U.S. President Joe Biden is said to be planning to end Nippon Steel Corp.’s $14.1 billion bid to buy United States Steel Corp. on national security grounds. A Treasury Department letter from August provides the justification.

The case against the takeover is spelled out in a letter to the steelmakers written by Treasury on behalf of the Committee on Foreign Investment in the U.S., the secretive panel charged with scrutinizing foreign deals for American companies. Cfius relies heavily on a novel argument: that the Japanese company represents a threat to an industry critical not just for production of military equipment, but also for infrastructure.

If Biden blocks the sale on such grounds, it could expand the government’s definition of national security to include threats to the American economy, rather than typical concerns of spying, data collection or technology theft. That potentially opens the door to additional powers for Cfius and in doing so, the committee risks exposing itself to criticism that its reasoning is politically motivated.

Bloomberg News reported Tuesday that Biden plans to formally block the foreign takeover of US Steel once the deal is referred back to him later this month. Shares of the iconic American steelmaker plunged 9.7% after the report to $35.26, well below Nippon Steel’s $55-a-share offer price, and have continued to drift lower. The stock fell as much as 3.4% Thursday in New York.

The Treasury Department declined to comment. The White House has said the Cfius process remains ongoing.

The Aug. 31 Treasury letter identifies national security concerns from the takeover, noting that “such risks relate to potential decisions by Nippon Steel that could lead to a reduction in domestic steel production capacity.”

In reaching that conclusion, Cfius relied on Commerce Department analysis “that considered a robust commercial steel market is essential for national security.” The committee used both classified and unclassified information, including assessments from Commerce experts, press reports and company submissions, according to the letter obtained by Bloomberg News. Treasury cited an investigation underpinning Trump’s 2018 steel tariffs as its basis for the national security analysis.

No Alternative

Among its findings, the letter said “no domestic alternative exists to replace the lost production capacity and variety of steel products produced at scale in the near term.”

US steel producers are unable to meet domestic critical infrastructure and commercial demand alone, leaving the market to depend on imports to fill the gap in demand, according to the letter. That raises concerns of hypothetical scenarios in which U.S. consumers would be unable to obtain specific steel from overseas due to shipping disruptions and no longer access such products from domestic mills.

“A continued loss of viable commercial production capabilities and related skilled workforce will jeopardize the US steel industry’s ability to meet the full spectrum of national security requirements,” it said.

Driving the concern of lost U.S. capacity, Cfius points to Nippon Steel’s large production base in India, with its low-cost steel mills. Production in India costs about 20% less on average than in the U.S. amid significantly cheaper labor costs. India — described in the letter as a “strong” exporter — is one of the Japanese company’s largest production markets outside China. Nippon Steel’s India mills are widely viewed as some of the company’s most efficient plants with the newest technology.

To be sure, shipping large volumes of steel across oceans is expensive.

“Although it’s not unreasonable to connect a robust commercial steel market to U.S. national security, it’s hard for the government to say with a straight face that this transaction would in fact weaken the commercial steel market,” said David Plotinsky, a partner at Morgan Lewis who consults clients on matters regarding Cfius. “In this case it seems that the tail may be wagging the dog, in that Commerce’s trade-related analysis is being used to help CFIUS gin up a very thin national security argument in the absence of genuine national security risk.”

Nippon Steel also has presence inside China, with the letter noting that those assets account for 5% of the company’s global production capacity — a concern for the Biden administration.

Nippon Steel said in an emailed statement that any suggestions that the company might take any actions to shut down US Steel’s production in the U.S. in favor of its operations in India or elsewhere is emphatically incorrect and has no basis in fact.

Trade Case Conflicts

In terms of the American industry, Cfius underscored how blast furnaces used in traditional steelmaking are still necessary to make certain products essential for infrastructure. The implication is that no domestic alternative currently exists to replace lost production capacity of integrated mills. In the event of war, the national security concern would be that foreign steel may not reach American shores, underscoring the need for domestic capacity.

The letter stressed that a competitive US steel market is crucial to end users, many of which are in “national security critical industries” including the U.S. highway system, bridges and ports.

The committee also cited potential conflicts a US Steel takeover could bring to trade cases, arguing that decisions on antidumping and countervailing duty cases “will be influenced by Nippon Steel, and may take into account Nippon Steel’s commercial interests and competitive position in the global steel market, which are broader than US Steel’s domestic interests.”

Nippon Steel said in September that it wouldn’t interfere with US Steel’s decisions on trade issues. It would establish a “trade committee” made up of U.S. citizens to make recommendations to the US Steel board.

Cfius, which has been reviewing the proposed takeover for much of this year, must refer its decision to Biden by Dec. 22 or 23, people familiar with the matter said this week.

With assistance from Stephen Stapczynski.

previous coverage

• Japanese steelmaker Nippon says it will not accept presidential block of US Steel deal
• Japan risks turning inward just as world braces for Trump return