Stormy Seas: U.S. Shipbuilders Face Big Challenges

Article Published in the San Diego Union Tribune

During America’s long ascent to global economic dominance, many industries have been left behind. Whaling. Footwear. Transistor radios and televisions. Economists say that such industrial evolution is inevitable as once-thriving enterprises are overtaken by new technologies, changing tastes, or more nimble competitors.

There is one domestic industry, though, where chronic signs of decline are harder to understand: shipbuilding. It’s true that most of the nation’s biggest shipyards can trace their origins back many years, to very different times. San Diego’s National Steel & Shipbuilding Company (NASSCO), the biggest shipbuilder on the west coast, was founded in 1905. East coast shipyards are even older.

But during the intervening century, America has grown to be the world’s greatest trading nation, and 95% of its overseas trade travels by ship. U.S. imports and exports make up a fifth of all oceanborne trade around the world.

Not surprisingly, the U.S. Navy grew as America’s global economic interests did. A century that began with Teddy Roosevelt’s dispatch of the Great White Fleet on a tour around the world ended with planes from the 97,000-ton carrier named for Roosevelt pounding Milosevic’s Serbia into submission. Today, America is the greatest naval power in history.

It doesn’t make sense that the world’s biggest maritime trader and military power can’t sustain a world-class shipbuilding industry. But the trends are clear. U.S. shipbuilders’ share of the global market for large, oceangoing commercial vessels stands at one percent — barely matching the performance of countries such as Finland and Croatia. Twenty years ago, the U.S. share was nearly 10 percent.

Since 1980, the number of domestic shipyards engaged in building large oceangoing vessels has plummetted from 22 to seven. The number of U.S. workers engaged in shipbuilding has been cut nearly in half, from 110,000 to 56,000 — a trend reflected at NASSCO, where employment has fallen from nearly 8,000 to about 3,000.

During the same period, the so-called “Big Six” surviving domestic shipbuilders have become captives of the Navy. In a typical year, well over 80% of their revenues come from that service. They almost never sell military or commercial ships to foreign customers, and the handful of commercial vessels they sell to U.S. buyers are built mainly because federal law discourages use of foreign-made ships in domestic waterborne commerce.

How did U.S. shipbuilding sink to such a low ebb?

Experts Wrong

The fashionable view among Washington policy wonks is that advanced industrialized countries such as the United States can’t compete in labor-intensive enterprises like shipbuilding. Those, it is said, have to be abandoned to developing countries with cheaper wage rates. As U.S. shipbuilders have tried to stave off the inevitable, these “experts” claim, they have substituted political clout for modern technology, becoming an industrial backwater.

It was this view that led the Reagan Administration to unilaterally terminate subsidies to commercial shipbuilders in 1981, a move that caused the collapse of nonmilitary ship construction in the United States. The same view now underpins Bush Administration efforts to repeal federal loan guarantees for commercial shipbuilding, which White House free marketeers consider a corporate subsidy.

Unfortunately, the fashionable view is almost entirely wrong — a triumph of ideology over analysis. First of all, most of the world’s leading shipbuilding nations are advanced industrial countries like the U.S. The biggest shipbuilder is South Korea, a country where internet penetration is higher than in America. The next biggest is Japan. Other countries in the top ten include Finland, France, Germany, Italy, Poland, and Spain.

Second, the notion that labor-intensive industries are properly the province of developing nations is specious. The fastest-growing part of the U.S. economy is services, which includes such labor-intensive activities as software engineering and biotechnology.

Third, shipbuilding companies in countries like Germany and Japan are at least as politically-protected as those in the U.S. Federal studies indicate that if all nations abolished their subsidies and legal protections — not unilaterally, but in tandem — U.S. shipbuilders would be fully competitive in global markets.

Finally, the notion that U.S. shipbuilders aren’t conversant with the latest technology is belied by the fact that they build the most sophisticated warships ever conceived. A Virgina-class attack submarine is far more complex than the largest commercial airliner. In fact, the main reason why U.S. naval shipbuilders can’t sell overseas is that their warships are too advanced to match foreign demand.

Double Trouble

U.S. shipbuilders aren’t blameless for their sector’s infirmity. In the decades following World War Two, they exhibited the same indifference to innovation that eventually laid low other basic industries such as steel and autos. With thousands of surplus Liberty ships left over from the war, there wasn’t much incentive to learn new shipbuilding techniques. When overseas rivals rebuilt from the devastation of wartime, their yards were newer and more capable.

Like foreign competitors, U.S. shipbuilders showed little aversion to protectionism when it served their purposes. But the decline of domestic shipbuilding over the last twenty years is traceable to other causes. In essence, the industry got caught in a vise between misapplied free-market philosophy and declining military demand.

The misapplied philosophy arose out of Reagan Administration determination to slow the growth of the welfare state, including so-called “corporate welfare.” One of Reagan’s first steps on this path was to eliminate federal construction subsidies for commercial ships. However, his advisors ignored the fact that the subsidy was designed to compensate for similar regimes in other countries.

By wiping out the domestic benefit without securing a quid pro quo from foreign nations, Reagan destroyed the ability of U.S. yards to compete in global markets. The number of merchant vessels on order from U.S. builders dropped from 62 in 1980 to 46 in 1981, 35 in 1982, 21 in 1983, 13 in 1984, and finally zero during his last year of office.

For shipbuilders, the blow of losing their subsidies was softened considerably by the Reagan defense buildup, which among other things was designed to assemble a 600-ship Navy. During the 1980’s the Navy spent $100 billion to buy an average of 19 warships annually. Builders barely noticed their waning presence in commercial markets as they scrambled to secure lucrative military contracts.

However, when the Cold War ended demand for warships collapsed and the industry found itself with no overseas markets to fall back on. The Clinton Administration introduced some modest measures aimed at revitalizing the sector, but the skills that had served shipbuilders so well in producing complex submarines and surface combatants proved ill-suited to cost-conscious commercial buyers.

It took a while for the industry to work off its backlog of naval orders — warships typically take several years to b