U.S.-Japan Trade Talks Exclude Steel Deal—Here’s What Investors Need to Know

The U.S.-Japan trade talks of 2025 have entered a critical phase, but not all high-stakes negotiations are on the table. Despite the central role of steel tariffs in the broader trade war, President Donald Trump recently stated that the controversial $14.1 billion U.S. Steel-Nippon Steel merger will not be part of ongoing bilateral discussions. This separation raises key questions: Why exclude the deal? What does it mean for investors? And how might the two tracks—trade talks and the merger review—interact?

The Trade Talks: Stagnation Amid Tariffs and Deficits

The U.S. and Japan remain locked in a standoff over trade imbalances and tariffs. Japan’s $63 billion trade surplus with the U.S. in 2024 has fueled U.S. demands for deficit reduction, while existing tariffs—10% on baseline goods and 25% on steel/aluminum—continue to strain relations. Federal Reserve Chair Jerome Powell has warned that these policies risk inflation spikes and slower growth, but Trump has doubled down, arguing for “big progress” in talks.

Yet progress is elusive. Japan has reportedly offered concessions like increased U.S. rice imports to address agricultural imbalances, but the U.S. insists on deeper reforms, including raising Japan’s defense spending to 3% of GDP (up from 1.8%). Meanwhile, the U.S. has delayed auto tariffs but maintains existing levies, leaving both sides in a stalemate.

The U.S. Steel-Nippon Deal: A Separate, but Critical, Track

While the merger is excluded from trade talks, its fate remains intertwined with broader U.S.-Japan relations. Nippon Steel’s bid to acquire U.S. Steel—a deal blocked by Biden in January 2025—was revived in April after Trump ordered a new CFIUS review, which concludes in late May.

The merger’s approval hinges on addressing national security concerns, including:
- Nippon Steel’s pledge to invest $1.4 billion in U.S. facilities and honor union contracts.
- Mitigating risks of foreign control over a strategic industry.
- Ensuring “friendshoring” benefits, such as reducing reliance on Chinese steel (which accounts for 50% of global production).

Investors have already reacted: U.S. Steel’s stock jumped 13% on April 7, reflecting optimism about approval. Nippon Steel’s shares, however, remain volatile, as markets weigh geopolitical risks versus the deal’s potential to modernize U.S. steel production via Nippon’s 2,000 steel-related patents.

Why Exclude the Deal from Trade Talks?

Trump’s decision to separate the merger from trade talks likely stems from political calculus and strategic prioritization:
1. Preserve Leverage: Including the deal in broader negotiations could dilute U.S. bargaining power on tariffs and defense spending.
2. Avoid Backlash: The merger has drawn criticism from unions like the United Steelworkers (USW), which fear foreign ownership. Keeping it separate avoids alienating Pennsylvania voters—a key swing state.
3. CFIUS’s Role: The merger is a national security review, not a trade negotiation. CFIUS’s expertise in evaluating foreign investments is better suited to this case than general trade talks.

Investment Implications: Monitor Both Tracks

Investors must track two distinct but related developments:

1. Trade Talks Outcomes

• Tariff Reductions: If Japan secures relief from U.S. tariffs, sectors like automobiles and semiconductors could benefit.
• Defense Spending: A jump to 3% of GDP (from 1.8%) would boost Japanese defense contractors like Mitsubishi Heavy Industries.

2. The Steel Merger’s Fate

• Approval: U.S. Steel’s valuation could rise further if the deal proceeds, while Nippon Steel gains a foothold in the U.S. market.
• Rejection: U.S. Steel’s stock could plummet, and Japan might seek alternative investments in U.S. infrastructure to offset trade tensions.

Conclusion: A Delicate Balancing Act

The separation of the U.S. Steel-Nippon deal from trade talks reflects the complexity of 2025’s geopolitical and economic landscape. While the merger’s approval hinges on CFIUS’s security review, the broader trade talks remain mired in unresolved issues like tariffs and defense spending.

Investors should prioritize sector-specific analysis:
- Optimism for U.S. Steel: The deal’s potential to modernize infrastructure and counter Chinese dominance makes it a high-reward bet, despite risks.
- Caution on Japanese Exports: Tariffs and a weak yen (contributing to a 4.7% rise in import costs) pose headwinds for Japanese exporters.

Key data points reinforce this outlook:
- A merged entity would become the world’s third-largest steelmaker, controlling 11% of global capacity.
- Japan’s trade surplus with the U.S. has grown by 15% since 2020, underscoring the difficulty of achieving deficit reduction.

In short, while the Steel deal isn’t on the trade table, its success—or failure—will ripple through markets. Investors must remain vigilant on both tracks to navigate this high-stakes terrain.