U.S. Steel’s Sale Is Industrial Policy Boomerang
Protectionists paved the way for Nippon’s takeover of U.S. Steel.
We have to admit to a smile as Washington’s protectionists howl about Japanese steel manufacturer Nippon Steel’s $14.1 billion deal to buy U.S. Steel. They apparently miss the irony that their tariffs and industrial policy have resulted in the foreign takeover of an iconic U.S. manufacturer.
U.S. Steel put itself on the auction block this summer and sought to strike a deal while the irony is hot. Trillions of dollars in Washington spending on public works and green energy are goosing domestic demand for steel while tariffs protect U.S. manufacturers against foreign competition. U.S. Steel’s best assets are political creations.
President Trump in 2018 slapped 25% tariffs on foreign steel under the pretense of protecting national security. Domestic steel producers lobbied for the tariffs, which they said would protect American workers from cheap foreign imports. Yet U.S. Steel’s workforce had shrunk to 22,740 at the end of 2022 from 29,000 in 2018.
The evidence shows that the tariffs have resulted in fewer downstream manufacturing jobs and raised prices for consumers, all while padding the bottom line of domestic steel makers. Washington’s industrial policy is also helping to boost demand for domestic steel and U.S. manufacturers’ profits.
Federal spending in the 2021 infrastructure bill includes conditions requiring contractors to use U.S.-made steel. The Inflation Reduction Act provides additional tax credits for wind producers that use domestic steel. Both laws are also spurring construction of new factories, at least for a time.
The U.S. iron-and-steel-mill order backlog is currently at a 15-year high. Because U.S. steel makers can’t meet demand, projects will be delayed or contractors will have to pay higher prices for foreign steel. That’s bad for consumers. But the cosseted U.S. steel makers will benefit from higher prices and profits.
You can understand why Nippon wanted to get in on the Washington spending action, especially as manufacturing flags in Europe and much of the world. Nippon’s $14.1 billion bid is roughly double what Cleveland-Cliffs offered to pay for U.S. Steel this summer, which underscores the economic value of tariff avoidance.
The U.S. Steel Workers supported Cleveland-Cliffs’ courtship, but it was opposed by auto makers worried about the potential behemoth’s pricing power. The combined company would have controlled 100% of blast furnace production in the U.S. and 65% to 90% of domestic steel used in vehicles.
U.S. Steel rejected Cleveland-Cliffs’ offer, and it may have been smart to hold out for a better deal. Nippon’s offer doesn’t appear to present antitrust concerns. Although the acquisition would make Nippon the world’s second largest steel maker after China’s Baowu, it has a relatively small footprint in the U.S.
The deal could even provide an American-Japanese counterweight to China’s steel powerhouse. Yet the same politicians who support higher tariffs and industrial policy to counter China now are raising doubts about the deal for purported national security reasons.
“Steel is always about security,” Pennsylvania Democratic Sen. John Fetterman declared. Ohio Sen. J.D. Vance chimed in: “Rest assured that I will interrogate the long-term implications for the American people, and I will do everything in my power to protect the future of our nation’s security, industry, and workers.” Do they think the Japanese are going to bomb Pearl Harbor?
U.S. steel making has been declining for decades owing to the higher labor costs of unionized production. American human and financial capital have been put to better work elsewhere such as advanced manufacturing. There are nearly one million more U.S. manufacturing jobs than a decade ago, and there probably would be more if not for Mr. Trump’s tariffs.
Some politicians, including presidential front-runners from both parties, want to take the U.S. back to the days of 1930s protectionism and industrial policy. But if the Japanese want to invest in the U.S., shouldn’t Washington welcome them with open arms?