June 25, 2020 11:57AM

Has the Federal Government Preserved U.S. Shipbuilding Vitality? Or Sapped it?

A recent New York Times feature about the construction of containerships contains the following passage regarding the state of the U.S. shipbuilding industry:

In the United States, large shipyards have been on the decline for decades, losing out on orders for massive commercial ships to cheaper foreign competition. Today, more than 90 percent of global shipbuilding takes place in just three countries: China, South Korea and Japan.

What industry does remain in the United States is supported by the federal government, which orders American‐​made ships of all kinds, from Coast Guard cutters to naval aircraft carriers. The industry is also protected by a century‐​old law, the Jones Act, which requires that people and goods moving between American ports be carried on ships owned and operated by U.S. citizens and built domestically.

The federal involvement has helped to preserve the vitality of the 124 remaining active American shipyards, which, according to government estimates, contribute more than $37 billion in annual economic output and support about 400,000 jobs.

According to the article, domestic shipbuilding is “protected” by the Jones Act and “supported” by the federal government. This federal involvement, the article adds, has “helped to preserve the vitality” of remaining U.S. shipyards. But the reality is closer to the opposite. Rather than vitalizing U.S. shipbuilding, the federal government has helped vitiate it. Washington’s meddling in this sector has contributed mightily to its downfall.

Efforts by the federal government to boost the fortunes of U.S. shipbuilding are longstanding. For most of U.S. history, even before passage of the 1920 Jones Act, waterborne domestic commerce has been restricted to vessels built in the United States. And until 1912 even U.S.-flagged ships engaged in foreign commerce had to be domestically built. Yet U.S. shipbuilding has been uncompetitive and in decline since the mid‐​1800s.

This is not a coincidence.

The foundation of competitiveness is competition, but protectionism thwarts competitive pressures and incentives to improve and innovate. A sector shielded from foreign competition will not be competitive almost by definition.

The U.S. shipbuilding industry offers a textbook example of this dynamic. So long as ships were made of wood and powered by sail, American shipbuilders—with easy access to ample supplies of timber—found themselves able to compete. Once such vessels gave way to a new era of iron and steam, however, domestic firms failed to keep pace.

Evidence of this inferiority abounds in the historical record. One government report, for example, notes that while England and Scotland were developing more efficient screw propellers for ocean ships in the 1800s, Americans were still using “paddle wheelers” of the type that used to be common on the Mississippi River. By 1900, when countries such as the United Kingdom, the Netherlands, Germany, and Spain had at least 70 percent of their shipping tonnage under steam power, a majority of the U.S. fleet was still under sail. At the turn of the century, nearly 80 years after the first sea voyage by an iron steamship, fully half of the U.S. fleet was still built of wood.

The high prices charged by these protected shipyards surely served as an obstacle to a modernized fleet. As a 1901 government report points out, one shipping firm that had identical vessels built in U.K. and U.S shipyards were charged $1,419,120 in the former and $1,846,800 in the latter—a price 30 percent higher.

None of this should surprise. Why would U.S. shipyards strive to build the most technologically advanced ships at the lowest prices when handed a captive market? Why try to be the best when not forced to compete against the best? Writing in the maritime publication Proceedings in 1882, Lieutenant R. Wainwright of the U.S. Navy clearly identified the counterproductive role of protectionist maritime laws forbidding the use of ships built abroad:

Some [of these laws] are injurious without any apparent excuse for their existence, such as those preventing the investment of foreign capital in American vessels. Others have been passed in order to benefit some other business; such as prohibiting the American flag to any but American‐​built ships. This was done in the interest of the shipbuilders, and has aided in crushing them (emphasis added).

The protectionist smothering of U.S. shipbuilding continues today. Even more uncompetitive than when the Jones Act was enacted, U.S. shipyards currently produce a mere handful of commercial ships at prices up to 400 percent higher than those built in other countries. As discussed in a November 2019 policy analysis, this is a predictable result of maritime protectionism under the Jones Act. By building for the small, captive U.S. shipbuilding market rather than the much larger international market, U.S. shipbuilders are incentivized away from specialization and economies of scale. High costs and technological inferiority are the inevitable consequence.

That the federal government offers a steady stream of shipbuilding contracts—accounting for 70 percent of industry revenue in 2015—only compounds matters. As then‐​Secretary of Transportation Alan Boyd testified before Congress in 1967, “you do not revitalize an industry by flooding it with federal dollars and imprisoning it within a wall of protection.”

U.S. commercial shipbuilding offers an object lesson in the dangers of protectionism and a reminder that such policies are not only bad for consumers, but often also the very industries they are ostensibly meant to help. These federal interventions are not a vitalizing force, but a corrosive one that undermines invention and promotes complacency. No revival of this sector will be possible until Washington’s role in the downfall of U.S. shipbuilding is properly recognized.