The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Colin Grabow – associate director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute – is the 461st in “The Trans-Pacific View Insight Series.”
Examine the feasibility of the Trump administration’s plans to revive the shipbuilding industry in the United States.
Any revival of U.S. commercial shipbuilding must overcome several formidable obstacles. Foremost is the chasm in competitiveness between U.S. shipyards and their international counterparts. U.S.-built oceangoing merchant ships can be four or more times the world price, and recent examples suggest this price differential is approaching a factor of six.
Closing that gap is a gargantuan task – indeed, it is likely impossible.
Competitive merchant ship construction requires building at scale to justify the large expenditures on infrastructure and technology needed to compete. U.S. shipyards, however, collectively build small numbers of ships – averaging less than three per year in recent decades – and thus cannot make the investments required to operate on the shipbuilding frontier.
The result is a longstanding and well-known technological inferiority.
But the problems go deeper. U.S. shipyards face a well-documented shortage of skilled labor that hinders their ability to meet current demand, much less raise output. Other challenges include the lack of a domestic supply chain – U.S.-built ships extensively rely on imported materials – and rising input costs. Shipbuilding consumes significant quantities of steel, yet tariffs are driving up its cost.
Such factors make the construction of large commercial ships through comparative advantage alone highly unlikely. If this is to take place, it will almost certainly have to be as a subsidized, money-losing enterprise.
Explain the impact of the Jones Act of 1920 on U.S. shipbuilding capabilities.
Reasons for U.S. shipbuilding’s decline are multicausal, but the Jones Act and its protectionist antecedents bear substantial blame for a lack of shipbuilding competitiveness that dates to the late 1800s. Rather than developing a niche within the fiercely competitive large global market, U.S. shipyards build small volumes and feature reduced specialization by operating in a captive domestic market. Shipbuilding success requires innovation, scale, and specialization, but Jones Act protectionism deters all three.
The result is a mounting cost/quantity trap. As prices rise, demand falls, triggering further price increases as economies of scale further erode. Notably, three 3,600 TEU containerships ordered from the Philly Shipyard in 2022 feature anticipated delivery costs of $334.5 million each. One Jones Act carrier recently took the extraordinary step of spending millions of dollars to convert a 1980-built steamship to LNG propulsion in China rather than purchase a new U.S.-built vessel.
U.S. shipbuilding now accounts for one-tenth of one percent of global commercial output, trailing even far smaller European countries. That the world’s largest and most innovative economy has been reduced to such a state is perhaps the clearest indication of the Jones Act’s tranquilizing effect on shipbuilding competitiveness.
Analyze the role of Japan and South Korea in U.S. shipbuilding development.
South Korean firms are no strangers to U.S. shipbuilding, having partnered with General Dynamics NASSCO since 2006 and been longtime suppliers of designs and materials for Philly Shipyard. South Korea’s integration into U.S. shipbuilding supply chains is extensive. Veteran class tankers built by the Philly Shipyard, for example, each required approximately 500 containers of material and 25 bulk shipments of larger items from South Korea.
More recently, South Korea has become more directly involved through Hanwha Ocean’s $100 million acquisition of the Philly Shipyard. Hyundai Heavy Industries, meanwhile, has signed memoranda of understanding with Fairbanks Morse Defense, which produces ship engines and components, and Huntington Ingalls Industries, America’s largest military shipbuilder.
Such developments are welcome, but expectations should be tempered by what may be accomplished. Korean ownership and partnerships will not single-handedly produce Korean levels of productivity and efficiency. Without the orderbook to justify significant upgrades and investments, a substantial capabilities gap will persist.
How are Asian shipbuilders responding to the prospects of U.S. demand for their capabilities?
U.S. interest in leveraging the world-class shipbuilding capabilities of its allies has not gone unnoticed in South Korea. Last year, Hanwha Ocean began performing maintenance, repair, and overhaul (MRO) operations on U.S. naval auxiliary vessels. One such operation has been completed, and another is underway. The company is seeking contracts to repair up to six ships this year.
Beyond MRO, Hanwha’s acquisition of the Philly Shipyard is also widely viewed as a means of entering the market for military vessel construction, which is statutorily limited to U.S. shipyards.
Hyundai Heavy Industries, meanwhile, has also signaled its interest in both MRO (seeking contracts for 2-3 repairs this year) and building ships for the U.S. Navy. Although building military vessels overseas currently faces significant legal barriers, President Trump has indicated a willingness to work with Congress to enable the purchase of “top of the line” ships from allied shipyards. If successful, South Korean shipyards appear poised to capitalize.
Assess the viability of U.S. shipbuilding efforts with Asian allies in competing against the scale of China’s shipbuilding capabilities.
National security experts increasingly recognize there is no viable path to addressing the shipbuilding gap between the United States and China that does not involve close cooperation with U.S. allies. U.S. shipyards are too far behind, and the obstacles to an industry turnaround are too great to be quickly remedied. Such cooperation, both through expanded partnerships and the construction of vessels in allied yards, would be mutually beneficial.
By leveraging its allies’ shipbuilding capabilities, the United States can meet its naval and commercial shipping needs more quickly and at lower cost. Allied shipyards, meanwhile, could tap into a new source of demand at a time when Chinese shipyards appear increasingly dominant. Indeed, allowing the use of allied-built commercial vessels could unlock significant latent U.S. demand for domestic water transportation (ships account for just 2 percent of domestic freight movement largely due to inflated capital costs) to help fill allied orderbooks.
Developing such a symbiotic relationship, however, is contingent on addressing daunting political obstacles – namely, the Jones Act and laws prohibiting the construction of military vessels outside the United States. Whether the Trump administration can overcome these laws will go a long way toward determining the scope and scale of allied shipbuilding cooperation.
