URSABLOG: Biting The Hand That Feeds It

Well, it really seems to be happening now. On Friday the Office of the United States Trade Representative (USTR) published an invitation on their website for comments from the public on their proposed Section 301 actions “aimed to obtain the elimination of China’s acts, policies, and practices targeting the maritime, logistics, and shipbuilding sectors for dominance.” [my emphasis]

I have written about this before, and had hoped that this would go away, but it seems that it is with us to stay. The Section 301 investigation – started by the Biden administration by the way –found “China’s acts, policies, and practices to be unreasonable and to burden or restrict US commerce.”

This is patently rubbish, but it’s difficult to know where to start. So let’s start here: the US has shown no inclination or desire in the last 50 years – at least – to build oceangoing vessels that could compete in the global market, by price or design. They preferred to build for their Jones Act protected trades, and for the US Navy.

I decided to search through our database – which includes all ships that exist in the world with an IMO number that were built by US shipyards, concentrating on proper oceangoing ships, those in excess of 10,000 deadweight. The system found the grand total of 228 vessels, a number less than the ships owned by many of the more sizeable private owners, let alone public or state-owned fleets.

Of this total, twenty are officially reported as laid up or scrapped, and I have included those ships exclusively trading in the Great Lakes only, too big to get out into the ocean in one piece. The largest ships built are tankers of a rather strange size – 195,000 dwt – all with the pre-fix Alaskan, all flying the US flag, and AIS data suggests a domestic shuttle trade between Alaska and Long Beach, which is hardly internationally competitive.

I could go on, but I can’t really be bothered except to say that the current US built fleet, the oldest being 1906 built, yes you read that right, 1906, is so small as to be a statistical error in the Greek owned international fleet, let alone the world’s.

So what happened? Well as far back as the 1970s, before China decided to enter the world properly in terms of trade, let alone shipbuilding, the US were not building ships for the global market. They just weren’t players in a market then, they didn’t want to compete. Far from being undermined by ruthless and unfair Chinese practices, they decided they had better leave shipbuilding to others, like Japan and South Korea whose economies they had created and encouraged after the Second World War and the Korean war, who could do it better, for cheaper.

Around the same, coincidentally enough, the US oil majors decided to exit the shipowning business and leave it to independent owners who could do it better, and yes, you guessed it, for cheaper too. The model of US business then – as now – with continual growth, and eternal profits, did not suit the hyper-cyclical and volatile business of international shipping; they could not dominate the market, or manipulate it, so they stayed out.

But times have changed, and things are different. The US wants to become great in international shipping – even if it was never really great in it before – and is starting to approach it with the usual heavy-handed tools at its disposal:

To obtain the elimination of China’s acts, policies, and practices, and in light of China’s market power over global supply, pricing, and access in the maritime, logistics, and shipbuilding sectors, USTR proposes to impose certain fees and restrictions on international maritime transport services related to Chinese ship operators and Chinese-built ships, as well as to promote the transport of U.S. goods on U.S. vessels.

Let’s revisit basic economics, at a level even I can understand. Shipping, especially tramp shipping (mostly dry bulk carriers and tankers, including the gas trades) exists in a world which is the nearest to a model of perfect competition that we have access to. This means that no one player, or country for that matter, has a sufficient dominant position to control or manipulate the market. China may be trying to increase the size of their fleet in an attempt to do that, but all Chinese controlled – whether state or privately owned – vessels, whether Chinese flagged or not, is no more than 20% of the world fleet. China is incredibly important to the global shipping market due to the amount of cargo it imports or exports, but as anyone who works in shipping knows, this is a far from a dominant position. Chinese importers, exporters, charterers and owners are price takers in the spot market. They can no more get a dominant position in the market than a ten-ship Greek owner.

Secondly, the demand for shipping is derived from the demand for trade of goods, i.e. if there is little demand to buy and sell goods over space and time, there is little demand for shipping. Further if there are too many ships to satisfy weak demand the freight market will suffer. An if there is too much demand and not enough ships to satisfy it then freight rates increase, and in moments of very strong tonne-mile demand, they increase exponentially. Like for container shipping during COVID. Who owns the ships is not necessarily who builds them. Greece has no shipbuilding industry to speak of, but that has not stopped Greek private owners from amassing a large fleet.

By lumping maritime, logistics and shipbuilding sectors in the same sentence, the USTR shows at once its ignorance of the global shipping industry, and any attempts to increase its share in it are therefore most likely doomed. This is no more apparent than in the “certain fees and restrictions” it wishes to impose “on international maritime transport services related to Chinese ship operators and Chinese-built ships.”

