A geopolitical drama has been brewing on both sides of the Pacific Ocean over steel. U.S. Steel, one of America’s most historic companies, has struggled through dire financial straits and saw its investors vote in April to sell to Japan’s Nippon Steel. The $14 billion deal was very popular with shareholders, but raised tough questions about what would happen with U.S. Steel’s unionized workers. It also raised questions about national security, as steel is a vital component of the defense industry in both infrastructure and weapons systems.
The Biden administration wants to block the sale of U.S. Steel to Nippon Steel on national security grounds, claiming the merger threatens domestic steel output. Fortunately, a domestic steel company, Cleveland Cliffs, has just reiterated its offer to buy a majority of U.S. Steel’s mills. Cleveland Cliff’s $8.3 billion offer was supported by the workers’ union, but rejected by U.S. Steel management. At the time the deal was made, the government feared the creation of a monopoly on domestic steel…but is now warming to the idea because the alternative is closing those steel mills and laying off thousands of steelworkers.
U.S. Steel Industry Struggling From Foreign Competition
America’s steel industry is in a rut, with demand lagging due to high interest rates, which primarily affect borrowing for new capital like heavy equipment. However, recent interest rate cuts by the Federal Reserve may renew Americans’ interest in buying new cars and heavy appliances, which require lots of steel. But will the new demand for steel lead to buying domestic steel or imported steel?
Since the 1980s, the United States has struggled to compete against cheap imported steel. Most recently, both presidents Donald Trump and Joe Biden have supported raising tariffs (taxes on imports) on steel from China. Over the summer, Biden tried to close a tariff loophole where Chinese steel first went to Mexico and then was brought across the U.S.-Mexico border. Other major sources of imported steel include Canada, Brazil, and South Korea, with the percent of imported steel in the U.S. having increased substantially over the past decade.
Steel Production Part of National Security
Steel is one of the most important resources when it comes to national security, as it composes major elements of all weapons systems. And this steel is not just vital for the defense of the United States itself but also our allies. Allies like Ukraine, Israel, and Taiwan have dramatically increased their demand for American-made weapons in recent years due to growing threats. Allowing domestic steel companies to be purchased by foreign companies increases the risk of production declines.
During an international crisis that affects the United States, a domestic firm may be more easily persuaded to increase steel output, while a foreign-owned producer may not wish to expend the resources. In a worst-case scenario, a foreign-owned steel firm may be a security risk for providing information to a geopolitical rival. The foreign-owned firm may even sabotage its own output to harm the American war effort. For those reasons, the U.S. government wants to keep U.S. Steel’s output domestic.
Image credit: Cleveland-Cliffs
