Introduction
The Trump administration’s plan to tax imports arriving in Chinese-owned or Chinese-built ships aims to protect US jobs and revive shipyards. However, this inward-looking strategy may do more harm than good.
The Largest Container Ships: A Comparison
- Kaimana Hila: Built in Philadelphia in 2019, this ship can transport 3,220 containers. It represents the pinnacle of US shipbuilding capabilities.
- Yangzijiang Shipbuilding: Near Shanghai, this shipyard builds vessels with a capacity of 24,346 containers. These ships are in a different league, highlighting the gap between US and Chinese shipbuilding.
Understanding the Policy Approach
- Taxing Imports: Starting Oct. 14, the administration plans to tax imports arriving in Chinese-built ships. This includes vehicles arriving in foreign-built carriers.
- Tariffs on Shipping Containers: Increased tariffs on Chinese-made shipping containers, cranes, and chassis. These measures aim to protect US jobs and revive shipyards but may squeeze American exporters and manufacturers reliant on imported inputs.
Historical Context of US Shipbuilding
- Emergency Fleet Corporation: Established during WWI, this agency spent $3.5 billion on 2,318 vessels, most built after the war ended.
- Construction Differential Subsidy Program: Post-WWII, this program covered over half the cost of building vessels for US companies serving international routes.
Global Shipbuilding Dominance
- Japan: Dominated shipbuilding in the 1960s with cheap labor and financing, becoming the leading shipbuilding nation.
- South Korea: In 1975, the government pushed industrialization, leading to a shipbuilding boom. By 1990, Korea’s ship production was eight times higher than in 1975.
U.S. Shipbuilding Policies: Protection or Paralysis?
The U.S. shipbuilding industry operates under a unique set of policies that are intended to protect domestic shipyards but often have unintended consequences:
- The Jones Act
- Enacted in 1920, the Jones Act mandates that all goods transported between U.S. ports must be carried on ships that are U.S.-built, U.S.-owned, and U.S.-crewed.
- While it ensures a baseline of demand for domestic shipbuilders, it also limits competition, allowing U.S. shipyards to operate in a protected bubble.
- This has led to higher costs and lower innovation, as there’s little incentive to improve efficiency or adopt global best practices.
- Lack of Global Integration
- U.S. shipbuilders are largely excluded from the global commercial shipbuilding market, which is dominated by countries like China, South Korea, and Japan.
- Unlike their foreign counterparts, U.S. yards rarely receive bulk orders for standardized vessels, which are crucial for achieving economies of scale.
- Historical Subsidies and Their Decline
- Programs like the Construction Differential Subsidy (CDS) once helped U.S. companies compete internationally by covering up to 50% of shipbuilding costs.
- These subsidies were phased out in the 1980s, leaving U.S. shipbuilders without the financial support that many foreign competitors still enjoy.
Challenges for U.S. Shipbuilders: A Structural Disadvantage
Despite policy protections, U.S. shipbuilders face several systemic challenges that hinder their competitiveness:
- High Steel Prices
- U.S. tariffs on imported steel—originally intended to protect domestic producers—have backfired on shipbuilders.
- Steel accounts for up to 20% of a ship’s cost, and U.S. yards must pay significantly more than their global competitors, inflating overall construction costs.
- Financing Gaps
- Unlike in countries like South Korea or China, where governments provide low-interest loans or direct subsidies, U.S. shipbuilders often struggle to secure financing.
- This makes it difficult to invest in new technologies or expand production capacity, especially for smaller yards.
- Lack of Economies of Scale
- Foreign shipyards often receive large, repeat orders for similar vessels, allowing them to streamline production and reduce costs.
- U.S. yards, by contrast, typically build custom or one-off ships, which are more expensive and time-consuming to produce.
- Aging Infrastructure and Workforce
- Many U.S. shipyards operate with outdated equipment and face a shortage of skilled labor, particularly in welding, engineering, and naval architecture.
- Without significant investment in modernization and training, productivity will remain low.
Conclusion
Reviving the US shipbuilding industry requires significant policy changes. These include canceling tariffs on steel and offering competitive financing for new ships. Without these changes, the strategy is unlikely to succeed, and US shipyards will remain dependent on a small, protected domestic market