Bracing for the Fight Over U.S. Steel: Trading Sentiment and Political Optics For a U.S. Competition Problem
By Diana L. Moss and Ed Gresser
The Politics of a Steel Merger
U.S. Steel (USS) is a 123 year-old American company, founded by J.P. Morgan at the turn of the 20th century. As with any centenarian company, USS has seen a lot, navigating changes in demand for steel, the globalization of steel markets, the “greening” of the steel industry, and antitrust troubles. Between 2008 and 2022, USS slid from 8th largest to 24th largest steel producer in the world.
Today, USS finds itself at the center of an unwelcome debate. In late 2023, Nippon Steel made a bid for the company, a deal that would combine the largest Japanese steel producer with the 3rd largest U.S. steelmaker. The bid outmatched a competing offer by the recently assembled conglomerate Cleveland-Cliffs, a mining company turned metals producer that in 2020 emerged as one of the largest American steelmakers after buying up most of the U.S. assets of Arcelor-Mittal.
The USS-Nippon Steel deal has been criticized by an eclectic collection of opponents, including steelworker unions, Donald Trump, populist-leaning lawmakers in Pennsylvania and Ohio and, most recently, President Biden. But opposition to a USS-Nippon Steel merger rests almost exclusively on the largely sentimental appeal of “retaining American control over an American company.”
There can be reasons for concern, such as national security, about some international purchases of U.S. firms. But the U.S. government has well-designed institutions to resolve them. Moreover, the rationale for opposing a USS-Nippon Steel merger is detached from substantive economic issues such as the impact of the deal on competition, U.S. steelworkers, or trade policy.
To make matters worse, the ‘solution’ to opposition to the ‘problem’ posed by a USS-Nippon Steel merger is to promote a USS-Cleveland-Cliffs merger. But that deal would raise serious competition concerns far bigger than anything triggered by the marriage of USS and Nippon Steel. That is, namely, how it will harmfully eliminate head-to-head competition and concentrate U.S. steel markets, to the detriment of U.S. consumers and workers.
USS-Nippon Steel — International Business and American Manufacturing
Let’s take the ‘problem’ first. Critics’ main argument is that a foreign-based company should not own USS, given the company’s significant, though not overwhelming, role in U.S. heavy industry. The government has a proper role in addressing legitimate concerns regarding the international purchases of U.S. firms. If there were concerns about Nippon Steel buying USS, however, the U.S. government has a perfectly functional system available to investigate and resolve them.
Experience to date, both with international firms in American heavy industry and with Nippon Steel specifically, suggests that a USS-Nippon Steel deal likely does not pose a problem. Foreign direct investment in the U.S. (FDI) is generally a positive thing, supporting jobs and bringing capital to the U.S. And most FDI projects do not pose security risks. For example, Japanese and European automakers for half a century have been designing and manufacturing quality automobiles everywhere from South Carolina and Kentucky to Ohio and California, and employing half a million American workers as they do so.
The international role in the U.S. metals sector is less prominent, but not small. International firms produce about a tenth of U.S. primary metals, and employ about a sixth of U.S. metalworkers. Nippon Steel itself has, for 15 years and without any obvious controversy, operated a 50% share of the 5-million ton Calvert steel mill in Alabama.
Against this background, the White House’s original response to arguments against the purchase of USS by Nippon Steel was to refer it to the statutory interagency group responsible for addressing concerns with foreign purchases. Known as the Committee on Foreign Investment in the United States (CFIUS) and led by the Treasury Department, it uses a Congressionally set series of security guidelines to identify potential problems, block unacceptable purchases, and mitigate any concerns that otherwise valuable FDI ventures might bring.
CFIUS handles hundreds of cases annually, and has access to the classified information and business-confidential materials necessary to make fully informed decisions. As National Economic Council Chair Lael Brainard noted in January, this is the appropriate place to go to for an objective, national security-based review and where any substantive concerns over Nippon Steel’s bid, if any emerge during the review, can be fully resolved.
