In condemning Nippon Steel’s proposed acquisition of U.S. Steel, many politicians, from John Fetterman to Donald Trump, are ignoring the severe costs of the alternative tie-up with a domestic steel-making rival—the harms to competition in both labor and product markets from the alternative merger with Cleveland-Cliffs (the “alternative merger”). Whatever security concerns might flow from ceding control of a large steel operation to a Japanese company must be assessed against the likely antitrust injury that would be inflicted on domestic workers and steel buyers by combining two direct horizontal competitors in the same geographic market. This basic economic point has been lost in the kerfuffle.
Harms to Labor
The first place to consider competitive injury from the alternative merger is the labor market, in which Cleveland-Cliffs and U.S. Steel compete for labor working in mines. If Cleveland-Cliffs (“Cliffs”) had been selected by U.S. Steel, there would only be one steel employer remaining in some geographic markets such as northern Minnesota and Gary, Indiana. This consolidation of buying power would have reduced competition in hiring of steel workers, almost certainly driving down workers’ wages by limiting their mobility.
To wit, Minnesota’s Star Tribune noted that “Cleveland-Cliffs and U.S. Steel have long histories on Minnesota’s Iron Range, controlling all six of the area’s taconite operations. Cliffs fully owns three of the six taconite mines, and U.S. Steel owns two.” Ownership of the sixth mine is shared between Cliffs (85%) of U.S. Steel (15%). A Cliffs/U.S. Steel merger also would have made the combined company the sole industry employer in the region surrounding Gary, per the American Prospect. Additional harms from newfound buying power include reduced jobs and greater control over workers who retain their jobs.
The newly revised DOJ/FTC Merger Guidelines explain that labor markets are especially vulnerable to mergers, as workers cannot substitute to outside employment options with the same ease as consumers substituting across beverages or ice cream. But the harm to labor here is not merely theoretical: A recent paper by Prager and Schmitt (2021) found that mergers among hospitals had a substantial negative effect on wages for workers whose skills are much more useful in hospitals than elsewhere (e.g., nurses). In contrast, the merger had no discernible effect on wages for workers whose skills are equally useful in other settings (e.g., custodians). A paper I co-authored with Ted Tatos found labor harms from University of Pittsburgh Medical Center’s acquisitions of Pennsylvania hospitals. And Microsoft’s recent acquisition of Activision was immediately followed by the swift termination of 1,900 Activision game developers, a fate that was predictable based on the combined firm’s footprint among gaming developers, as well job-switching data between Microsoft and Activision.
This is the type of harm that the U.S. antitrust agencies would almost assuredly investigate under the new antitrust paradigm, which elevates workers’ interests to the same level as consumers’ interests. Indeed, the Department of Justice recently blocked a merger among book publishers under a theory of harm to book authors. Under Lina Khan’s stewardship, the Federal Trade Commission is likely searching for its own labor theory of harm, potentially in the Kroger-Albertsons merger.
And the Nippon acquisition would largely avoid this type of harm, as Nippon does not compete as intensively, compared to Cliffs, against U.S. Steel in the domestic labor market. To be fair, Nippon does have a small American presence: It has investments in several U.S. companies and employs (directly and indirectly) about 4,000 Americans—but far fewer than U.S. Steel (21,000 U.S. based employees) and Cliffs (27,000 U.S. based employees). Importantly, Nippon employs no steelworkers in Minnesota, and its plants in Seymour and Shelbyville, Indiana are roughly a three-hour drive from Gary.
It bears noting that United Steelworkers (USW), the union representing steelworkers, has come out against the Nippon/U.S. Steel merger, alleging that U.S. Steel violated the successorship clause in its basic labor agreements with the USW when it entered the deal with a North American holding company of Nippon. This opposition is not proof, however, that the alternative merger is beneficial to workers, or even more beneficial to workers than the Nippon deal. Recall that the union representing game developers endorsed Microsoft’s acquisition of Activision, which turned out to be pretty rotten for 1,900 former Activision employees. Sometimes union leaders get things wrong with the benefit of hindsight, even when their hearts are in the right place.
Harms to Steel Buyers
Setting aside the labor harms, the alternative merger would result in Cliffs becoming “the last remaining integrated steelmaker in the country.” Mini-mill operators like Nucor and Steel Dynamics do not serve some key segments served by integrated steelmakers, such as the market for selling steel to automakers. In particular, automakers cannot swap out steel made from recycled scrap at mini-mills with stronger and more malleable steel made from steel blast furnaces. According to Bloomberg, a combined Cliffs/U.S. Steel would become the primary supplier of coveted automotive steel.
The prospect of Cliffs acquiring U.S. Steel triggered the automotive trade association, the Alliance for Automotive Innovation, to send a letter to the leadership of the Senate and House subcommittees on antitrust, explaining that a “consolidation of steel production capacity in the U.S. will further increase costs across the industry for both materials and finished vehicles, slow EV adoption by driving up costs for customers, and put domestic automakers at a competitive disadvantage relative to manufacturers using steel from other parts of the world.”
Moreover, a U.S. Steel regulatory filing detailed how antitrust concerns in the output market factored in its decision to reject Cliffs’s bid. U.S. Steel’s proxy noted: “A transaction with [Cliffs] would eliminate the sole new competitor in non-grain-oriented steel production in North America as well as eliminate a competitive threat to [Cliffs’s] incumbent position in the U.S., and put up to 95% of iron ore production in the U.S. under the control of a single company.”
Once again, the lack of any material presence by Nippon in the United States ensures that such consumer harms are largely limited to the Cliffs tie-up. An equity research analyst with New York-based CFRA Research who follows the steel industry noted that Nippon has a “very small footprint currently in North America.”
Balancing Security Concerns Against Competition Harms
Regarding national security concerns from a Nippon-U.S. Steel tie-up, The Economist opined these harms are exaggerated: “A Chinese company shopping for American firms producing cutting-edge technology that could help its country’s armed forces should, and does, set off warning sirens. Nippon’s acquisition should not.” If the concern is control of a domestic steelmaker during wartime, the magazine explained, U.S. Steel’s operations “could be requisitioned from a disobliging foreign owner.” For the purpose of this piece, however, I conservatively assume that the security costs from a Nippon tie-up are economically significant. My point is that there are also significant costs to workers and automakers from choosing a tie-up with Cliffs, and sound policy militates in favor of measuring and then balancing those two costs.
Finally, this perspective is based on the assumption that U.S. Steel must find a buyer to compete effectively. Maintaining the status quo would evade both national security and competition harms implicated by the respective mergers. But if policymakers must choose a buyer, they should consider both the competition harms and the national security implications. Ignoring the competition harms, as some protectionists are inclined to do, makes a mockery of cost-benefit analysis.