Aging U.S. Great Lakes Fleet Another Example of Protectionist Failure

By Colin Grabow of Cato.

"Last week a U.S. shipyard on the Great Lakes did something sadly unusual: it launched a new commercial ship. Called the Mark W. Barker, the self‐​unloading freighter—which still requires a bit more work—is slated for delivery next spring. When that happens, it will be the first new ship added to the U.S.-flagged Great Lakes fleet since 1983.

Put another way, the last time the Great Lakes fleet saw a new ship was the same year Michael Jackson unveiled the moonwalk and the first cell phone was released for commercial use.

In sharp contrast, Canada’s own Great Lakes fleet has been adding new ships at an impressive pace. Canada Steamship Lines (CSL), for example, has taken delivery of six new freighters in the last 10 years while Algoma Central Corporation has added eleven. And more ships are on the way.

Algoma Central says that it expects the new ships to be 45 percent more energy efficient than the vessels they are replacing, owing to a combination of new engines, increased cargo capacity, and an advanced hull form. CSL similarly predicts various efficiency gains from its new vessels.

So why aren’t American shipping companies following suit? The answer in large part lies in differing policies towards imported ships. Ships engaged in domestic trade in the United States must comply with the Jones Act, which among other restrictions forbids the use of ships built abroad. Canada, meanwhile, allows foreign‐​built ships to be purchased duty‐​free for domestic use following its repeal of a 25 percent tariff in 2010.

As a result, the U.S. Maritime Administration admitted in a 2013 report that Canadians can now buy their ships at prices “substantially below what they would cost to build in North American shipyards.” One Great Lakes shipping expert points out that Canadians can buy three foreign‐​built ships for the same price it would take to construct one at home.

The tariff’s repeal appears to have played a decisive role in Canada’s fleet modernization. “The bottom line was the import duty was lifted,” said an official with the Canadian Shipowners Association in 2015. “That generated considerable investment by our membership.”

If a 25 percent tariff is a deterrent to new ships, imagine the impact of the Jones Act’s U.S.-built requirement which essentially has the same effect as a tariff of several hundred percent.

Unfortunately, little imagination is required. While the Canadian Great Lakes fleet becomes increasingly modernized the U.S. fleet—chained to a vastly uncompetitive domestic shipbuilding industry—features ships that were mostly built in the 1970s and decades prior. Incredibly, one vessel in the Great Lakes fleet, the St. Mary’s Challenger, was built in 1906 as a freighter and still served that purpose all the way until 2013 when it was converted to use as an unpowered barge.

This reliance on ancient vessels is only feasible is due to the freshwater environment of the Great Lakes which, unlike saltwater, doesn’t quickly corrode steel. It does, however, become thinner over time necessitating replacement. Engines and other parts also must be replaced, both due to wear and tear and a desire to take advantage of superior technologies. As the example of Canada’s fleet shows, at some point it just makes financial sense to buy a new ship.

But American ship operators are highly reluctant to do so given the high capital costs involved, and instead make do with measures such as “repowering” the old ships with new engines. But that’s still far from cheap, with engine upgrades pegged in 2009 at $22 million. In comparison, Canadian firm Algoma Central has purchased entirely new ships for $50 million.

It’s difficult to figure out what national interest current U.S. policy is supposed to be serving. It plainly isn’t promoting a more efficient water transportation network on the Great Lakes, with harmful consequences for the industries—including regional steel producers—that rely upon these laker ships as part of their supply chain. It also isn’t promoting the domestic shipping industry, with the U.S.-built requirement vastly inflating the price of new vessels (although vessel operators no doubt appreciate that such high prices protect their position by deterring new competitors from entering the market).

It’s not even clear it is serving the interests of U.S. shipbuilders in the region. As one study points out, U.S. government policy “…has not resulted in a healthy merchant shipbuilding base especially in the [Great Lakes Marine Transportation System].” Indeed, many of the ships found in the U.S. Great Lakes fleet were constructed in shipyards that no longer exist. The shipyard currently building the Mark W. Barker, Fincantieri Bay Shipbuilding, is a modest operation with a typical output of 2–3 tugboats and barges per year.

There’s just not that large of a market for ships and other vessels that cost significantly more than those constructed overseas.

What we are witnessing on the Great Lakes is a fascinating natural experiment in protectionism versus free trade. Canada’s embrace of the latter has led to new investment and modernized vessels while the United States finds itself with an ancient fleet and little commercial shipbuilding. The superior choice is clear. Washington should follow Ottawa’s lead and allow free trade in ships by eliminating the Jones Act’s U.S.-built requirement. Or better yet, repeal the law entirely."