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The US Trade Representative has filed a “Report on China’s Targeting of the Maritime, Logistics and Shipbuilding Sectors for Dominance” (January 16, 2025). In the lingo of US trade law, this is a “Section 301” report, which comes from a 1974 law delegating the authority to the USTR to investigate “unfair” trade practices by other countries and to impose tariffs or other trade restrictions in response.

There is zero doubt that China has targeted its shipbuilding industry with major subsidies. But part of what is interesting in this case is that the US has not been a major player in global shipbuilding for decades. Thus, the USTR report reads strangely to me, because while it is phrased in terms of effects on US shipbuilding, the industry has been dominated by Japan and South Korea.

Either fortuitous or thanks to excellent editorial decision-making, the Journal of Economic Perspectives, where I work as Managing Editor, published a paper on Chinese ship-building subsidies in the Fall 2024 issue as part of a symposium on industrial policy. Like all JEP papers back to the first issue, it is available free and ungated. Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur describe “Industrial Policy: Lessons from Shipbuilding.” 

They present a figure showing global patterns of shipbuilding. As you can see, the UK(blue) and other nations of Europe (red) dominated global shipbuilding for most of the first half of the 20th century. The US has surges of shipbuilding in each World War but is generally not much of a factor. Then Japan (orange) took a large share of the global shipbuilding market after World War II and Korea (green) entered the market in force in the 1980s. China’s share begins to rise rapidly in the early 2000s.

As the figure illustrates, it would be impossible for China’s shipbuilding to have affected the US shipbuilding industry before about 2000. Thus, when the USTR report discusses the low levels of US shipbuilding in, say, the 1970s or 1980s, the causes are necessarily elsewhere.

The USTR report has only a few mentions of shipbuilding in Japan and Korea, mostly in footnotes, but it does drop in an occasional sentence. For example, USTR (pp. 116-117) notes in passing: “For China to achieve its targeted dominance, including as demonstrated by explicit global market share targets, Chinese companies must displace foreign companies in existing markets and take new markets as they develop. Such displacement affects China’s current top competitors in Korea and Japan, as well as U.S. shipbuilders, which continue to see their small market share decline and are unable to compete with China’s artificially low prices and massive scale.” At another point, USTR (p. 60) quotes an outside study stating: “Chinese yards often force ship buyers to source engines and other subcomponents in China when they order vessels. Otherwise, ship buyers interviewed by the authors indicate, they would favor Korean and Japanese-made engines and other internal parts.” In short, this is not a case where a large or cutting-edge US industry is being challenged by China’s subsidies.

Shipbuilding has been a highly subsidized industry in Europe, Japan, and Korea before it became subsidized by China, as Barwick, Kalouptsidi, and Zahur point out in JEP. They write:

First, why do governments subsidize shipbuilding? Our narrative suggests a wide variety of reasons: the connection between trade, shipping, and shipbuilding; the development of heavy manufacturing as a strategy for promoting economic growth; employment; national security and military considerations; and the desire for national prestige (or “pride and machismo,” as Stråth (1987) puts it). Yet, in none of the historical cases is it self-evident exactly what mix of objectives led to industrial policy in shipbuilding.

Second, was industrial policy successful? It is challenging to evaluate if industrial policy worked. There are certainly examples of “apparent success” in Japan, South Korea, and China, where a country with a negligible initial share of the global industry embarks on a program of industrial policy and rapidly becomes a global leader. But the history of shipbuilding is also filled with examples of unsuccessful industrial policy, such as the long- standing US policy of protecting its shipbuilding sector through cabotage laws, European governments’ prolonged and costly attempts to subsidize their shipbuilders in the face of Japanese and Korean competition (Stråth 1987), or an earlier attempt by South Korea to promote shipbuilding in the 1960s (Amsden 1989). Other countries have failed to launch a shipbuilding industry as well, as in the case of Brazil’s failed attempt to launch its own shipbuilding sector in the late 1970s (Bruno and Tenold 2011). Even the apparent success stories required massive support, leading to the question (rarely answered in the literature) of whether the benefits from subsidizing shipbuilding are worth its large cost.

