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Avoiding a US-Japan Rift Over Steel

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Avoiding a US-Japan Rift Over Steel

Is a deal between Nippon Steel and United Steelworkers in the offing?

Avoiding a US-Japan Rift Over Steel

Nippon Steel Corporation’s logo is displayed on a sign outside its headquarters in Tokyo on Nov. 26, 2021.

Credit: AP Photo/Hiro Komae

For those seeking to avoid a rupture between the United States and Japan over Nippon Steel’s attempted purchase of U.S. Steel (USS), February 26 brought some long-awaited good news. Industry union United Steelworkers (USW) – which, up until now, had acted in public as if it opposed the buyout under any conditions – signed a non-disclosure agreement with Nippon Steel. That means that it will now engage in serious and secret negotiations in the hopes of reaching an agreement that would enable USW to endorse the buyout. The first step in the process was announced on March 4, when Nippon Steel Executive Vice President Takahiro Mori, the man designated to be in charge of U.S. Steel, announced he will meet with union chief David McCall sometime this month.

Moreover, according to clued-in observers, both sides intend to reach such an agreement before the November elections. That would pave the way for the Biden administration to do what it has always wanted: to say that the deal poses no threat to national security under the rules of the Committee on Foreign Investment in the United States (CFIUS). Mori told the press that, if the union endorses the deal, it would “no longer [be] a political issue.”

From a political standpoint, this was never an ordinary cross-border purchase. When the merger was first announced in December, USW denounced the notion of a foreign company buying USS, and criticized Nippon Steel in particular, as did all four senators in the key electoral states of Pennsylvania (the headquarters of USS) and Ohio. Former President Donald Trump raised the electoral stakes by vowing to block what he called a “horrible” merger “instantaneously.”

In the face of this political uproar, the Biden administration very publicly ordered a review of the buyout for “its potential impact on national security and supply chain reliability.” In reality, however, the administration never had any desire to block the merger, and certainly not on the insulting grounds of national security. It understands how much that would damage Japan-U.S. relations and security throughout the Pacific. It would be a gift to an increasingly bellicose China. (A return of Donald Trump would hurt security in the Pacific even more.)

Yet an already unpopular Biden as well as Congressional Democrats faced mounting political pressure given rising nationalism and protectionism among both Democratic and Republican voters. The only sure way out of this dilemma was for Nippon Steel to win the acceptance of USW.

What most people don’t know is that Nippon Steel and USW “have been engaged in a dialogue.. .since the transaction was announced in December,” a spokesperson for the Japanese company reported in an email response to my written questions a couple weeks ago. “We are committed to finding common ground with USW.”

Until now, the dialogue consisted mostly of talk between lawyers on the ground rules for the talks, including the NDA. Now, the hope is that substantive talks can begin in the next few weeks. This dialogue leading to the NDA has not been reported in most of the press, in part because the union has talked as if it would never accept a foreign takeover. It seems as if its harsh rhetoric is a negotiating tactic of “playing hard to get.”

Reaching a deal will not be easy, but both sides are serious about the effort and about getting it done before the election.

Election Year Politics

The entire fracas results from election-year politics. President Joe Biden probably cannot win reelection unless he wins Pennsylvania. In addition, the Democrats would find it very hard to retain the Senate unless Sherrod Brown wins re-election in Ohio. On the other hand, if the union declared itself satisfied, the White House and the Democratic senators in these states would be free to endorse the merger.

Biden has never said he opposes the deal, only that it deserves scrutiny by CFIUS. The fact is that CFIUS has reviewed countless Japanese acquisitions, and none has been blocked. Softbank was compelled to make a small modification, and it’s possible that Nippon Steel could be compelled to give up some assets in China, a tiny fraction of its revenue. But CFIUS is not a strictly legal process; it’s a political one. Even if CFIUS’s technical staffers found no national security threat, the Cabinet-level body and the president could still forbid the deal and the public would likely never even find out what the staff report said.

The good news on the political front is that there is no bandwagon in Congress against the deal. Only four Democratic and three Republican senators, plus 53 members of the House of Representatives’ 435 members from both parties, have denounced the merger. Moreover, neither of the two Democratic senators running for re-election in critical states, Brown of Ohio and Bob Casey of Pennsylvania, has peppered their campaign speeches with mention of the Nippon Steel issue since their initial comments in December. It’s not a big concern for most voters, but in a close election, any issue can tip the balance.

Consequently, the surest way to secure the merger is for Nippon Steel and USW to come to an agreement before November’s election. In public, Nippon Steel has sometimes sounded complacent. Indeed, when I asked whether a deal with USW was politically necessary, a spokesperson emailed a rather legalistic answer: “We believe the CFIUS process will determine that our transaction does not pose any threat to national security.”

Nonetheless, in private, Nippon Steel leaders were said to be well aware of the need to make a deal. The  announcement of early, direct talks between Mori and McCall confirms this.

Can a Deal Be Made?

On the surface, the union has talked up until now as if it objects to Nippon Steel simply because it is a foreign firm and because it preferred a takeover by the first bidder, a company called Cleveland-Cliffs that is very friendly to the union.

However, a takeover by Cleveland-Cliffs would likely never have been approved by antitrust regulators because the new company would have dominated steel production, particularly that used in auto plants. In fact, the Alliance for Automotive Innovation – a coalition including both the Detroit Three and foreign automakers such as Toyota and Volkswagen – immediately fired off a letter of protest to Congress, as well as the Fair Trade Commission and the Justice Department Antitrust Division.

By contrast, automotive firms and other steel consumers gathered at the prestigious Tampa Steel Conference in February told Bloomberg that they felt much safer with the purchase by Nippon Steel.

At the root of the union’s complaints seem to be two issues, both eminently solvable. Revenue gains in the U.S. market would make it profitable for Nippon Steel to pay what it takes to solve these problems.

The first is fear by the union that, like the USS management, Nippon Steel would seek to shut down the unionized blast furnaces or sell them off. Instead, it would rely completely on electric arc furnaces located in non-union states. Indeed, in its first effort, Nippon Steel bid only for those electric arc plants. It bought the blast furnaces as well when USS stated that it was an “all or nothing” purchase. Now, however, the Japanese company says, “We do not intend to shut down any of U.S. Steel’s blast furnaces as a result of this transaction. We look forward to bringing fresh investment and innovation into U.S. Steel’s existing blast furnaces to help drive our collective decarbonization efforts and overall efficiency.” A re-elected Biden could even sweeten the deal by allotting some Inflation Reduction Act money to help finance work on decarbonizing the blast furnaces.

Second, relations between the union and the current USS management are so acrimonious that Nippon Steel needs to make peace with the union simply to guarantee smooth operations of the unionized mills. USW distrusts USS management and fears that Nippon Steel will use the current managers to run the facilities. The Japanese side needs to convince the union that it will use new managers and that it will bring a very different attitude.

Nippon Steel has made the right noises on thorny issues like the blast furnaces, no layoffs and maintaining the terms of the union contract. But USW complains that Nippon Steel has taken the attitude of “trust us.” The union wants guarantees. The question is whether Nippon Steel is prepared to provide enough guarantees to satisfy the union – and in time to avoid blockage by Donald Trump.