Biden Statement On Nippon Steel Does Not Preclude Merger

Steelworkers Union and Nippon Steel Still Talking But Negotiations Are Arduous

Source: Author calculations of market share based on https://www.steel.org/2024/01/steel-imports-down-8-7-in-2023/ Note: Import tonnage in raw and finished products in the source are multiplied by total import market share of 21% in finished products, the only share mentioned in the source. Three quarters of US imports are of finished products.

President Joe Biden’s March 14 statement opposing Nippon Steel’s purchase of US Steel (USS)—saying “it is vital for it to remain an American steel company that is domestically owned and operated”—may help his uphill drive for reelection and the Democrats’ struggle to retain control of the Senate. Indeed, a week later, Biden was endorsed by the United Steelworkers (USW) union, which had urged him to make some sort of strong statement. However, it by no means precludes the merger. On the contrary, Nippon Steel and the USW are still negotiating whether Nippon Steel will agree to conditions that the USW deems necessary to get its approval.

The negotiations are arduous and the outcome uncertain. On March 12, Nippon Steel Executive Vice President Takahiro Mori, who would be in charge of US Steel after the merger, met for the first time with union chieftain David McCall. While the USW issued a harsh assessment of the meeting, and Biden made his statement two days later, informed observers say that is typical of the union’s hard-nosed negotiating style.

It’s important to understand that Biden and the USW are saying different things. Biden is saying he opposes the merger altogether, which meets his election needs in pivotal states like Pennsylvania (for his re-election) and Ohio (for continued Democratic control of the Senate). The union, on the other hand, is saying it opposes the merger unless Nippon Steel agrees to certain conditions.

            Currently, staffers from the union and Nippon Steel are conducting “talks about talks,” i.e., setting up an agenda and date for the next round of high-level talks. The USW has stated publicly it wants Nippon Steel to agree to certain enforceable guarantees before it will agree to a second high-level meeting. While Nippon Steel insists it has offered assurances that it will put into a written contract, the union believes the assurances made to “assume all union contracts” have not yet been put into enforceable form. Due to the union’s stance on preconditions, it remains unclear how long it will take to get another round between Mori and McCall. However, on March 27, Nippon Steel sent a letter to the USW putting into writing assurances that it had offered at the March 12 meeting. This was just reported today and, as is typical of the USW’s negotiating tactics, it dismissed the Nippon Steel letter as “empty promises.” I’ve been told that, in negotiations, the USW keeps saying “no” until it says “yes.” There is no “in between.”

Nippon Steel also sent a similar letter to Pennsylvania’s two Democratic Senators (John Fetterman and Bob Casey) and Casey is running for re-election this year. That came, in response to a March 19 letter from them asking Nippon Steel and USS to “produce binding legal commitments to maintain these agreements, protect workers, and alleviate concerns about successorship.” The implication is that, if Nippon Steel met those concerns to the USW’s satisfaction, these two Senators could withdraw their objection.

The key point here is that the union has not walked away from the negotiating table in light of Biden’s statement or even in the aftermath of its typically harsh response to Nippon Steel’s March 27 letter. Both the USW and Nippon Steel are serious, and both would like to get an agreement prior to the November Presidential election. If they reach that agreement, Biden would be free to say he now supports the merger. Consequently, the government’s Committee on Foreign Investment in the United States (CFIUS) would approve it, just as it has approved every other Japanese purchase of an American company. It is notable that, Biden never mentioned using CFIUS to block the deal.

USW approval of the merger, as I detailed in a previous post, is the outcome that Biden would prefer. The alternative—using CFIUS to block the merger on alleged national security concerns—would damage US-Japan relations. That, in turn, would undermine security throughout East Asia in the face of a more bellicose China. If the talks between Nippon Steel and the USW fail, and CFIUS then blocks the merger, the White House would likely argue (in private) that blocking one deal would do a lot less harm to US-Japan relations than a return of Trump to the Oval Office. As I discussed in the post, CFIUS is a political body, not a strictly legal body.

Kishida Administration Avoiding the Issues

Meanwhile, the Kishida administration is studiously avoiding the issue so as not to further heighten tensions or hand Trump an election issue (that a “weak” Biden would “surrender” to Japanese pressure). Besides, I’m told that Nippon Steel has not requested aid from the government, nor does it want the government’s advice.

            According to reliable sources, Prime Minster Kishida had not intended to bring up the merger issue in his April 10 summit with Biden. The White House has said that Biden will do so. Kishida will likely respond by discussing the benefits of overall Japanese investment in the US. In public statements, senior Japanese officials state that they will not comment on the Nippon Steel case, since it concerns the transactions of a private company. They add that US-Japan relations remain strong.

