Subsidies and Misplaced Shipbuilding Nostalgia

By Colin Grabow of Cato.

"Reading some of the commentary, one could be forgiven for believing that the United States was a major commercial shipbuilding force in the post‐​World War II era until it was brought low by the end of a particular subsidy in the early 1980s. Known as construction differential subsidies (CDS), they were meant to encourage domestic shipbuilding by bridging the difference in price between constructing ships in the United States and abroad (up to a maximum of 50 percent). With these subsidies in place, some argue, the country’s shipyards were in a vibrant state.

The Brookings Institution’s Aaron Klein, for example, has credited these subsidies with helping to deliver 75 ships per year in the mid-1970s—a far cry from the 3 built per year in recent decades—while the Lexington Institute’s Loren Thompson claims their elimination led the United States to quickly go from “the biggest commercial shipbuilder in the world to no longer producing any vessels for international trade.” Earlier this year defense analyst Jerry Hendrix described the subsidies as a recognition by the federal government that a “robust and resilient shipbuilding sector was a critical component of a comprehensive national security strategy.”

But as data from U.S. Maritime Administration annual reports make clear, the sector during this era—at least on the commercial side—was something less than robust (and claimed deliveries of 75 ships per year simply erroneous). Even with these industry handouts in place the United States still languished in shipbuilding mediocrity.

Some facts to consider:

• Measured by the number of ships delivered, U.S shipyards only exceeded 5 percent of global output twice (1953, 1954). Most years it did not exceed 3 percent.
• From 1951–1981, U.S. shipyards averaged 18 ship deliveries per year. For perspective, during this same period French shipyards averaged 28 deliveries, Swedish shipyards 41, U.K. and German shipyards more than 80, and Japanese shipyards 270.
• A 1992 U.S. International Trade Commission report notes that none of the ships built since 1960 were for export (i.e. for customers using foreign‐​flagged ships).
• The surge of deadweight tonnage during the late 1970s is in large part accounted for by the delivery of unsubsidized tankers to transport oil from the newly opened Trans‐​Alaska Pipeline. Fiscal years 1977 and 1978 saw the delivery of 13 such tankers for the Alaska trade with a combined deadweight tonnage exceeding 1,800,000. In other words, much of this temporary bump in shipbuilding output was due to a unique one‐​off event rather than the construction differential subsidies.

Plainly, this was an era of strength only relative to the minuscule levels of current output.

As I’ve written before, however, this doesn’t necessarily mean that the notion of shipbuilding subsidies (or more accurately, additional subsidies) should be dismissed. If the construction of large merchant ships in sizable numbers is indeed critical to U.S. national security—a not entirely obvious proposition given the limited overlap between commercial and military shipbuilding—then the industry should be supported in the most efficient and transparent manner possible (which is to say not via the Jones Act, whose U.S.-built requirement should be repealed as part of any deal for new subsidies). But expectations about what such shipbuilding subsidies could achieve must also be properly calibrated and trade‐​offs carefully weighed.

More importantly, the conversation around the ills of U.S. commercial shipbuilding must be expanded to include the stultifying influence of Jones Act protectionism. Examining this long‐​standing lack of competitiveness and its relationship with the captive market generated by the Jones Act’s total prohibition on foreign‐​built vessels in domestic trade is vital to reversing this industry’s declining fortunes. It would certainly be time better spent than reminiscing about a shipbuilding past that never was."