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In December, Japan’s Nippon Steel Corporation announced its intention to acquire U.S. Steel, the storied American steel producer founded by J.P. Morgan and Andrew Carnegie. Nippon agreed to pay a 40 percent premium over U.S. Steel’s current market capitalization, generously compensating shareholders and providing capital to an industry in which both the former and current U.S. presidents have sought to boost U.S. competitiveness. Nippon, moreover, pledged to honor all existing agreements with the United Steelworkers union, allow U.S. Steel to retain its name and even keep the Pittsburgh, Pennsylvania, headquarters as a subsidiary. The deal seemed a “win-win” for all parties involved.
Every rose, however, has its thorn. In this instance, prominent policymakers took issue with Nippon’s Japanese ownership and demanded President Biden upend the deal. It now appears the president is seriously considering doing so, with administration officials stating the acquisition needs “serious scrutiny” before moving forward. Blocking the deal—particularly one initiated by a buyer from a G7 state—would have significant implications for U.S.-Japan relations, investment ties with U.S. allies, and the dynamic linkage between economic and security policy.
Q1: What is the CFIUS mandate, and why have members of Congress requested an intervention?
A1: Legislators have lambasted the deal on several fronts, with the harshest condemnation coming from Pennsylvania Democrats Bob Casey, John Fetterman, and Chris Deluzio. In a letter to Treasury Secretary Janet Yellen, the trio called for intervention from the Committee on Foreign Investment in the United States (CFIUS), chaired by Yellen, and labeled the deal “a step backwards” for national security. Republican senators JD Vance, Josh Hawley, and Marco Rubio likewise requested the deal be blocked via CFIUS in a separate letter to Yellen, citing national security as their primary concern.
CFIUS was created in 1975 by executive order as an interagency committee for inbound investment screening. Comprised of representatives from numerous executive agencies and departments, the committee was given a broad mandate to review and advise the president on transactions with national security implications. Initially a relatively obscure entity, CFIUS’s authority has since swelled through both executive order and legislation.
In 1988, Congress bolstered CFIUS through the Exon-Florio Amendment, which granted the president powers to terminate acquisitions by foreign entities given “credible evidence” of a resulting national security threat. CFIUS’s authorities were again broadened in 2018, with the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA) under President Trump. This law widened the president’s authority to police foreign transactions, lengthened CFIUS’s investigation timeline, and boosted the committee’s funding. Continuing in his predecessor’s footsteps, President Biden issued Executive Order (EO) 14083 in September 2022. The EO broadened the factors CFIUS can consider during its review process to include supply chain resiliency, U.S. technological leadership, cybersecurity, data security, and industry investment trends.
Q2: How has CFIUS ruled in the past and how likely is President Biden to approve a blockage if one is recommended?
A2: It is quite uncommon for presidents to block high-profile mergers and acquisitions (M&A) deals even after a CFIUS review. Before 2012, it had only happened once. Since then, however, the practice seems to have become more normalized; Obama barred two transactions, both of which involved Chinese acquirers, and Trump nixed a remarkable four transactions, three related to Chinese acquirers and one Singaporean. Biden has not publicly blocked an M&A transaction thus far. It is worth noting, however, that CFIUS’s classified nature sometimes obscures its true influence. While the public knows these seven acquisitions were formally blocked by presidential order, it is more difficult to perceive when firms voluntarily withdraw from a deal after encountering roadblocks or anticipating an unfavorable CFIUS recommendation.
In the Casey-Fetterman-Deluzio letter, the Pennsylvanians specifically cite EO 14083’s industry investment trends provision as justification for a CFIUS review. This provision calls on CFIUS to consider transactions that “may appear to pose a limited threat when viewed in isolation, but when viewed in the context of previous transactions . . . harm national security.” The logic behind this provision means to protect against incremental market domination by foreign-owned firms in key sectors, which could expose the U.S. economy to coercion from abroad.
