Steeling politics

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Politics ruins everything. Right now, it is ruining America's steel industry. The Biden administration, with plenty of bipartisan support, has announced it will block Nippon Steel's bid to acquire U.S. Steel.

Years of tariff protection and other special government treatment has already left America's steel industry soft and uncompetitive. Now the administration is set to turn away a massive investment in modernizing U.S. Steel, a company that badly needs it. And the reason is politics.

U.S. Steel has been in decline for years. Macalaster College economist Timothy Taylor wrote at his excellent blog, The Conversable Economist:

For me, the real shock was the announced purchase price of $14.9 billion. When US Steel was formed back in 1901 by merging together a number of smaller competitors, it was the largest firm in the world. By 1960, it was still in the top 10 US firms in the Fortune 500 listings. By 1991, US Steel was no longer included in the 30 large firms that make up the Dow Jones Industrial Index. In 2014, US Steel fell out of Standard & Poor's index of the top 500 US firms. Indeed, US Steel is no longer even the largest US steel firm-that would be Nucor. US Steel now makes about 12% of American steel.

Thanks to tariffs and other government protections, steel prices in the US are about $300 per ton above the world price. That lets U.S. Steel and other American producers get away with being flabby and inefficient without losing domestic market share, though foreign market share is a different story.

Innovation is hard work, and tariff protection gives companies like U.S. Steel a cozier, though less innovative, existence. As a result, they've fallen behind the rest of the world.

U.S. Steel has plenty of talent, experience, and physical capital. It just isn't being used very well. Nippon Steel sees an opportunity to bring U.S. Steel up to modern standards. Not only would U.S. Steel's employees and shareholders benefit, so would U.S. Steel's customers. Better steel at lower prices would bring some relief to house and car prices, among other steel-using products.

Then politics entered the room. Politicians from both parties view the steel industry as a sacred cow. They assume swing voters in Rust Belt states have strong Buy American views, and would prefer an economy more like it was in the 1950s. This is pure social desirability bias on politicians' part; a recent poll says most people want more foreign investment and trade.

Politicians are making some ridiculous arguments, such as that Japan is a national security threat. Japan and the US have had formal mutual defense treaties in place since 1951. America's "alliance with Japan has been the cornerstone of U.S. security policy in East Asia for decades.," according to the Council on Foreign Relations. They are China's biggest regional counterweight.

According to the State Department, Japan is also "the United States' fourth largest trading partner, and, as of 2021, the top provider of foreign direct investment (FDI) in the United States." This is not the profile of a national security threat.

But what if they were? About 70 percent of steel used in the US is made in the US. The Defense Department uses about 2 percent of America's steel supply. If foreigners were to cut us off entirely from steel imports, the harm to national security would be approximately zero.

For those worried that Nippon Steel's takeover would result in moving American steel production abroad, the Institute for Progress' Alec Stapp tweeted a fact that should allay such fears: "THE PHYSICAL STEEL PLANTS ARE IN THE US"

This would make also make it difficult for Japan to deny the US any steel, in the event they did turn against us.

There is also a rent-seeking angle. U.S. Steel's rival Cleveland Cliffs would also like to buy U.S. Steel. But its offer is 45 percent less than Nippon Steel's. Accepting their offer would harm US Steel's employees and shareholders, as well as its customers. Nippon has a better offer both financially and technologically.

But Cleveland Cliffs CEO Lourenco Goncalves has invested heavily in politics, as opposed to improving the business, and that investment may well pay off in the short run.

In the long run, blocking Nippon Steel's offer would send a message to anyone who wants to invest in the American economy: don't. This is not a recipe for the growth and dynamism that would benefit America's domestic economy, as well as its foreign policy interests.

America is the world's top recipient of foreign investment, and that is one reason for its economic success. America has more stable and more market-oriented institutions than any other large country; no wonder everyone wants to invest here. Turning that away would do massive harm to American competitiveness and American living standards.

We warned about all of these things at a CEI event earlier this year in an event featuring Cato's Scott Lincicome and the Global Business Alliance's Jonathan Samford.