U.S. Navy Secretary Looks to South Korea and Japan to Revive Shipbuilding at Home

Global shipbuilding order volume in 2020

 Decline of US Shipbuilding

The decline of the U.S. shipbuilding industry is a complex issue with multiple contributing factors, but some of the key points include:

Foreign competition:

• Subsidies: After World War II, several countries, particularly Japan and South Korea, heavily subsidized their shipbuilding industries, allowing them to offer lower prices and undercut American shipbuilders https://scholarworks.calstate.edu/downloads/cv43nx70g.
• Lower labor costs: Shipbuilding is labor-intensive, and wages in these countries were significantly lower than in the U.S., giving them a cost advantage.
• Technological advancements: Some foreign shipyards adopted new technologies and practices more readily, allowing them to build ships faster and more efficiently.

Policy decisions:

• Ending subsidies: The U.S. government also used to subsidize its shipbuilding industry, but these subsidies were gradually reduced and eventually eliminated in the early 1980s. This left American shipbuilders at a significant disadvantage compared to their foreign competitors who continued to receive government support.
• Focus on the military: Following the end of World War II, the U.S. shipbuilding industry primarily focused on building military vessels. This limited their ability to compete in the commercial shipbuilding market, which was becoming increasingly dominated by foreign companies.

Other factors:

• Environmental regulations: Some argue that stricter environmental regulations in the U.S. increased the cost of shipbuilding compared to other countries with less stringent regulations.
• Management practices: Some analysts suggest that the U.S. shipbuilding industry may have struggled to adapt to changing market conditions and may not have been as efficient as its foreign competitors.

It's difficult to give a precise number on the total amount of subsidies Japan and South Korea provided to their shipbuilding industries after World War II. Here's why:

• Evolving subsidies: The forms and amounts of subsidies changed over time. They weren't always direct cash payments but often included:
  • Favorable loans with low interest rates
  • Government-backed guarantees for financing
  • Research and development support
  • Tax breaks
• Lack of full transparency: It can be challenging to determine the exact value of all subsidies, particularly indirect support through favorable government policies.
• Data availability: Historical records on the precise level of subsidies over the entire post-WWII period might be incomplete or difficult to access.

However, to give you some idea:

• Significant support: It's well-established that both Japan and South Korea heavily subsidized their shipbuilding industries as part of their larger strategy to drive industrial recovery and become economic powerhouses.
• Result: These subsidies were a major factor allowing Japanese and South Korean shipbuilders to offer extremely competitive prices which gradually drove many of their Western competitors out of the commercial shipbuilding market.

Some resources that might provide more insight:

• WTO Disputes: Japan and South Korea have been the subjects of World Trade Organization complaints for their shipbuilder subsidies. Looking at WTO records of these cases might shed light on specific subsidy programs.
• Academic research: Search for academic articles or books on the shipbuilding industries in Japan and South Korea. These may contain detailed information on the nature and scope of subsidies
• Industry reports: Industry associations or think tanks focused on shipbuilding or maritime trade might have published reports analyzing the role of subsidies.

 WTO Complaints

The WTO doesn't directly regulate shipbuilding. Instead, it provides a framework for regulating trade, including shipbuilding, through agreements like:

• The Agreement on Subsidies and Countervailing Measures (SCM Agreement): This agreement sets rules for the use of subsidies by WTO members. It prohibits certain types of subsidies and outlines procedures for countries to challenge subsidies of other WTO members that cause economic harm. This is the primary way WTO can address unfair shipbuilding practices.
• The General Agreement on Tariffs and Trade (GATT 1994): This broader agreement includes principles about fair trade, including non-discrimination, which countries can apply to the shipbuilding sector.

How could the SCM Agreement be used to target shipbuilding subsidies?

• Prohibited subsidies: The SCM Agreement explicitly forbids export subsidies (where a subsidy is contingent on export performance) and subsidies contingent on using domestic goods over imports.
• Actionable subsidies: Other subsidies can be challenged if a country proves they cause harm to its domestic industry in the form of:
  • Injury to its domestic industry
  • Threat of injury to its domestic industry
  • Nullification or impairment of benefits they should receive under the GATT 1994 agreements.

China and shipbuilding complaints

No WTO complaints primarily target China's shipbuilding subsidies, there are several points to consider:

• WTO member: China is a WTO member and must abide by WTO agreements, including the SCM Agreement.
• Potential subsidies: It's possible that China could be subsidizing its shipbuilding industry. This might raise concerns from other countries if those subsidies are found to be violating WTO rules and causing harm.
• Lack of public cases: The absence of public WTO disputes doesn't necessarily mean complaints don't exist. Countries may be addressing issues through negotiations or could be gathering evidence to build potential cases.

Why could China be less of a target than Korea and Japan?

