Industrial sentimentalism and national-security bluster don’t give politicians the right to make business decisions.
Industrial sentimentalism and national-security bluster don’t give politicians the right to make business decisions.
T he 572nd most valuable company in America is being bought out. This isn’t big news, but some people think it is.
Senators John Fetterman (D., Pa.), Sherrod Brown (D., Ohio), J. D. Vance (R., Ohio), Marco Rubio (R., Fla.), and Josh Hawley (R., Mo.) have all expressed their displeasure with U.S. Steel’s pending sale. It is one of the enduring ironies of economic discourse that the people who sometimes accuse free-market proponents of being shills for business often get all sentimental about businesses targeted for acquisition.
Vance, Rubio, and Hawley co-authored a letter to Secretary of the Treasury Janet Yellen urging her to block the acquisition of U.S. Steel by Nippon Steel on national-security grounds. They write that U.S. Steel is an “icon of American industry” and that the sale would have “dire implications for the industrial base of the United States.”
U.S. Steel was at one time vital to the industrial base, but that time has long passed. Its peak employment was 340,000 during World War II when, like other companies, it was effectively government-run to supply the war effort. Today’s employment is just over 20,000. Peak market share was when the firm started, and peak output was in the 1970s. “X,” the firm’s ticker symbol, ceased being a component of the Dow Jones Industrial Average 32 years ago. It hasn’t even been an S&P 500 component since 2014.
Calling it the 572nd largest company by market cap is actually being generous, because its share price has shot up in the past few months as the market expected it to be purchased by another firm. Its market cap as recently as August was only $5 billion, which would put it around 925th today, near companies such as Columbia Sportswear and Zurn Water Solutions (probably best known to most people for its toilet-flush valves often seen in public restrooms).
One of the smartest things the founders of U.S. Steel did was put “U.S.” in the firm’s name. This is a common marketing strategy to communicate a sense of grandeur and importance. Other examples of companies that have used this strategy include Bank of America, Alcoa (Aluminum Company of America), and American Airlines. None of these firms was started by the government or is currently publicly owned, but putting the country’s name in the company’s name makes it sound like it’s a bad thing for America if it’s purchased by a company from another country.
The ownership of U.S. Steel has nothing to do with the condition of the U.S. The largest U.S. steel producer today is Nucor. It produced 20.6 million metric tons of steel in 2022, compared with U.S. Steel’s 14.5 million metric tons. Nucor does most of its production in right-to-work states and is not unionized, unlike U.S. Steel. Nucor was not originally a steel company and got into the steel business when it saw an opportunity to undercut producers such as U.S. Steel with more cost-effective production methods.
Nippon Steel, the firm that has offered to purchase U.S. Steel, produced 44.4 million metric tons in 2022. Nippon Steel used the same marketing strategy as U.S. Steel, “Nippon” being the Japanese word for “Japan.” Despite the names, both Nippon Steel and U.S. Steel are publicly traded companies. Neither dominates the global steel industry, which has an output of about 1.9 billion metric tons.
When you push the sentimentalism aside, a relatively large publicly traded company in a global industry is purchasing a much smaller publicly traded company in a way that will have negligible effects on industry consolidation either globally or within the United States. U.S. Steel shareholders are bullish about the deal. Nippon Steel has offered to pay $14.9 billion, billions more than the company is currently valued, to complete the transaction.
The senators have made vague insinuations about national security in their opposition to the acquisition. Vance, Rubio, and Hawley wrote, “Domestic steel production is vital to U.S. national security.” They never get around to saying how the deal would reduce domestic steel production.
As is common with arguments for government intervention, the national-security issue is a red herring. Secretary of Defense James Mattis, for example, estimated, “The U.S. military requirements for steel and aluminum each only represent about three percent of U.S. production.” Even if the military goes on a building spree that triples the amount of steel it needs, it would still be a single-digit percentage of total U.S. production. The Defense Production Act already gives the military the ability to jump to the head of the line for steel if it’s absolutely necessary. And the ownership of Nucor, Cleveland-Cliffs, and numerous other smaller steelmakers is unaffected by this deal.
