The Office of the United States Trade Representative (USTR) filed a complaint. “A report targeting China’s hegemony in the maritime, logistics, and shipbuilding sectors” (January 16, 2025). In US trade law terms, this is a “Section 301” report. It comes from a 1974 law that delegated authority to the USTR to investigate “unfair” trade practices in other countries and impose tariffs or other trade restrictions in response.
There is no doubt that China has targeted the shipbuilding industry through massive subsidies. But one of the interesting things about this case is that the United States hasn’t been a major player in global shipbuilding for decades. So the reason the USTR report reads strangely is because it describes the impact on the U.S. shipbuilding industry, but the hat industry is dominated by Japan and Korea.
Perhaps coincidentally, or perhaps thanks to excellent editorial decision-making, the Journal of Economic Perspectives, where I serve as editor-in-chief, published a paper on Chinese shipbuilding subsidies in its Fall 2024 issue as part of its Industrial Policy Symposium. As with all JEP papers going back to the first issue, it is available free of charge and unpublished. Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur explain “Industrial Policy: Lessons from Shipbuilding.”.”
They present a picture showing global patterns in shipbuilding. As you can see, the United Kingdom (blue) and other European countries (red) dominated global shipbuilding for most of the first half of the 20th century. The United States experienced a surge in shipbuilding during each world war, but this was generally not a major factor. Next, Japan (orange) has occupied a large share of the global shipbuilding market since World War II, and Korea (green) has entered the market in the 1980s. From the early 2000s, China’s market share began to rise rapidly.
As the figure shows, it is impossible for Chinese shipbuilding to have influenced the American shipbuilding industry before about 2000. So when USTR reports discuss the low levels of U.S. shipbuilding in the 1970s or 1980s, the causes inevitably lie elsewhere. .
The USTR report contains few references to Japanese and Korean shipbuilding, mostly in footnotes but occasionally missing sentences. For example, USTR (pp. 116-117) states: “For China to achieve its intended dominance, including explicit global market share goals, Chinese companies will need to displace and develop foreign companies in existing markets while also opening up new markets. . This displacement affects not only China’s current biggest competitors, South Korea and Japan, but also American shipbuilders, who continue to see their smaller market share decline and are unable to compete with China’s artificially low prices and massive scale.” At another point, USTR (p. 60) cites external research that states: “Chinese shipyards often force ship buyers to source engines and other subcomponents from China when they order a ship. Otherwise, ship buyers interviewed by the author said they would prefer engines and other internal components made in Korea and Japan.” In short, this is not a case of large or cutting-edge American industries being challenged by Chinese subsidies.
As Barwick, Kalouptsidi, and Zahur point out in JEP, shipbuilding was a heavily subsidized industry in Europe, Japan, and Korea before receiving subsidies from China. They write:
First, why does the government subsidize the shipbuilding industry? Our story is about the links between trade, shipping and shipbuilding; Developing heavy industry as a strategy to stimulate economic growth; employment; national security and military considerations; and the need for national prestige (or, as Stråth (1987) puts it, “pride and manliness”). However, it is not clear exactly which combination of objectives among historical cases led to shipbuilding industry policy.
Second, was the industrial policy successful? It is difficult to assess whether industrial policy has been effective. To be sure, there are examples of “clear success” in Japan, Korea, and China, where countries with a modest initial share of a global industry embark on industrial policy programs and quickly become global leaders. But the history of shipbuilding is also full of examples of failed industrial policies, including the United States’ long-standing policy to protect the shipbuilding sector through offshore maritime laws, and European governments’ long-running and costly attempts to subsidize their own shipyards in defiance of Japan and South Korea. . competition (Stråth 1987) or Korea’s early attempts to promote shipbuilding in the 1960s (Amsden 1989). Other countries have failed to launch shipbuilding industries, as did Brazil’s failed attempt to launch its own shipbuilding sector in the late 1970s (Bruno and Tenold 2011). Even the apparent successes required significant support, raising questions (little answered in the literature) about whether the benefits of shipbuilding subsidies were worth the large costs.