Let’s have a look at these in a little more detail:

–           Service Fee on Chinese Maritime Transport Operators: Chinese operators will pay up to US $1 mill per vessel per US port entrance or US$ 1,000 per net ton of the vessel’s capacity

–           Service Fee on Operators with Fleets Comprised of Chinese-Built Vessels: Non US operators of Chinese-built vessels will pay up to US$ 1.5 mill per US port entrance

Not content with this, they also address those operators with a proportion of Chinese-built vessels in their fleets:

–           for those with 50% or greater of their fleet comprised of Chinese-built vessels, the operator will be charged up to US$ 1 mill per vessel entrance, or

–           for operators with greater than 25% and less than 50% of their fleet comprised of Chinese-built vessels, up to $750,000 per vessel entrance, or

–           for fleets less than 25% percent of their fleet comprised of Chinese-built vessels, up to $500,000 per vessel entrance, or

–           based on the percentage of Chinese-built vessels in an operator’s fleet: an additional fee of up to US$ 1 mill per vessel entrance if the number of Chinese-built vessels in the operator’s fleet is equal to or greater than 25%

Leaving aside whether the authorities consider a time charterer like, say, Cargill as a vessel operator or not, or whether a ship manager like, say, Safe Bulkers, a company listed in the US, is a US operator, this kind of legislation shows a complete lack of understanding of shipping in general. If a vessel is under time charter then the charterers will surely pay all port costs, of which this service fee be will be included. It follows that charterers will only take non-Chinese built ships to avoid paying these sums, increasing the hire for such ships over others. But all this means that the fleet is fragmented, and as we experienced after Russia’s invasion of Ukraine, a fragmented fleet is a booming one for everyone, as trade routes are altered, and tonne-mile demand rises as access to appropriate supply decreases.

If, as it appears to me at least, the focus of this legislation is container liner operators, the cost of freight in and out of US ports will increase as operators shift their vessels around so that non-Chinese built ships are used to service US trades. There seems to be no scenario where the cost of maritime transport actually decreases, and whilst this may be good for shipowners, it certainly won’t be good news for US exporters or US consumers. Their costs will only go up.

All this, however detrimental, could be implemented fairly quickly. Where we go into the realms of complete fantasy is when we come to those owners with orders already placed in Chinese shipyards.

Those operators with 50% or more of their orders placed in Chinese shipyards that are due to be delivered in the next two years will pay up to US$ 1 mill per port entrance, between 25% and 50% will pay US$ 750,000 and so on. What are owners expected to do? Cancel their orders and make new ones in non-Chinese yards? China has over 50% of newbuilding capacity at the moment, and the orderbooks for Japanese and Korean shipyards are full until 2028 at least. There is no other capacity available. If the intention is to move the orders to US shipyards, then simply forget it. The capacity, designs, skills and products simply do not exist. I know of no shipowner, at least not yet, who would seriously consider building in US yards. What would they build? And at what price? And what machinery would they use? Main engine construction – whether inside or outside of China – is running at full capacity. There is simply nothing available to power the ships.

The remissions for US built ships – you get similar discounts of US$ 1 mill for using a US built ships that doesn’t exist – are risible. And the aims of the USTR are equally fantastical:

The international maritime transport of all U.S. goods, such as capital goods, consumer goods, agricultural products, and chemical, petroleum, or gas products [i.e. everything], must comply with the following schedule:

–           Effective immediately, at least 1% percent of U.S. products, per calendar year, that is exported by vessel, is restricted to export on U.S.-flagged vessels by U.S. operators

–           By two years at least 3% of U.S. products is restricted to export on U.S.-flagged vessels by U.S. operators

And so on: by three years 5%, by seven years 15%.

In case you haven’t been paying attention, the ships don’t exist, and US shipbuilding capacity doesn’t exist either. Japanese shipbuilding capacity is falling, mostly due to a lack of labour, partly caused by demographic challenges, but also in large part due to their strict immigration policies. In any case, potential workers are not enthused by the prospect of working outside in all weathers to strict deadlines and quality controls. I can’t imagine US labour being that enthusiastic either. South Korea is allowing thousands of Malaysian and other foreign workers to come and work in their shipyards, numbers that would surely cause many in the White House sleepless nights if they had to sign off on legal immigration for Mexican and other central American workers.

China has come to dominate the shipbuilding market because they wanted to do it, not because of unfair labour and dominant trade practices. Other countries have had to reduce their capacity because they have chosen not to invest further in legacy industries, or because they don’t have the labour available to work there. This is called – was called in the US – global development and diversification, comparative advantage, globalisation, and has benefitted the world as a whole as China has lifted itself out of poverty and the US has continued to grow economically on the back of it.

The USTR proposals, first investigated by the Biden administration and now being taken up by the current occupier of the White House have broad bipartisan support apparently. It is not that surprising that these measures are ultimately self-defeating, isolationist, inflationary and aggressive. I take little hope – as others still seem to possess – that faced with the self-contradictory and self-defeating results that will surely result if these proposed measures are put into action, even if in part, they will be quietly forgotten about: recent events suggest otherwise. What I do know however is that shipping will survive, and perhaps even profit, from such disruption. It’s just that those who will benefit will not be those for whom the legislation is intended, i.e. citizens of the United States of America. You can’t eliminate China by trying to turn the clock back to a time that never existed. The world has moved on, and so has shipping.

Simon Ward