• Market share: Historically, China's shipbuilding industry may not have been as dominant as Korea's or Japan's in terms of its ability to undercut global competitors.
• Focus: China's shipbuilding might currently focus more heavily on domestic needs than international competition.

 There have been several WTO complaints regarding shipbuilding subsidies, primarily targeting Japan and South Korea:

1. EU vs. Korea (DS273 & DS351):

• Timeline: In 1999, the EU filed complaints against Korea's shipbuilding subsidies (DS273 & DS351), alleging they violated the Agreement on Subsidies and Countervailing Measures (SCM Agreement).
• Claims: The EU argued Korean programs like the "Advanced Shipbuilding Program (ASRP)" and "Provider's Export Credit Guarantee (KEXIM)" unfairly advantage their shipbuilders with:
  • Direct financial assistance: Grants, loans, and equity infusions
  • Indirect support: Loan guarantees, tax breaks, and debt restructuring
• Ruling: The WTO panel found some Korean programs constituted prohibited export subsidies. However, it dismissed claims regarding debt restructuring and tax concessions.

2. Japan vs. Korea (DS571 & DS594):

• Timeline: Japan initiated two complaints against Korea in 2018 (DS571) and 2020 (DS594), raising similar concerns about various Korean shipbuilding support measures.
• Claims: Japan alleged Korea's programs, including:
  • Corporate restructuring support
  • Loan guarantees and insurance for financing
  • Pre-shipment loans and other financing
  • Eco-ship replacement subsidies
  • Other measures allegedly aiding Korean shipbuilders violated the SCM Agreement and the General Agreement on Tariffs and Trade (GATT) 1994.
• Status: These cases are still ongoing, with no final rulings yet.

Significance of these complaints:

• These disputes highlight the ongoing concerns about subsidies distorting competition in the global shipbuilding industry.
• The WTO rulings in the EU vs. Korea case set some precedents regarding the legality of specific subsidy practices.

It's important to note:

• WTO dispute settlements are complex and involve lengthy legal procedures. Reaching a final resolution can take years.
• These are just a few examples, and other WTO complaints related to shipbuilding might exist.

U.S. Navy Secretary Looks to Asia to Revive Shipbuilding at Home

gcaptain.com

Bloomberg

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By Nick Wadhams (Bloomberg) —

The US needs to revive domestic shipbuilding with increased funding from Congress and investment from overseas, Navy Secretary Carlos Del Toro said, framing the issue as a matter of economic security in the competition with China.

Del Toro said on Thursday that he planned to travel to Japan and South Korea soon to encourage investment in shipbuilding, especially at smaller yards. He called for getting congressional appropriators on board “so that we can get started moving in the right direction.”

“China has been able to build a tremendous commercial shipbuilding industry over the course of the last 40 years,” Del Toro said at an event hosted by the Aspen Strategy Group and Bloomberg LP, the owner of Bloomberg News. “We’ve lost that capability from about the 1980s when we left it open to market forces.”

Navy Secretary Del Toro Calls for New ‘Maritime Statecraft’ Strategy

Del Toro’s remarks follow on sentiment expressed in the Pentagon’s National Defense Industrial Strategy that was released last month. It said China had become a shipbuilding powerhouse and called for an injection of fresh ideas — and venture capital — to revive the US industrial base.

For Del Toro, the path toward expanded shipbuilding capacity travels through South Korea and Japan, which he said were “great allies and partners” in the effort. According to the US Naval Institute, China now has almost 50% of the global shipbuilding market, with South Korea and Japan in second and third place at almost 30% ad 17%. US capacity accounts for 0.13% of the global market.

Navy Secretary Del Toro Launches Government Shipbuilders Council

Diminished capacity has led to delays and cost overruns for several crucial weapons programs, including to build aircraft carriers and submarines. While refusing to name any companies, Del Toro criticized contractors that deliver on orders late or over-budget.

“It’s the company’s responsibility to deliver things on time and not simply make excuses,” he said. “I fully understand that the supply chain has been challenged because of Covid and many other issues around the globe. But don’t just talk to me and use that as an excuse, talk to me about what is it that you’re going to do to try to make that better.”

© 2024 Bloomberg L.P.

U.S. Shipbuilding Is At Its Lowest Ebb Ever. How Did America Fall So Far?

Loren Thompson

forbes.com

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[Corrected, July 27, 2021]

In 1919, Ralph D. Paine began a brief history of the old U.S. merchant marine with these words:

“The story of American ships and sailors is an epic of blue water which seems singularly remote, almost unreal, to the later generations. A people with a native genius for seafaring won and held a brilliant supremacy through two centuries and then forsook this heritage of theirs. The period of achievement was no more extraordinary than was its swift declension.”

Paine was talking mainly about the era of sailing ships, when U.S. whalers and traders often ventured to the opposite side of the world in pursuit of prizes.

But he might just as well have been talking about the state of U.S. shipbuilding and maritime trades today, which have virtually collapsed over the last generation.