USS-Cleveland-Cliffs — Lost Competition and Harm to U.S. Workers and Consumers
Now let’s consider the ‘solution.’ The major motivation behind the Nippon Steel-U.S. Steel deal is for companies to gain access to global steel markets and better serve demand both in the United States and abroad. This is a similar rationale for other large transnational deals that did not generate a nationalistic blowback. Good examples include the acquisitions of American agricultural biotech, Monsanto, by the German-owned Bayer; wireless telecommunications carrier, Sprint, by German-owned T-Mobile; and Stellantis’ purchase of Chrysler Motors.
Opponents of a USS-Nippon Steel merger have pushed an alternative, namely, reviving the 2023 merger proposal of U.S.-based Cleveland-Cliffs and USS. This solution to the USS-Nippon Steel problem, however, raises major antitrust concerns, with serious implications for consumers and steelworkers that are likely to dwarf any political woes around a friendly Japanese firm’s purchase of a U.S. company.
Just as it has a legitimate role in addressing the national security implications that can come with a large FDI transaction, the U.S. government evaluates the likely impact of mergers on competition. This includes deals that involve domestic and international companies doing business in the U.S.
To be sure, a USS-Nippon Steel tie-up may not be squeaky clean on competition. Reports are that the U.S. Department of Justice is examining the impact of eliminating competition between facilities in Alabama, especially for automotive steels. But this concern is extremely small as compared to the impact of a USS-Cleveland-Cliffs merger, which would combine the 2nd and 3rd largest competitors in the U.S. steel industry.
The merger would vault the newly created company into the #1 spot, above U.S.-based Nucor, leaving around 60% of total U.S. raw steel production in the hands of two companies. A merged USS-Cleveland-Cliffs’ dominant position would extend to complete control of blast furnaces at steel mills in U.S., which are needed to make high-grade steel for automobile manufacturing, including electric vehicles.
It is no surprise, therefore, that U.S. automakers strongly oppose a USS merger with Cleveland-Cliffs, raising concerns about the company’s control over “vast swathes” of the domestic markets that steel automakers rely on. They are rightly worried. Markets featuring two large players are a textbook example of oligopoly, where few sellers have weak incentives to compete on the merits and strong incentives to anticompetitively coordinate on pricing, wages, output, and innovation.
USS recognizes the anticompetitive concerns raised by a merger of USS with Cleveland-Cliffs merger and commensurately higher regulatory risk. Indeed, the companies would be unlikely to gain approval from the U.S. Department of Justice (DOJ) for proposed divestitures to reduce their post-merger dominance. Moreover, the scope of such divestitures would likely gut the value proposition behind the merger.
A USS-Cleveland-Cliffs merger would galvanize antitrust scrutiny. The DOJ would assess if and how the merger would eliminate head-to-head competition, raise market concentration, and limit employment opportunities. This is especially true in regions where both U.S. Steel and Cleveland-Cliffs operate facilities, such as Indiana, Ohio, Pennsylvania, Minnesota, and Alabama, and for a variety of product markets, including automotive steels.
Trading a merger that arouses sentimental opposition for one that poses high risk of harm to competition in the U.S. is a raw deal for millions of U.S. consumers. They will pay higher prices, directly or indirectly, for automobiles, stoves, houses and other products as the result of USS-Cleveland-Cliffs’ greatly enhanced market power.
A USS-Cleveland-Cliffs merger also spells trouble for workers in the steel industry workers, who could lose a major source of alternative employment in regional markets for specialized labor. Any commitment to transfer existing USS labor contracts to Cleveland-Cliffs would protect workers only for a period of time. When renegotiated, workers would find themselves on the short end of the bargaining power “stick,” exposed to lower wages and fewer benefits from less competition.
Policymakers should not risk sacrificing the important interests of consumers and workers for reasons of sentiment or short-term political calculation. This is especially true as they consider the implications of potentially declining competition and high concentration in key manufacturing and trade sectors. Policymakers should assess the Nippon Steel purchase on its merits, with an objective CFIUS review as a guide. At face value, pending a CFIUS conclusion, it is far preferable to a USS-Cleveland-Cliffs deal, which threatens competition problems and harm to consumers and workers.
Diana L. Moss is the Vice President and Director for Competition Policy and Ed Gresser is the Vice President and Director for Trade and Global Markets at the Progressive Policy Institute.
