Trump Industrial Policy to Help US Commercial Shipbuilding
Two-way trade between the United States and other countries totaled over $5 trillion last year. Most of that trade moved by sea. But very little of it moved on American-owned shipping, or on vessels built in America.
American shipping companies largely confine their operations to routes within the U.S., which are reserved for American-owned and operated vessels under a 1920 law known as the Jones Act. When they do carry cargo to other countries, that typically is accomplished pursuant to cargo preference laws that reserve military and other federally-financed loads for U.S. ships.
American commercial shipbuilders, who dominated the global market prior to the Reagan Administration, now claim less than 1% of that market, and most of the large oceangoing vessels they produce are destined for Jones Act routes such as those between Hawaii and the West Coast, because federal law requires the use of U.S.-made ships on those routes. The biggest U.S. shipyards are engaged mainly in building warships for the Navy.
U.S. commercial shipbuilding and shipping is so diminished today that, even as the nation begins to ship its abundant natural gas overseas, there is not a single U.S.-flagged liquid natural gas (LNG) carrier in the entire global fleet. All the LNG carriers operate under rules set by less demanding countries, and for the most part, they are owned and operated by foreigners.
Why have U.S. maritime interests disappeared from international trade?
The explanation comes down to an unfortunate confluence of foreign mercantilism and domestic ideology during the Reagan years. In a fit a free-market exuberance, President Reagan decided to end subsidies to U.S. shipbuilders without securing similar action by other shipbuilding nations. Once the “construction differential subsidy” was removed, U.S. shipbuilders could not compete with the ships made in other countries.
So an industry that had been producing an average of 20 large oceangoing commercial vessels annually since the 1950s simply collapsed, wiping out tens of thousands of jobs. Shipbuilders migrated to Navy work, which was expanding rapidly as a result of the Reagan defense buildup. Meanwhile, the heavily protected and regulated U.S. merchant marine saw its share of U.S. overseas commercial traffic fall from about 50% in early 1950s to 5% at the end of the Reagan years.
The U.S. economy that President Trump inherited thus is heavily dependent on foreign ships and shippers to obtain vital materials and products that are not generated domestically. For instance, the president has recently moved to protect what is left of America’s aluminum smelting capacity — only one domestic site remains that produces the kind of aluminum used in fighter aircraft — but all of the places where aluminum ore is produced are far from U.S. shores. So the ore is shipped to America on foreign ships.
This state of affairs presents two headaches for U.S. policymakers. First, it is not feasible to fully secure the supply chain for America’s defense industrial base when production inputs originating overseas travel on shipping controlled by foreign interests. Second, the U.S. merchant marine is too small (175 vessels) and too old (over 30 years on average) to provide sufficient sealift for U.S. military forces when a large-scale overseas crisis arises.
We have been here before. The U.S. was heavily dependent on foreign shipping in the years leading up to World War One, and then found itself unable to secure adequate sealift for moving troops once it entered the war. The government ended up building over a thousand ships to cope with the shortage. The Jones Act was supposed to mitigate the danger of a repetition in future wars by assuring the existence of a domestic shipbuilding industry and merchant marine. But circumstances have conspired to limit its effectiveness.
Threats tend to unfold faster today than they did a century ago. Washington might not have the time to build up its merchant marine before decisive battles are fought in a future conflict. Worse, the U.S. might have to resort to the use of nuclear weapons to compensate for a lack of conventional forces in places like Eastern Europe or South Korea. Lack of logistics can have lethal consequences in a fast-moving military campaign.
Given these concerns, it is inevitable that the White House’s forthcoming assessment of the defense industrial base, due to be released in the next few weeks, will address deficiencies in the U.S. shipbuilding base and merchant marine. President Trump has made national security a central organizing principle for many of his exertions in the trade arena, and past experience proves this is a legitimate concern when it comes to shipbuilding and shipping. Every war is accompanied by increased demand for commercial shipping.
The question is what measures might most effectively reverse the decline of the U.S. commercial maritime sector. Imposing tariffs or other penalties on foreign ships or shippers that receive subsidies is one conceivable approach, but that would take a long time to implement and be very complicated. Restoring the kinds of subsidies unilaterally withdrawn by the Reagan Administration would be controversial, and potentially costly. So the most likely move would be to expand cargo preference rules with regard to who may move what cargoes.
The U.S. might, for example, begin requiring that a portion of all U.S. trade be transported on U.S.-built and/or crewed vessels. I won’t try to address the complexities involved in such a regime, but it is borderline absurd that so little of America’s international trade moves on U.S. ships. Not just absurd, but dangerous — who knows how capable or willing foreign shippers might be to continue moving vital cargoes in a major conflict? As I observed above, past experience is not encouraging.
The Jones Act is likely to provide a foundation for whatever additional steps the White House proposes. Although critics complain it distorts markets, its impact is trivial compared with the distortions created by foreign subsidies. The U.S. commercial shipbuilding industry would disappear entirely in the absence of Jones Act protections. The merchant marine would also be devastated. The Pentagon would probably need to buy a lot of additional sealift and hire thousands of mariners to compensate for the loss of domestically-controlled commercial ships.
Without the Jones Act, foreign shippers would also begin insinuating themselves into the domestic commerce of the U.S. For instance, imagine Chinese shippers assuming a role in moving Great Lakes iron ore from the Mesabi Range to steel mills in the Midwest. Or moving natural gas from Texas to New England. That would create new security concerns. So the Jones Act isn’t going away. The question is what additional protections the White House might deem necessary to impose.
Some companies to which I have business ties could conceivably benefit from changes in current federal rules regarding who may move which cargoes.