CFIUS experts note that while reviewing the deal would be well within the committee’s broad jurisdiction, recommending a complete blockage would be surprising. Emily Kilcrease, a CFIUS expert who served as the Commerce Department’s lead policy representative on the committee for several years, told the New York Times she expected CFIUS to stop “well short of a recommendation to kill the sale.” More likely, she said, the committee would require Nippon to maintain certain levels of U.S. employment or domestic production before the deal proceeded.
Though precedent and expert opinion point toward the deal moving forward, Biden will ultimately have the final word on the matter. In making this decision, the president will not only have to ponder threats to national security, but also the implications for his 2024 presidential campaign. Per polling aggregator FiveThirtyEight, Biden sits virtually neck and neck with likely competitor Donald Trump, and an endorsement from the United Steelworkers union, which backed Biden in 2020, would be instrumental in securing votes in key swing states across the Midwest. The union, however, has raised several concerns regarding the acquisition, calling the deal “greedy” and “shortsighted,” and Trump has taken notice. Following a recent meeting with the International Brotherhood of Teamsters, the former president said he would “absolutely” block the deal if reelected, adding that the sale of U.S. Steel to a foreign company was “terrible.” Whether Biden will risk losing these voters to keep the deal intact is now a matter of serious uncertainty.
Q3: What are the implications for future investment flows from Japan and other U.S. allies?
A3: Preventing the acquisition would send a dubious signal to Japan, a treaty ally that provides more foreign direct investment to the United States than any country in the world. Data shows that these investments are critical to U.S. growth. In 2021, U.S. subsidiaries and affiliates of Japanese companies spent roughly $12 billion in research and development, employed 930,000 workers, and exported over $75 billion of goods. Roughly half of Japan’s investment has been in manufacturing—a sector both the Trump and Biden administrations consider instrumental in revitalizing U.S. competitiveness.
Blocking this acquisition, particularly after Nippon already exhausted considerable resources finalizing the deal itself, would no doubt cool Japanese enthusiasm for investing in U.S. firms operating in other politically sensitive yet critical industries like aerospace, information technology (IT), and communications. This sentiment has already been expressed by Sasae Kenichiro, former Japanese ambassador to the United States, who told Reuters a presidential blockage could be “a warning sign to some segments of Japanese investors.”
Halting the deal may also cause broader uncertainty among U.S. allies regarding future CFIUS intervention. To date, M&A blockages by the president have had an obvious national security rationale. In 2012, for example, President Obama prevented a Chinese firm from acquiring wind farms near a top-secret U.S. Navy facility in Oregon. Other blockages have involved the acquisition of an aircraft component manufacturer, a semiconductor investment fund, and a prominent IT firm.
While the Trump administration decided steel was a national security imperative after applying protectionary tariffs in 2018, blocking a transaction in this industry would be unprecedented and signal an expansion in CFIUS’s approach to its mandate. With CFIUS’s influence magnified, foreign investors may think twice before executing a deal with a U.S. counterpart, or even scrap profitable deals altogether if they deem the risk of government intervention too great. Implications for foreign investors would be especially significant as the United States heads into a 2024 election where the presumptive Republican candidate has signaled he is not afraid to take robust measures to promote domestic production in the name of economic security.
When assessing this deal, it is imperative that the Biden administration think beyond its political objectives and contemplate the implications of a blockage for Japanese foreign direct investment flows, the United States’ economic relationship with its allies, and the precedents set for future administrations. Moreover, Biden must not rule out the possibility of finding a middle ground. Coming to a formal agreement with Nippon to maintain a U.S. presence, respect union covenants, or continue selling steel products to American buyers is a nuanced option that goes beyond the simple black and white presented by most commentators.
John Strezewski is an intern with the Scholl Chair in International Business at CSIS. William Reinsch holds the Scholl Chair in International Business at CSIS.
The Scholl Chair thanks Thibault Denamiel and Matthew Schleich for their helpful research contributions to this CQ.
