Over the past eight months, the United States has seen a significant change of course in its shipping interests as the U.S. Government looks to address and recoup critical ground in the maritime sector that has been lost to competing nations. Initiatives such as the SHIPS Act, which aims to increase the number of U.S. Flag vessels trading internationally, USTR Section 301, which will tax Chinese built and operated vessels calling U.S. ports, as well as the current administration’s Maritime Action Plan, are all components of a multi-pronged approach designed to revitalize shipbuilding, strengthen the maritime workforce, and level the playing field for international shipping. However, it is becoming increasingly clear that before the United States can restore its shipping dominance it must first recapture its relevance.
To realize what the U.S. must do to restore its dominance, it is important to understand how a nation, who at the end of World War II owned and controlled two-thirds of the global merchant fleet, now only represents less than 1% of that fleet. The U.S.’s post-war economic boom resulted in higher wages, more consumer spending, and a steady increase in the cost of living. These higher living standards and costs pushed many U.S. based shipping interests to flag abroad for lower costs and less stringent regulations. The construction and manning of ships followed similar paths as companies worked to circumvent the high costs associated with the U.S. As a result, U.S. shipbuilding contracted to a few yards performing mainly government contract work, and just enough private sector work to maintain a Jones Act Fleet responsible for restricted coastwise and inland waterway trades.
For decades, Congress had been warned that the U.S. Maritime industry was falling behind its international peers. The glaring vulnerabilities this presented from a mobilization standpoint were repeatedly pointed out by the Department of Defense (DOD) and largely went ignored by the DC establishment. Today, the U.S. is at a distinct disadvantage to other industrialized nations in terms of ship building capacity and merchant fleet assets and the administration is now looking to change the narrative at an aggressive pace.
We understand why, the big question remains how?
The approach by the U.S. is multi-faceted and relies on several public and private elements to build back ship building capacity and merchant fleet assets. For example, the SHIPS Act looks to deploy new taxes and fees on certain foreign vessels and to make direct investments in U.S. shipbuilding infrastructure and programs. The Maritime Security Trust Fund, funded by these new taxes and levies, will then fund domestic shipbuilding and revitalization efforts, including a $250 million annual authorization. However, while it may seem like a lot of money to solve the problem, given the high cost of ships and long lead times to build, the figures provided by Congress do not necessarily add up.
In recent weeks, there has been no shortage of press releases and articles making it increasingly difficult to ascertain what is fact and what is political grandstanding as nations and companies look to curry favor with the administration in Washington. If all these investments and capital commitments come to fruition, it will mark the first step in a long and costly journey back to the world stage, but all too often there are empty promises that disappear when the political winds change.
For example, CMA CGM Group pledged $20 billion in investment to the U.S. over the next four years, while in the same breath, ordered sixteen (16) 15-22,000 TEU dual fuel vessels from China valued at more than $2.2 Billion. Moreover, the 16 ships are under USTR Section 301, which means they are subject to the tonnage taxes and fees because the vessels are built in China. The administration touted the commitments from CMA CGM group, but time will tell if the group stands by its commitments and invests the full amount in the U.S. or continues to direct its investments elsewhere.
Similarly, Hanwha Ocean has committed to building two (2) US-Flag LNG carriers; however, the main scope of the work will likely be carried out in Korea as Hanwha’s recently acquired yard in Philadelphia (Aker) does not have any other experience building LNG carriers. Moreover, the more recent announcement is Hanwha’s decision to build ten (10) Jones Act Medium Range product tankers at its Philadelphia site. If completed, this will cost more than $2 billion to build but will do little to move the needle in terms of the number of U.S. Flag vessels. In all, the Republic of Korea has committed to invest $450 billion in the U.S., which includes $100 billion in energy purchases. However, as is the case with CMA CGM, time will tell if these commitments come to fruition.
Scaling up the U.S. Merchant fleet
The decision by Hanwha to build Jones Act product tankers calls into question the feasibility of the current political agenda and the overarching goal of the Maritime Action Plan to bring the U.S. back to the forefront of international shipping. It is well documented that Jones Act Trade is a capital-intensive business and it can be as much as four to five times the cost to build a Jones Act vessel than a foreign built and operated vessel. What is perhaps less appreciated is the fragile ecosystem the Jones Act supports. The high capital cost and OPEX (operational expense) require the U.S. market to support significantly higher charter rates and freight levels. When the costs get too high, the door opens to imports from abroad and rates subsequently get pushed down, often taking years for the markets to bounce back. Even with the phasing out of aging ships and given the finite number of cargoes that move coast to coast under the Act, the addition of ten (10) MR vessels to a fleet of only forty-three (43) could have a negative impact and serve to set the Jones Act market back years as a result.
Indeed, the more scalable solution may be to reflag internationally built ships, designated exclusively for international trade, by offering Owner/Operators tax incentives to offset the higher OPEX and costs associated with U.S. flag registry. Ships built abroad, which are restricted from the Jones Act coastwise trade, can be 80% cheaper to build and operate with considerably shorter lead times. Also, there are established operators with large portfolios of business in and out of the U.S. that can provide an immediate tailwind to drive the initiative forward. This will not only buy the U.S. critical time to build back the shipbuilding infrastructure domestically but also serve to create a process to rapidly scale up the U.S. merchant fleet assets.
Moreover, valuable lessons and technological advancements can also be garnered by working closely with U.S. allies who have spent decades perfecting large-scale shipbuilding and bringing those lessons back to U.S. soil.
Crewing and Manning
Another obstacle is that even with additional funding, it will take time for the maritime academies to scale up and produce enough seafarers to man a growing fleet. The industry will face additional challenges to find young men and women willing to go to sea, which can be quite demanding. The more tangible approach is to use U.S. officers and source ratings (unlicensed personnel that perform support tasks aboard) from friendly nations and trade partners of the U.S. This will enable operators to manage OPEX and scale up quickly.
Publicly steered, privately driven
Overall, the U.S. administration has put the basic road map in place to restore its position as a maritime powerhouse. However, it is increasingly evident that the forward path necessitates support from private industry. There are simply not enough government cargoes to employ merchant vessels in a peace-time economy and the Jones Act trade is too small and fragile to support an increase in the fleet. The ability to scale up the merchant fleet will require U.S. flagged vessels to compete in the global marketplace and thus makes private industry the linchpin in the success of the Maritime Action Plan. The free market will require the U.S. merchant fleet to compete on the world stage and demand tax incentives to offset the higher operating costs to encourage Owner/ Operators to reflag their vessels and level the playing field. These incentives would serve to motivate fleet growth and allow the government to focus on the redevelopment of critical U.S. shipbuilding infrastructure.
Winston Churchill, one of the 20th Century’s most iconic figures, was credited as saying, “You can always count on Americans to do the right thing, but only after they have tried everything else.” In many respects, the same ethos seems to be playing out before us today as the U.S. looks to rebuild what was, and continues to be, an indisputably important and rich maritime tradition for this country.
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By Patrick Quincannon
President and CEO
Quincannon Associates