The Ever Given, operated by Evergreen Marine, can carry 20,000 containers. Nobody in America builds ... [+] container ships this big.

Wikipedia

A nation that was among the world’s leaders in commercial shipbuilding at key junctures in its history today builds less than 10 vessels for oceangoing commerce in a typical year.

China builds over a thousand such ships each year.

The entire U.S.-registered fleet of oceangoing commercial ships numbers fewer than 200 vessels, out of a global total of 44,000.

And despite trade flows to and from America exceeding a trillion dollars annually—the vast preponderance of which travel by sea—U.S.-registered ships carry barely 1% of that traffic.

That is quite a decline from the year I was born, 1951, when the U.S. merchant marine transported a third of all global trade.

To make matters worse, the U.S. Navy has apparently lost its capacity to keep up with China in military shipbuilding.

China now has the largest fleet of warships in the world, about 350, while America’s Navy is struggling to get above 300.

The Navy’s request for ship construction funds next year envisions building only four combat vessels (out of eight total), a level of effort that if sustained would guarantee Chinese maritime dominance by 2030.

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U.S. sailors are still better trained and better equipped than their Chinese counterparts, but all the trends are in the wrong direction.

It tells you a lot about the state of America’s maritime sector that the largest exporter of containerized cargo to the U.S. is a shipping company owned outright by the Chinese government.

The U.S. merchant marine today is so small that analysts question its ability to support military sealift requirements in a war.

With only 180 or so oceangoing vessels in the U.S.-registered commercial fleet and less than 12,000 professional mariners—most whom would be tied up serving domestic routes at the onset of a war—the capacity of the private sector to supplement the government’s aged collection of sealift vessels in an emergency is problematic at best.

It is easy to find excuses for why Washington has allowed the U.S. maritime presence to waste away.

After all, how likely is a protracted war with China, requiring months or years of sealift activity to sustain forward-deployed forces?

However, that hardly disposes of all the national security concerns surrounding America’s gradual disappearance from the world’s oceans.

We know that Beijing’s long-term goal is to dominate global supply chains for vital industrial goods, so the fact China is outproducing America in large commercial vessels 100-to-1, that it increasingly dominates traffic, and that it is securing control of ports along key trade routes, should have elicited a policy response from Washington.

So far, it has not.

Meanwhile, Beijing’s ability to dominate the future naval balance in its own region—the industrial heartland of the new global economy—is increasingly evident.

China already possesses geographical and economic advantages in that pursuit, so its ability to outproduce the U.S. in warships each year should be viewed with alarm.

China’s most immediate naval goal is to secure control of nearby seas; the smaller U.S. Navy needs to maintain a presence everywhere, from the North Atlantic to the Mediterranean Sea to the Persian Gulf to the Western Pacific.

It seems the trade patterns and the naval patterns are mutually reinforcing, pointing to an historic loss of U.S. maritime influence in the near future.

This problem is fixable, but it may require a different kind of political culture than America currently possesses.

The decline of U.S. shipbuilding is just one facet of America’s broader deindustrialization, a process that has seen the land of Edison and Westinghouse gradually abandon the production of every industrial product from smartphones to aluminum since the Cold War ended.

It was not so long ago that the U.S. hosted a dozen builders of aircraft; today it has exactly one manufacturer of large aircraft left, and that company has been faltering of late.

America’s insular and polarized political system seems incapable of even noticing such problems, much less ameliorating them.

For instance, the domestic shipbuilding industry went from being a major producer of commercial oceangoing vessels to building barely any at all in a mere 10 years, thanks to a foolish move by the Reagan administration to wipe out construction subsidies without seeking reciprocal action from other nations.

That move was never revisited, even though the shipbuilding industry lost 40,000 workers during the Reagan years.

Time will tell whether the Biden administration has the sense to revise naval shipbuilding plans, which at the moment could spell doom for some of the surviving U.S. shipyards.

Optimism is not warranted, given that the U.S. has lost 14 new-construction shipyards since 1970, with barely a peep from Washington.

Today there is only one full-service shipyard left on the entire West Coast, and outside of submarines every segment of the domestic shipbuilding industry, both military and commercial, is facing major uncertainties in the years ahead.

The Trump administration’s last industrial-base report to Congress correctly stated that “the largest contributing factor of declining U.S. competitiveness in global shipbuilding has been state intervention from competitor countries.”

In other words China and other shipbuilding nations subsidize their industries, at the expense of America’s shipbuilders.

So what is Washington going to do about it?

Basically, there are three options: institute expanded cargo preferences for U.S.-built and -manned vessels, directly subsidize U.S. shipbuilders, or persist in our current dream-like state until the destruction of U.S. maritime supremacy is complete.

I’m not holding my breath waiting for an effective policy response from Washington.

Correction: This article previously stated incorrectly that the U.S. was the world’s leading commercial shipbuilder as recently as 1976.