Friends Without BenefitsInvestors take note: the U.S. trusts Japan enough to integrate military commands, but not enough to sell off a troubled steel company
Last night's State Dinner for Japanese Prime Minister Fumio Kishida reportedly included American beef and salmon served on gilded Tiffany plates amid glasses of Oregon wine. There was no mention if the cutlery might have included alloy from U.S. Steel. But for all the efforts to deepen political and military relations between Washington and Tokyo this week, the economic diplomacy between the two countries remains fraught over the proposed acquisition by Nippon Steel of the struggling American industrial icon. It’s another lesson that as complicated as national security issues can be, they are nowhere near as thorny as economic diplomacy when jobs and elections are at stake. For investors tracking the world’s shifting alliances, capital flows and supply chains, it’s also a fresh reminder that all politics-including all geopolitics-is fundamentally local. Facing a tight re-election race in Pennsylvania, where U.S. Steel was founded, President Joe Biden announced last month it was “vital” the firm remain “domestically owned and operated.” Officially, the deal is under review on national security and competition grounds, but there are enough doubts about it ever closing that U.S. Steel stock now trades at a 25% discount to the offer price. Indeed, the strategic decisions in the U.S.-Japan relationship look easy by comparison to what should be a simple corporate acquisition. As long as the Secretary of State can round up a few like-minded foreign ministers, they can organize a summit, draft a communique and get their top brass to drum up some joint maneuvers. The new, streamlined command structure for U.S. forces operating in Japan marks a huge step forward, and so does the trilateral summit set for today that includes President Ferdinand Marcos Jr. of the Philippines. But progress flows naturally from the countries choosing to work together to resist Chinese maritime claims in the Pacific. But deepening trust and cooperation on national security priorities are not enough to allow the world’s fourth largest steel maker to buy the 27th largest for $14.1 billion. That Japan is now easily the biggest foreign direct investor in the United States (well ahead of the United Kingdom) doesn’t seem to matter. Nor, apparently, do statements by Nippon Steel to forswear plant closures and layoffs. It also highlights that the United States has not yet managed to negotiate comprehensive free trade agreements with its closest military allies in Asia or Europe, because even the deepest geopolitical alignment does not trump (or Trump) embedded interests of key industries and unions to limit foreign competition. Perhaps it’s also worth noting here that while there are risks to doing business with close allies, there are plenty of opportunities to be explored with strategic rivals. As tensions mount ever higher between the United States and China, the flows of money, investment and trade continue apace. We may not want to sell advanced semiconductors or buy subsidized solar panels, but there is plenty of business to be done in airliners, soybeans and lawn furniture. Nippon Steel may yet prevail if it keeps its head down until after the November election, but stockholders seem to want plenty of upside to take on that risk. |