They seek to estimate the full extent of Chinese subsidies to the shipbuilding industry: cheap land near the sea, cheap low-interest long-term loans, subsidized inputs (such as steel), ship export subsidies, subsidies to ship buyers, and streamlined financing licenses. . China opened literally hundreds of shipyards from 2006 to 2013. They estimate that these government subsidies amounted to about half of China’s shipbuilding industry’s total revenue during this period.
Should China’s shipbuilding subsidies be evaluated as a ‘success’? They write:
[A]Although China’s shipbuilding subsidies have been very effective in achieving increased production and increased market share, they have been largely unsuccessful in terms of welfare measures. The program generated some gains in domestic producer profits and domestic consumer surplus. Over the long run, the total return on the adopted policy mix, measured as the lifetime earnings growth of domestic firms divided by total subsidies, is only 18%. This means that for every dollar the government spends, it gets back 18 cents. To profitability. That is, when consolidating costs to the government, the net return was negative 82%, with entry subsidies accounting for the largest portion of the negative return.
They discuss how they can estimate higher returns. For example, if shipbuilding subsidies had been targeted at larger, more efficient companies rather than encouraging entry, as China eventually did, the returns on the subsidies would have been higher. Additionally, given that China’s massive shipbuilding program would have been large enough to reduce global shipping costs, China (and other exporters around the world) would have also benefited from being able to trade more cheaply.
The current situation in the global shipbuilding industry is that if the United States imposes sanctions on the Chinese shipbuilding industry, most of the profits will go to Japanese and Korean shipbuilders. But let’s try to look beyond that. Why has the United States played such a small role in global shipbuilding? What would it take to change that?
For most economists, the difficulties of American shipbuilding date back to laws of the 19th and early 20th centuries, such as the 1920 Jones Act, which sought to protect American shipbuilding from foreign competition. By law, transportation between two U.S. ports can only be carried on ships built in the United States. But once U.S. shipbuilders no longer faced global competition, their efficiency lagged. Current estimates suggest that the cost of building large oceangoing vessels in the United States is approximately 300 to 400 percent higher than those built in Japan or Korea. As a result, the U.S. shipbuilding industry began to focus on small vessels for domestic use rather than ocean-going vessels. USTR wrote: “U.S. shipyards delivered 608 vessels of all types in 2020, including 15 deep draft vessels and five large offshore barges. Of these 608 vessel deliveries, most were inland dry bulk or tank barges, tugs and tugs. In 2024, American shipbuilders delivered only four bulk carriers…
If American shipping were much cheaper, the American shipping system might look quite different. For example, it would be much cheaper to transport freight and bulk goods between the East and West coasts than to use overland rail or trucks. For example, American lumber companies complain that they are at a disadvantage compared to Canadian lumber companies when it comes to transporting lumber between U.S. regions. Because Canadian companies have access to cheaper international shipping.
It is difficult for me to imagine the U.S. economy ever becoming a significant global shipbuilding power. Looking at the big picture, the country needs to develop domestic expertise to lower the cost of building large oceangoing vessels by around 75%. This includes building management and corporate expertise along with employee expertise and developing a supply chain of specialized products to support these efforts. But as a more basic starting point, imagine the problem in the American situation of acquiring land and sea or river land large enough to launch hundreds of ocean-going vessels.
Perhaps it is easier to imagine the newly-boarded U.S. shipbuilding industry focusing on specific tasks, such as top-level maintenance and repair of large oceangoing vessels, or as a starting point for a specific segment of the market. The JEP authors note: “The main types of ships currently produced include container ships, (petroleum) tankers and bulk carriers, as well as niche products such as cruise ships, liquefied natural gas carriers and “ro-ro ships”. A vessel capable of loading and unloading vehicles.” The USTR report also notes that installing offshore wind turbines requires special vessels.
I am sure Japanese and Korean shipbuilders will be very happy that the United States has taken steps to curb Chinese shipbuilding subsidies. However, I confess that pouring government subsidies and attention into creating a globally competitive shipbuilding industry will not be high on my list as I aim to position the United States as a key industry for prosperity in the 21st century.