Regardless, it’s not as though Nippon Steel is moving U.S. Steel’s production to Japan. Countless Japanese companies employ Americans in the United States, including Nippon Steel already. As Eric Boehm wrote at Reason, Vance understood how beneficial foreign investment in the U.S. workforce can be when he wrote Hillbilly Elegy. The Japanese firm Kawasaki bought Armco, a major employer in Middletown, Ohio. Despite initial opposition from residents, “Kawasaki gave Armco a chance, and Middletown’s flagship company probably would not have survived without it,” Vance wrote in the book.
Even putting aside the fact that Japan is one of the United States’ closest allies, Japan isn’t buying U.S. Steel. The idea that U.S. Steel is currently American-owned and will now be foreign-owned is not quite right. U.S. Steel is owned by both Americans and foreigners right now because anyone in the world can purchase its shares on the New York Stock Exchange. In the same way, Americans and foreigners can purchase shares of Nippon Steel on the Tokyo Stock Exchange.
China produces about half of the world’s steel, which is likely part of the reason for some senators’ concern. But that doesn’t mean the U.S. is doing something wrong. First, China has 1.5 billion people, so we should expect it to produce a lot of steel.
Second, a large part of the Chinese Communist Party’s economic policy is centered on construction. The party juices the country’s economy to support the building of highways, trains, airports, apartments, and offices, even if there’s no actual need for them. In an underdeveloped country with lots of labor, that’s a straightforward way to boost GDP. The Belt and Road Initiative is the international version of this strategy, sending Chinese construction firms to build in other countries as well. That strategy requires a lot of steel, so the party props up a bunch of steel companies to keep projects going.
If the U.S. had China’s environmental and labor standards and a communist government that could take capital from elsewhere and force it into the steel sector, it could put up some impressive steel-output numbers too. Nobody wants that, so the U.S. doesn’t do that. As things stand, the U.S. is the world’s fourth-largest steel producer, with output 21 percent higher than South Korea’s and more than double Germany’s.
Ninety percent of China’s steel production is done by the basic-oxygen method, which is commonly used in the large integrated steel mills that you might see in grainy photographs from decades ago. Only 29 percent of U.S. steel output today is from integrated mills. The rest is from mini-mills, which use the electric-arc technique and are more cost-effective to produce most kinds of steel. Additionally, mini-mills are operated by 50 companies in the U.S., compared to only three that operate integrated mills.
The senators mention that “U.S. Steel received competitive bids from American companies” in the letter to Yellen. Populists claim to be concerned about market concentration, except when it’s companies they like. Cleveland-Cliffs was the top U.S. bidder for U.S. Steel, offering $35 per share in a half-stock, half-cash buyout. Nippon Steel’s offer beat Cleveland-Cliffs’ handily, at $55 per share and all cash.
If Cleveland-Cliffs had bought U.S. Steel, industry concentration would have increased significantly. There would have been only two integrated-mill operators instead of three, and the combined production of Cleveland-Cliffs and U.S. Steel would leapfrog Nucor. But Cleveland-Cliffs is from Ohio, the state both Vance and Brown represent in the Senate. It’s also the buyer preferred by the United Steelworkers union, whose favor politicians seek.
The Nippon Steel purchase hasn’t even gone through yet, and in the face of political opposition, the company could change its mind. It’s already overpaying, and it might decide that the added abuse isn’t worth it. It’s also hard to say whether the deal will be a smart business decision. Nippon Steel sees underutilized potential at U.S. Steel and believes it has the resources and acumen to improve the company. Maybe it will do that successfully, maybe it won’t.
But we know with 100 percent certainty that senators don’t know any better than Nippon Steel or U.S. Steel what constitutes a good deal for their respective companies. The deal should go through if both companies’ boards and shareholders want it to. Warm fuzzies about America’s industrial past and bluster about national security are not sufficient causes to prevent property owners from doing what they please with their property.