There has been a lot of commotion following US president Joe Biden’s decision to block the $14.9bn acquisition of US Steel by Nippon Steel. Why would a company from Japan, an ally country, pose a national security threat significant enough to prompt a presidential veto?

A retrospective on the country’s FDI screening framework dispels much of that commotion. Japanese investors have been front and centre of foreign direct investment (FDI) restrictions in the US from the early days of FDI screening regulations in the 1980s. 

It was with Japanese investors in mind that US legislators first gave the government the power to veto foreign investment deals based on a loose idea of national security. 

The Exon-Florio amendment

Japan experienced fast-growing current account surpluses during the 1980s. Japanese companies reinvested much of those surpluses in the form of FDI, with the US being a prime destination for their investments. That growing wave of Japanese investment created apprehension in Washington.

The US economy had limited recent experience as an FDI destination. Up until that point in post-second world war history, outbound US investment had typically been more prominent than inbound FDI. In fact, the Reagan administration spent more time formalising the country’s open investment policy than restricting it. 

The resulting legal void came to light when the White House found itself lacking legal avenues to kill a proposed deal by Fujitsu to acquire 80% of loss-making microchip firm Fairchild Semiconductor, a subsidiary of then France-based Schlumberger. Eventually, the Japanese company called off the deal amid heightened political opposition, although the only way US agencies seemed able to contest the deal was through an antitrust case via the Department of Justice.  

It was against that backdrop that the Exon-Florio amendment was added to the 1988 trade act. The amendment granted the president the authority to investigate FDI deals from a national security perspective and block proposed or pending foreign “mergers, acquisitions, or takeovers” that “threatens to impair the national security”. 

Although the White House upheld its open investment policy, it faced increasing headwinds from legislators keen to tighten up further the country’s fledgling FDI screening mechanism. 

“An increasingly vocal group of politicians on both sides of the aisle believes that a crackdown on foreign-owned firms is justified on the grounds of competitiveness and national security,” wrote an FDI review authored by economist DeAnne Julius and published in 1991 by the Washington-based think tank Group of 30. 

“Their rationale is a straightforward extension of protectionism thinking from the trade field.”

The track record

Following its establishment in 1975 and the Exon-Florio amendment in 1988, the Committee on Foreign Investment in the United States’s (Cfius) powers were gradually expanded over the years, giving the body and the president more agency to scrutinise and eventually veto FDI deals. 

Up until 2016, the US president blocked only two deals, both by Chinese companies, one in aerospace and the other one in renewables. But FDI has come under growing scrutiny in recent years, which led to another six presidential vetoes since 2016, once again, all involving Chinese companies except for the proposed acquisition of Qualcomm by then Singapore-based Broadcom. 

This is only the tip of the iceberg, however. According to official data, Cfius investigated 1150 FDI deals between 2014 and 2023. Some 448 of them were withdrawn before closing, or 39% of the total. Between 2021 and 2023. Investors from Japan, mostly in the manufacturing sector, featured among the most scrutinised, behind peers from China, Singapore and Canada. 

With the first presidential veto of an FDI deal proposed by a Japanese company, history has now come full circle. US Steel has been bleeding assets and workers for years. However, with the winds of protectionism sweeping across the country, the company’s ownership has become a matter of national economic pride. 

“US Steel will remain a proud American company — one that’s American-owned, American-operated, by American union steelworkers — the best in the world,” read the statement by President Biden that sealed the fate of the acquisition on January 3. 

The fact that Japan is still perceived as a country chasing a lopsided FDI policy — encouraging outbound investment over inbound investment — didn’t help either. Despite recent efforts by the government to open up the national economy to FDI, the country has among the lowest levels of FDI to GDP among all OECD countries, and has the largest gap between outbound and inbound FDI stocks among major economies. 

Much as the US’s expanding web of FDI screening regulations has to do with geopolitics, its original rationale is to be found in economic nationalism and protectionism. As such, it’s meant to take no prisoners, whether they be allies or not.

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