From my blog, Regions. Check out the full post here. 

Washington is collectively aghast at the pending sale of U.S. Steel to its much larger Japanese rival, Nippon Steel. While Nippon quickly pledged to honor all labor agreements with U.S. Steel’s workers and is set to make major investments in the United States going forward, the backlash was nevertheless swift and vicious. Now, the transaction faces months of federal reviews that may ultimately scuttle the sale. 

The New York Times hails this sale as a major test of the Biden Administration’s reindustrialization efforts. Perhaps this is true. But I think this slightly misses the mark. A new bipartisan consensus has emerged that the United States ought to engage unapologetically in activist industrial policy to support strategically important sectors and supply chains. I think it’s more accurate to say that this moment represents a test of whether this consensus (of which I am a supporter!) is going to be based on cold, rigorous, and consequentialist assessments of the national interest or mere vibes and nostalgia. The initial reaction to U.S. Steel’s sale suggests we may be in for more of the latter than the former.

Are the “national security concerns” in the room with us right now?

Opponents of the deal overwhelmingly flagged it as a risk to national security. Indeed, the idea that a once-iconic industrial giant so symbolic of American power might fall into the hands of a foreign-domiciled corporation sounds a bit scary. But what precisely is the worry here? I’m having a hard time finding clear answers.

Japan is one of the United States’ closest allies. Tens of thousands of American troops are stationed across the country. Further, Japan has at least as much to fear from an ascendant and aggressive China as we do; they are as firmly in the “American bloc” as you can get.

If firms from a country as closely aligned with American foreign policy and strategic interests as Japan cannot invest here, who can? Deriving opponents’ first principles here is challenging. Even their most generous interpretation implies a far more radical and disruptive decoupling from global supply chains than anyone in the political mainstream has seriously lobbied for. 

Sen. Marco Rubio, an opponent of the sale, correctly points out in Newsweek that while Japanese and American leadership have been closely aligned for many decades, it is not inevitable that American and Japanese interests will always and everywhere align. It’s fair to go a step further than that. No American alliance, with Japan or otherwise, is guaranteed to last.

Rubio points to a Bureau of Industry and Security report from 2018 arguing that maintaining a strong domestic steel supply chain is critical for meeting the military’s demands. High-quality, low-cost steel is also an upstream component key to all sorts of other manufacturing sectors.¹ While the staunchest market fundamentalists may outright reject industrial policy per se, for the rest of us, the case for supporting domestic steel is worth a hearing.

But here is an obvious question that nobody seems to be asking: If a strong, innovative, and productive domestic steel industry is an urgent national security imperative, is the current leadership of U.S. Steel even remotely up to this task?

A failure to innovate doomed U.S. Steel, not vague notions of “neoliberalism.”

The fall from grace of U.S. Steel is staggering by any measure. Today, U.S. Steel produces 14.5 million tons of steel per year, barely one-third more than it did in the year of its founding, 1902 (global production increased roughly one hundred-fold since then). Compared with its peak of 35 million tons in the 1950s, production is down nearly 60 percent. Having once produced a full two-thirds of American-made steel, the company now accounts for less than 20 percent of a shrinking market. Once far and away the world’s largest producer, the company now barely cracks the top 30.

As the Institute for Progress’ Brian Potter writes, the fall of U.S. Steel lies squarely in the company’s hostility to new technology and consistent inability to adopt competitors’ innovations:

“Arguably, US Steel has been a disappointment since the day it was formed. It was created as a fundamentally conservative reaction to the vicissitudes of the steel industry, and this guided its early years and shaped its culture. The economies of scale it achieved were never passed on to the consumer, and instead it used its size to bully other steelmakers and extract money from consumers. When this stopped working, it used its political influence to prevent consumers from buying low-cost foreign steel. Improving the efficiency of its operations was something it did as a last resort when left with no other options.”

“…being transformed into a lean, competitive company doesn’t seem to have changed its fundamental culture, a company that's content to be a follower, rather than a leader in technological development and pushing the industry forward.”

Potter plots one instance after another in which U.S. Steel either (at the height of its power) attempted to squash technologies that might disrupt the industry and threaten its status or (later on) simply failed to act on the threats it faced. 

As Potter points out, policymakers hardly stood by idly as the company slowly faded. Presidential administrations have granted the industry massive subsidies and protection from international competition for decades. In one episode, Potter writes, President Lyndon Johnson strong-armed European and Japanese producers to limit exports to the United States and give domestic steelmakers some breathing room to catch back up to the technological frontier. Rather than use this reprieve to tech-up and regain international competitiveness, steelmakers’ investment instead stagnated.

Congress has supplied decades of even more explicit support. The Buy America Act of 1933 directs public procurement of construction materials like steel to domestic producers, even if they offer higher prices than their peers. The Bipartisan Infrastructure Law strengthened these rules further in 2021, widening the scope of federally-funded projects required to use American-made steel. Further, domestic producers have long been protected by tariffs and import quotas, most recently the 25 percent “national security tariff” applied by the Trump Administration in 2018. As the Congressional Research Service reports, efforts to fight the scourge of affordable steel products have escalated further over the last 20 years:

Yet decades of guaranteed business from government at elevated prices, timely interventions when domestic producers were on the ropes, and successful lobbying for protective tariffs have evidently failed to create a thriving and innovative domestic steel sector. China produces more than ten times more steel annually than the United States. India and Japan are well ahead of American totals, too. An iconic brand like U.S. Steel remains but a minor player in global markets, apparently too vulnerable to survive on its own.