They seek to estimate the full range of China’s subsidies for the shipbuilding industry: cheap land near the ocean, cheap low-interest long-term loans, subsidized inputs (like steel), subsidies for exporting ships, subsidies for ship-buyers, and streamlined licenses. China opens literally hundreds of shipyards from about 2006-2013. They estimate that these government subsidies were equal to about half of the total revenue for China’s shipbuilding industry during these years.

Should China’s shipbuilding subsidies be counted as a “success”? They write:

[A]lthough China’s shipbuilding subsidies were highly effective at achieving output growth and market share expansion, we find that they were largely unsuccessful in terms of welfare measures. The program generated modest gains in domestic producers’ profit and domestic consumer surplus. In the long run, the gross return rate of the adopted policy mix, as measured by the increase in lifetime profits of domestic firms divided by total subsidies, is only 18 percent, meaning that for every $1 the government spends, it gets back 18 cents in profitability. In other words, the net return when incorporating the cost to the government was a negative 82 percent, with entry subsidies explaining a lion’s share of the negative return.

They discuss how one might estimate a higher return. For example, if China had targeted its shipbuilding subsidies to larger and more efficient firms, rather than encouraging entry–as it eventually did–the return to its subsidies would have been higher. Also, if one takes into account that China’s massive shipbuilding program was probably large enough to drive down global costs of transportation, then China (and other exporters around the world) would have also benefited from being able to trade more cheaply.

The current situation in global shipbuilding is that if the US penalizes Chinese shipbuilding, most of the benefits will go to Japanese and Korean shipbuilders. But let’s try to look beyond that. Why has the US has played such a small role in global shipbuilding? What would be involved in changing that?

For most economists, the travails of US shipbuilding go back to laws in the 19th and early 20th century–for example, the Jones Act of 1920–which sought to protect US shipbuilding from foreign competition. The law requires that shipping between two US ports can only be carried by ships built in the United States. But when US shipbuilders no longer faced global competition, their efficiency fell behind. Current estimates are that the US cost of building a large ocean-going ship is about 300-400% higher than a ship built in Japan or Korea. Thus, the US shipbuilding industry has become focused on smaller ships for domestic purposes, not ocean-going vessels. The USTR writes: “U.S. shipbuilders delivered 608 vessels of all types in 2020, including 15 deep-draft vessels and 5 large oceangoing barges. The majority of these 608 vessel deliveries were inland dry cargo or tank barges and tugs and towboats. U.S. shipbuilders delivered only four bulk vessels in 2024 …”

If US ships were much, much cheaper, the US transportation system could look quite different: for example, it would be much cheaper to transport cargo and bulk goods up and down the East Coast and West Coast, rather than using overland rail or trucks. For example, US lumber companies complain that they are at a disadvantage in shipping lumber between US locations compared to Canadian lumber firms–because Canadian firms can use cheaper international shipping.

I struggle to imagine the US economy becoming an important global ship-building nation. In a big-picture sense, the country would need to develop the domestic expertise to drive down the cost of building large ocean-going vessels by, say, 75%. This would involve building managerial and corporate expertise, along with worker expertise, and developing the supply chains of specialized products to support this effort. But a more basic starting point, imagine the problems in a US context of acquiring land and permitting by the ocean or a large enough river to make launching hundreds of ocean-going ships possible.

It’s perhaps easier to imagine a newly boarded US shipbuilding industry focused on particular tasks, like top-level maintenance and repair of big oceangoing vessels, or focusing as a starting point on a particular part of the market. As the JEP authors point out: “The major types of ships currently produced include containerships, (oil) tankers, bulk carriers, as well as more niche products like cruise ships, liquefied natural gas carriers, and “Ro-Ro’s,” which are ships that allow vehicles to be rolled on and off the ship.” The USTR report also points out the specialized ships need to install offshore wind turbines.

I’m sure that shipmakers in Japan and Korea are perfectly happy for the US to take a stab at reining in Chinese subsidies for shipbuilding. But I confess that when I think of orienting the US toward key industries for 21st-century prosperity, pouring in the government subsidies and attention to create a globally competitive shipbuilding industry would not be high on my list.

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