US should be encouraging more foreign investment, not stifling it

The pending U.S. Steel-Nippon Steel deal and its trailing political intrigue is a microcosm of both the economic hope and the political cynicism at work in the United States as we race toward the midpoint of the 21st century. 

As has been well–chronicled, the deal, which has been approved by U.S. Steel’s shareholders, involves foreign direct investment from Nippon Steel, a public company owned by citizens of one of America’s strongest allies, Japan. The deal would retain the iconic company’s name, its existing headquarters, and its union contracts, as Nippon Steel injects $1.4 billion in capital to upgrade U.S. Steel’s factories. This investment would expand on the $721 billion Japanese companies have injected into the U.S. economy since 2021 and the nearly 1 million Americans they have employed. Further, it is much to our advantage that this deal is made in America rather than in northern Mexico, which has become a manufacturing investment hub for China and Japan.

Independent of this legitimate transaction between two public companies, America would win from this deal in many ways: the American workforce would suffer no harm (and would ultimately benefit); American infrastructure would be revitalized and better utilized; the American economy would grow both now and in the long term with the cash flow from this investment; U.S. Steel investors would benefit with their gains and be able to invest in other job-creating opportunities; and federal tax and revenue collection would be higher.

This last point — getting more money into the federal coffers — deserves special consideration from America’s policymakers and regulators. Foreign investment is a big part of the hope and solution to the nation’s fiscal crisis, which is a genuine existential threat in the medium and long run. 

Federal spending has long exceeded our nation’s financial means. Since 1970, the U.S. had a surplus in only the four years 1998-2001. Those four years resulted from the combination of slowed federal spending and strong economic growth. 

Due to the looming insolvency of Social Security and Medicare, any hope for a repeat of the 1998-2001 period is wishful thinking. The Congressional Budget Office projects worsening deficits for all years through 2054. The unrealistic benefits that politicians promised from our safety net programs — the primary drivers of the fiscal crisis — have never aligned with budgetary realities, and the bill is coming due.

Absent politicians finding the fortitude to enact meaningful structural reforms to Social Security and Medicare, the coming policy options in the 2030s are either significant benefit cuts or growing more sources of revenue. This situation will develop in tandem with national and global demographic and workforce changes, owing to declining fertility and the replacement of our current workforce with a denser immigrant labor force, whose productivity will lag compared to existing workers.

This means we need to encourage both domestic innovation and cultivate investment now to ensure that the nation has the necessary resources to protect our safety-net programs and advance our standard of living. Receipts generated from foreign direct investment, such as the U.S. Steel-Nippon Steel deal, are precisely the investment that we need — investment from an ally that directly benefits American workers and our nation’s broader fiscal environment. It is consistent with the Hamiltonian norm dating to the foundation of our republic. 

The most recent data from the Bureau of Economic Analysis report $5.25 trillion of foreign direct investment in the U.S. for 2022. We should pursue policies that grow this number.

Whether American politicians have the prudence to recognize this and put temporary political gains aside for the long-term good of the nation is the point of despair. The recent timing and sequence of opposition to the deal from the United Steelworkers union, President Joe Biden’s support of the union’s position, and the union’s subsequent endorsement of Biden certainly looks like a quid pro quo. 

This high-stakes situation has long-term implications that go far beyond the 2024 presidential election. So far, Nippon Steel has not backed out of the deal, though it would be hard to fault them if they did. 

Yet, how many other public companies are watching? If this deal is blocked due to a political purpose — and given the facts (and the absence of national security risks), what other purpose exists? — it has the potential to discourage future foreign investment. Why take on the costs of arranging a fair and mutually advantageous investment in America if it can be undone by a politician seeking political support from a particularly coveted group? That type of uncertainty and volatility would be a huge red flag.

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Far more than a single transaction is at stake in the U.S. Steel-Nippon Steel deal. Cash flows to the U.S. from foreign investment are one of the big areas for hope in solving America’s growing fiscal crisis. 

But will this investment be quashed by cynical, political decisions? How the U.S. Steel-Nippon Steel deal resolves will have major implications for our fiscal future. The world is watching.

Doug Branch is principal at Phronesis Insights, LLC and previously served 25 years in Congress, including as a senior adviser and deputy staff director of the Joint Economic Committee, and senior adviser at the Senate Committee on Homeland Security and Governmental Affairs.