            In private, some Japanese sources familiar with government thinking say that even CFIUS disapproval would not harm US-Japan ties because the steel merger is an exceptional case. I disagree. Like drops of water on a rock, more and more “exceptions” cannot help but erode trust in America’s reliability and its commitment to open economic relations governed by the rule of law. It smacks of the nationalism and isolationism being embraced by a growing share of the electorate. I recall in 2017 a Japanese Foreign Ministry official telling me: “Our problem is not just Trump, but the fact that America voted for him.” Biden’s growing “Buy America” rules on several fronts and his stance on the steel merger springs from the same trend among voters. It makes a mockery of the Administration’s talk of “friendshoring.” I began forecasting the step-by-step deterioration of America’s role as a “benign hegemon” on economic issues in a Foreign Affairs piece way back in 2016 during the controversy over the Trans-Pacific Partnership (TPP).

Despite Union Hopes, No Other American Company Can Buy US Steel

The union faces a dilemma. There is no American firm that can buy USS. So, if the Nippon Steel merger fails, the union would have to continue dealing with USS management, which it regards as very hostile to unions. Moreover, the Nippon Steel purchase would strengthen USS finances, shoring up its ability to meet its obligations to the union. Currently, USS bonds are rated junk quality, which forces USS to pay higher interest rates. Traders and rating agencies believe the bonds would be upgraded if the merger with Nippon Steel goes through.

            The USW had wanted another company, Cleveland-Cliffs (CC), to buy the USS. CC is very friendly to the union. However, big antitrust issues would make that virtually impossible if Biden is re-elected and it would face a lot of obstacles even if Trump wins. If CC bought USS, then CC would control 100% of American iron ore reserves and at least 65% of the type of steel used by American automakers while becoming the sole producer of the kind of steel used for electric vehicle engines, and the sole owner of all American “integrated” steel mills in the US, i.e., mills that can do everything from processing iron ore to making finished products. That concentration would enable the merged firm to impose higher steel prices on automakers and other customers, thereby reducing their ability to compete and forcing ordinary Americans to pay more for cars. The Alliance for Automotive Innovation—a coalition including both the Detroit Three and foreign companies like Toyota, Volkswagen, and others—opposed a purchase by CC in a letter to Congress, as well as the Federal Trade Commission (FTC) and the Justice Department Antitrust Division. On March 29, the automakers sent a letter to Biden advising him not to let CC buy USS.

            In fact, lawyers for US Steel told its board last October that antitrust regulators would probably block a CC purchase of USS, according to a regulatory filing on the negotiations.

            Moreover, according to the Wall Street Journal, Biden administration officials earlier this year studied brokering a sale of USS to Cleveland-Cliffs “before deciding it wasn’t feasible, according to people familiar with the talks. The goal now is to simply drag out the national-security [CFIUS] process until after the election, according to people familiar with the thinking, some of whom expect the deal to be approved then [emphasis added].”

            The union may believe that, if Trump wins, a politicized Justice Department would approve a merger with CC (traditionally, Justice rather than the FTC tends to work on steel mergers). However, the level of concentration from a USS-CC merge goes far beyond what past Republican administrations have approved and the FTC is less subject to blatant politicization.

            Moreover, any merger has to be approved by the shareholders of both USS and CC. CC’s chieftain says that, if he makes any new offer for USS in the aftermath of the failure of the Nippon Steel bid, it would be far lower than his previous offer. USS shareholders might not accept that. Moreover, CC shareholders might not accept it either, given fears that antitrust issues would force CC to divest itself of many assets. Prices in such a divestment would be lower than normal. 70% of CC shares are held by big institutional investors. Trump has no power to force them to swallow a CC buyout.

            Some press outlets are inaccurately saying the Nippon Steel purchase is in jeopardy because the Justice Department is looking into one Nippon Steel plant in Alabama. However, if worse comes to worst, Nippon Steel can easily sell that plant with little loss of revenue.

Can A Deal Be Made?

The union’s chief complaints are eminently solvable, and revenue gains in the U.S. market would make it highly profitable for Nippon Steel to do what it takes to solve them. Nippon Steel is prepared to go a lot of extra miles to reach an agreement. It even signed, albeit reluctantly, a so-called “hell or high water” clause guaranteeing that it would do what is necessary to get antitrust approval, including required divestment, and that it pay a '‘reverse termination fee,” in case the deal was not consummated for whatever reason, including CFIUS disapproval. CC offered a more limited “hell or high water” clause.

            Reaching a deal before the election will not be easy, but both sides would like to get it done—on their terms. If Trump takes office before an agreement is reached, he would almost certainly use CFIUS to block the deal.