressed concerns about the Nippon Steel acquisition, and a formal decision to block it seems unlikely to sway a single vote in the November election. A smarter move would be to allow Nippon Steel to withdraw its CFIUS application until cooler political judgment can be made.
The trade-offs examined in the series typically involve difficult choices policymakers face between competing policy objectives: responding to unfair trade practices with tariffs, fighting domestic inflation, or accelerating the clean energy transition by de-risking from China or increasing imports of Chinese-made electric vehicles. In the case of Biden’s reported decision to block Nippon Steel’s proposed acquisition of U.S. Steel, the trade-off the White House is aware of appears to be between good politics and good policy. Indeed, both are likely to lose.
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Trade
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