Biden's steel war plan to compete with China on shipbuilding faces significant economic challenges.

• The Biden administration has recently initiated a trade investigation into Chinese shipbuilding as part of a plan to strengthen the U.S. steel industry.
• Since the 1980s, when the Reagan administration ended subsidies, it has not been economically feasible to manufacture ocean carriers in the U.S., despite Biden's desire to bring the industry back home.
• The cost of U.S.-made vessels is four to six times higher than their competition, and the lack of demand is a challenge in the oversaturated ocean freight market.

The U.S. shipbuilding industry has been diminished since the 1980s, making it challenging for President Biden to revive it.

According to maritime industry analysts, the recent announcement by the Biden administration of a new trade investigation into China's dominance of the ship manufacturing sector is at odds with economic reality. They argue that Biden's shipbuilding talk is more campaign promise than reality and that it is not economically viable for domestic shipbuilding to be competitive globally.

The Biden administration is correct that China has not played fair.

Over the past 20 years, China has been expanding and supporting its shipbuilding industry, according to Ben Nolan, maritime and energy infrastructure analyst at Stifel. However, Nolan stated that China's Asian competitors, specifically Japan and South Korea, are being negatively impacted by this growth. These countries are the top shipbuilders and construct thousands more commercial ships than the United States, which has struggled to maintain competitiveness due to a lack of economies of scale over the past century.

In the 1970s, U.S. shipyards constructed about 5% of the global fleet, resulting in 15-25 new ships annually. However, in the 1980s, the Reagan administration withdrew government subsidies for shipbuilding in line with its free-market ideals. As a result, shipbuilding decreased to around five ships per year, which is roughly the current rate of U.S. shipbuilding.

The United States produces a small number of vessels compared to China, Japan, and South Korea, according to data from S&P Global for CNBC.

An investigation into Section 301 of the Trade Act of 1974 by the Office of the U.S. Trade Representative was initiated following a petition by five national labor unions, including steel representatives, on March 12, requesting the U.S. to examine the policies and practices of China's maritime, logistics, and shipbuilding sectors.

The U.S. investigation into China's trade practices is being opposed by China's Ministry of Commerce, which has labeled it a "mistake on top of a mistake."

Nolan claims that Biden's strategy, which involves visiting the United Steel Workers union headquarters in Pennsylvania and blocking Japan's acquisition of a U.S. steel company, is solely political.

"Nolan stated that Biden's announcement appears to be an attempt to win over union votes. "We are not discussing microchips. The truth is that China can construct ships at a lower cost than we can, as we have observed over the past three decades with companies outsourcing tennis shoes and clothing production to Bangladesh, China, and other Asian countries. They are the economically viable option.""

The three Asian nations, China, Japan, and South Korea, not only lead the global market in massive container vessels for freight transport but also produce tankers and dry bulk vessels. According to analysts, Japan's steel and vessels are renowned worldwide for their quality and longevity.

The USTR did not respond to a request for comment from the White House by press time.

The cost of foreign-made freight vessels is estimated to be at least four times lower than U.S.-made ships, which are also smaller in size and can carry less freight.

In November 2022, Matson Shipping, a Jones Act shipping company, ordered three vessels from the Philly Shipyard with a carrying capacity of 3,600 twenty-foot equivalent units (TEUs) at a cost of $330 million each. At the same approximate time, CMA CGM ordered 16 vessels from China's COSCO and OOCL, with a carrying capacity of 24,000 TEUs and a cost between $240 million-$250 million each. According to Darron Wadey, an analyst at shipping consultant Dynamar, these vessels were $80-$90 million cheaper than the Matson units and 6-7 times bigger.

To be commercially viable, ocean carriers require competitive return on investment metrics linked to container freight rates, according to Wadey.

"In 2023, Matson's revenue per TEU was approximately $3,000, while Hapag-Lloyd's revenue per TEU was $1,600 due to access to cheaper tonnage and global operations."

While Hapag-Lloyd can charge less and still make money, U.S.-made vessels have to charge higher freight rates to generate a profit, and they also have to be out on the water for a longer period to generate an ROI that makes economic sense, resulting in a much longer "economic lifecycle" for U.S.-made ships.

Matson typically sends the oldest containerships for recycling, as evidenced by its 1979 ship being scrapped in 2023 and a 1971 ship being sent to scrap in 2021, which were 44 and 52 years old, respectively. In contrast, the average age of scrapped ships in 2023 was 27.

As time passes, older vessels will require more repairs and may not operate as efficiently as newer ships on the water. However, the cost of constructing container ships is predicted to rise due to inflation, while ocean freight rates are anticipated to revert to their pre-pandemic levels.

"The high costs of capital, labor, and equipment are likely to make inflation sticky for shipbuilding, as Wadey pointed out. In developed economies, including the United States, labor and materials will always be more expensive, leading to higher costs for shipbuilding."

According to CNBC, analysts estimate that 40% of shipyard construction involves labor, with the main challenge being attracting and retaining workers. To address this issue, pay and benefits would need to be increased. However, Nolan explains to CNBC that there is a Catch-22: due to the high costs of labor and capital, companies cannot build vessels without orders.

To produce vessels at a large scale, you will need a significant number of people, and since U.S. labor is expensive, your materials per unit will also be more expensive. When considering the bottom line and shareholders, you would opt for a lower-cost option.

According to analysts, indefinitely reinstating subsidies is necessary to offset costs and make U.S. shipbuilding competitive.

The federal Maritime Administration reports that there are currently 154 active private shipyards in the US, located in 29 states and the US Virgin Islands. While over 300 shipyards are capable of ship repairs or building ships, only a fraction of them are actively engaged in shipbuilding. Most shipyards are situated along coastal states, but some are also found on major inland waterways such as the Great Lakes, Mississippi River, and Ohio River.

Huntington Ingalls Industries' Newport News Shipbuilding is the largest shipbuilding company in the United States, primarily serving as a government contractor. It is the sole provider of U.S. Navy aircraft carriers and one of two providers of U.S. Navy submarines. Analysts report that the military accounts for 90% of the overall revenue of domestic shipbuilding, and without subsidies and demand, there is no commercial case to build vessels.

One way to increase shipbuilding in the U.S. Navy is by increasing its size. In July 2023, the Navy released the Battle Force Ship Assessment and Requirement (BFSAR) report, which recommended a future fleet of 381 manned ships by 2042. Currently, there are 294 manned ships. The report stated that 381 ships were necessary to meet the future demands of warfighting and campaigning. It generally takes five to 10 years to make a major Navy vessel.

The Biden administration's defense budget does not align with the Navy's future size, as naval affairs specialists have stated. According to the Administration's five-year defense plan, the Navy will have a total of 291 manned ships in 2029, after both vessel deliveries and retirements.

According to Ronald O'Rourke, a naval affairs expert at the Congressional Research Service, increasing the Navy's shipbuilding budget without also increasing the overall Navy budget to cover the costs of maintaining a larger fleet would not result in a larger Navy.

""Instead of increasing the size of the Navy, it would make it younger, improving ship capability and reducing maintenance costs, but the fleet wouldn't be significantly larger," O'Rourke stated. "Despite having numerous opportunities to endorse a new force-level goal for a fleet in the size range suggested by Navy studies, the administration has not explicitly done so," he added."

The Biden administration could have explicitly endorsed a larger force-level goal in the October 2022 National Defense Strategy report, but the document did not include force-level figures for the Navy or any other part of the military, and no force-sizing metric was provided for determining U.S. military force-level goals.