Isn’t there a lesson we should draw here?

Competition and industrial policy success go hand-in-hand.

Decades of American steel policy have failed to learn what I see as a fundamental lesson of industrial policy’s success stories: Any serious industrial policy to advance national or economic security interests must relentlessly chase productivity improvements and innovation, harnessing competition and global engagement to do so.

Libertarians may argue that the failure of American steel policy demonstrates the inevitable folly of industrial policy writ large. But this gets the story only half-right.

Take a look at the most recent rankings of the 50 largest steel producers in the world. A majority are Chinese-owned and nearly all are, on some level, creations of activist industrial policy, including Nippon Steel itself.

I recently re-read Joe Studwell’s, How Asia Works, which comes as close to an industrial policy Bible as one can find. In it, Studwell traces the rise of South Korean steel giant POSCO, setting its story against the epic state-led failure to create a domestic steel champion in Malaysia.

Studwell takes us on a tour of POSCO’s Pohang facility, where the firm scaled up its production and became the global powerhouse it is today. Set on the coast, the facility has convenient terminals to both directly receive inputs from its upstream suppliers and promptly export the finished product abroad. As Studwell notes, the Pohang plant exported between 30 and 40 percent of its output from the very beginning. POSCO received deep financial support from the state, and was heavily incentivized to export—competing against the world’s most advanced producers—rather than simply serve the smaller domestic market.

Through explicit support for exporters, Korea pushed POSCO to climb the value chain and gradually learn the most advanced production techniques. POSCO courted investment from larger Japanese firms, absorbing their technologies. But the firm insisted that Korean workers learn these new systems inside and out:

“…the firm showed a relentless application to the job of learning everything there is to know about a steel plant. During the first and second phases of its construction, POSCO management refused to employ the computerised control systems recommended by their Japanese consultants lest they did not fully understand the equipment they were buying.”

Contrast the experience of POSCO with Malaysian Prime Minister Mohamad Mahathir’s pet project, the Perwaja steel plant. The first mistake Studwell highlights is the plant’s location; whereas POSCO’s Pohang facility is right on the coast, designed from the outset to export, Perwaja was instead located across the Malaysian peninsula from both its suppliers and buyers. An effort to develop a particularly poor region of the country, Mahathir’s choice of location was political, not economic.

In contrast to POSCO, Malaysia’s Perwaja project faced no requirements to export. It, too, sought Japanese investment, but failed to learn the underlying technology and remained reliant on its foreign patrons. While POSCO is now one of the biggest steel producers in the world and a publicly traded independent company listed on the New York Stock Exchange, Perwaja remains a stark reminder of Malaysia’s failure to join the ranks of developed economies.²

The dueling tales of these two plants stand in for Studwell’s broader thesis: that manufacturing policy which insisted on producers exporting (learning from international competition) and which cut off support for those who didn’t succeed, was what differentiated successful industrialization drives in East Asia from failures.

Studwell’s book is taken largely as a set of lessons for developing countries seeking to climb the value chain, but the lessons for American steel and our new era of industrial policy should be hard to miss. State support for firms in key sectors may be necessary at least for a time, but it is hardly sufficient for producing world-leading firms.

I like to think about industrial policy in the way international relations specialists view economic sanctions. When coupled with tangible, achievable policy goals, sanctioning a misbehaving regime stands a decent chance of working, causing the targeted regime to either make concessions or fall. But at least two obstacles stand in the way. First, the sanctioning country may renege on the conditionality of its sanctions. The sanctioned country may concede to giving up its missile program, but the sanctioning country may try to push its luck, promising to maintain its policy until the sanctioned country gives up all its nefarious activities.

Second, a defiant regime may simply withstand the initial period in which the sanctions bite hardest. Domestic supply chains re-adjust. The hard, initial costs start to fade. The country is left poorer, but the regime survives and can rally domestic support in opposition to the sanctioning country trying to impose its will.

Similarly, industrial policy and state support can indeed forge world-leading producers at the bleeding edge. In fact, that’s how most of today’s global steel powerhouses earned their status. But support won’t work unless producers are forced, as Studwell writes, to compete in global markets, learn from their more advanced rivals, and ultimately lose state support if they fail.

One administration after the other was happy to protect U.S. Steel when it was most vulnerable and direct public procurement officers its way even when it cost taxpayers dearly. But this assistance did not come with the condition that the firm learn, upgrade, or innovate. It did little more than subsidize the culture of complacency that ended up being U.S. Steel’s undoing.

Sale or no sale, the challenge of building a productive, internationally competitive domestic steel sector remains no less daunting. And as this new bipartisan consensus further explores questions of economic resiliency and supply chain security, we will need serious ideas beyond nostalgia and one-off security reviews. If we are going to do industrial policy, we have some learning and innovating to do ourselves.

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