US-China Watch

By blocking Nippon Steel’s $14.9 billion purchase of US Steel, the Biden Administration has turned international economic policy inside out. On this point, the incoming Trump Administration is in rare agreement. Like many conflict-prone moves in recent years, this action has been justified on the basis of alleged national security concerns. Yet in the end, it is nothing more than a blatant political move at odds with the core economic and financial needs of the United States.

Unsurprisingly, at least for those of you who have been following me for years, I start with macro context:  This intervention occurs against the backdrop of America’s profound shortfall of domestic saving—a net national saving rate that averaged just 1% in the first three quarters of 2024. As I have argued ad nauseum, this anemic saving position—the lowest domestic saving rate of any leading nation in modern history—underscores America’s need to import surplus saving from abroad in order to invest and grow. Such foreign capital comes in many forms—investments in Treasuries, equities, other dollar-based securities, and the foreign direct investment (FDI) of global multinational corporations. The Nippon-US Steel transaction fits into the FDI bucket of the foreign capital inflows that the United States needs to fund its shortfall of domestic saving.

No, I am not arguing that stopping a $14.9 billion deal poses a dire threat to America’s vast external financing needs. After all, the US current account deficit was running at an annual rate of over $1 trillion in the first half of 2024 (around 3.5% of GDP, or 0.8 percentage points above its ten-year average of 2.7%). Rather, I am underscoring the audacity of the world’s major debtor nation to presume that it can pick and choose the form by which it receives capital from abroad. Call it a corollary of America’s well-known “exorbitant privilege”—the seemingly open-ended capacity of the US to draw on its reserve-currency status to finance massive external deficits on exceptionally favorable terms.   The question I am raising is whether there are limits to that privilege.

The macro response is that the audacity of the borrower does not wipe out the external financing obligation; in other words, if the foreign capital required to fill the domestic saving shortfall doesn’t come from this particular Japanese FDI transaction, it will have to come from somewhere else.  The political point is less subtle. How can the United States, in good faith, raise national security concerns with our most trusted ally in Asia?  Japan, where the US currently has about 55,000 troops deployed in fifteen major military bases, is host to America’s largest foreign military presence.  The US Seventh Fleet  and the Fifth Airforce, both of which rely on leading-edge US defense technology, are both headquartered in Japan. Washington has no compunction about security risks associated with major force projections in Japan, but it somehow worries about the supposed threat of an overseas investment in our largest steel company!

Which, of course, touches on an even bigger point—that this is a dispute over the politics of ownership pride, not a security threat about losing a proprietary technology that might have a bearing on America’s competitive or stature or defense posture. It’s not as if the Japanese acquiror is about to extract a piece of capacity from America’ domestic manufacturing base and ship it back to Japan.  In fact, given the long-standing trend toward downsizing in the US steel business in general, and US Steel, in particular, there is good reason to welcome a new injection of capital and technological prowess from the world’s leading integrated steel producer.

This could well be a symptom of a much larger problem. In an era of mounting global trade frictions, FDI is at risk of becoming a new lightening rod in America’s swing to anti-globalism. Yet that is very much at odds with the key role it has played in supporting the US economy. This is captured best by data on Majority-Owned US Affiliates (MOUSAs) of foreign multinational enterprises. In 2022, MOUSAs accounted for over 6% of total private employment,  over 6% of US business value added, over 11% total business spending on research and development, and nearly 16% of business capital spending.

Japan has long played an especially prominent role in driving foreign direct investment in the United States. As can be seen in the figure below, Japan is ranked number one, slightly ahead of Canada, when measuring FDI position by country of “ultimate beneficial owner of US affiliate.” That’s true of aggregate FDI positions in all US industries, as well as for Japan’s leading FDI position in manufacturing (slightly ahead of the United Kingdom), where the now seemingly questionable Nippon Steel transaction would fall.

Notwithstanding the historical record, the political arguments against the Nippon-US Steel transaction have become deeply ingrained in America’s new bipartisan nationalistic mindset. President Biden’s January 3 executive order offers little detail to his sweeping conclusion that the deal “threatens to impair the national security of the United States.”  An accompanying statement provides a convoluted rationale drawing on the trebling of tariffs on Chinese steel imports as justification for protecting US steelworkers  — note, Nippon Steel is Japanese, not Chinese! Biden also stresses the imperatives of supply-chain security, stretching to imply that the integrity of cross-border production flows is somehow contingent on parent ownership issues.

This weak political case against Nippon-US Steel transaction, in conjunction with an equally weak economic case, is a sad commentary on the conflict-prone state of play in the world today. Vaguely defined national security concerns have become the new lightening rod to pit nations against one another. I have stressed this repeatedly in raising concerns about America’s penchant for Sinophobia based on the conjectural motives of alleged Chinse threats, ranging from electric vehicles and dock-loading and construction cranes to TikTok and Huawei. China’s tit-for-tat national security retaliation has only compounded the problem.   And now, one of America’s most trusted allies, Japan, is being tainted with the same national security paranoia.

Unsubstantiated national-security fears are a quick path to the low road of deglobalization. They can be used as excuses to decouple supply chains, vilify foreign producers, curtail people-to-people relationships, or drive wedges between allies as is the case by blocking the Nippon-US Steel transaction. This tendency could well be amplified during Trump 2.0. Under the purported guise of national and economic security, President-elect Donald Trump has recklessly mused about America’s new colonial adventurism in Greenland, the Panama Canal, and even Canada. As if a conflict-prone world didn’t already have enough on its plate!

In his seminal work on The Rise and Fall of Great Powers, Paul Kennedy concluded that the seeds of great-power decline were invariably sown by the time-honored tendency of “imperial overstretch.”  Kennedy frames such overstretch largely in military terms. I have argued that there is a corollary in economic terms, when geostrategic power projection outstrips vulnerable economies. In Accidental Conflict, I warned that an increasingly outward-facing China, with its gathering sense of internal economic malaise, may well be susceptible to such a tendency. That’s not to say that the United States isn’t vulnerable to the hubris of a very different strain of overstretch. By thumbing its nose to well-intentioned Japanese capital or hinting at a new imperialism, saving-short America—the beggar in this melodrama—may well face comparable risks.