Streetwise Professor

Those of you intrepid souls who have followed this blog for a while know that I’ve been banging on about the pathetic state of US Navy procurement, and especially shipbuilding, for years. It’s therefore encouraging that the Trump administration has prioritized this issue, and created a White House shipbuilding office.

My main reservation is that it promises to address both commercial and naval shipbuilding. To be blunt, (a) US commercial shipbuilding is a lost cause, and (b) a division of effort is likely to mean that neither is likely to do well, especially if (as is likely) the lost cause sucks up disproportionate resources. That would be a tragedy.

A few basic facts.

Most importantly, US naval power has never been heavily reliant on commercial shipbuilding capacity in peacetime. Indeed, the US has always been an also ran in terms of US commercial ship construction. In the 19th and early-20th centuries, Britain dominated civilian construction. The US share was measly. Ditto in the interwar years. Only during the World Wars did US commercial construction represent a majority of hulls built in the world, and immediately after each–and I mean immediately–US commercial ship construction shriveled to virtually nothing.

Thus, clearly the US has never had a comparative advantage in building bulk, liner, or container ships. Never. Even with the sunk investments in shipyards and workforce training, and learning by doing (notably in Liberty ships, for example), US yards could not compete after WWII.

Yet, even with its emaciated (at best) civilian ship production, after WWII in particular the Navy was able to churn out numerous ships of all types, many of them first-of-their-kind, such as large deck carriers, nuclear subs, ballistic missile subs, large amphibious craft and on and on, as well as numerous new classes of conventional types such as destroyers, cruisers, and frigates. The US achieved a 600 ship navy when its share of non-military construction was rounding error:

(Figure from an article “Industrial Policy: Lessons From Shipbuilding” in the Fall 2024 issue of the Journal of Economic Perspectives by Barwick et al that I will return to below).

In brief, a large civilian shipbuilding sector is not necessary for US naval construction to flourish. It is also very hard to identify any synergies whatsoever, and indeed, the sectors would compete for specialized resources (notably labor in coastal regions).

Next, and relatedly, competing in the civilian ship world will be enormously expensive and unremunerative, and for a reason related to the lack of US production today (and for decades past): massive subsidies by other countries.

As the Barwick et al article shows, the demise of UK shipbuilding dominance and the succession of new dominant countries, first Europe, but then especially Japan, South Korea, and China in the post-war period, was due to subsidization and industrial policy by these countries. Japan, Korea, and Japan successively identified shipbuilding as a strategic sector, and threw lavish resources at it. Indeed, it is likely that the Koreans and the Chinese were just imitating the Japanese model.

To beat a subsidy you need a subsidy. And a particularly big subsidy if you don’t have a comparative advantage in the first place–as US history demonstrates it does not. And a really really big subsidy if the leader is subsidizing heavily, as is the case today with China.

Bartwick et al estimate using very clever methods that China has subsidized its shipbuilding industry to the tune of $80 billion. They further estimate that this lavish support has indeed built market share, but not profit. Indeed, they estimate that every $1 in subsidy in China has produced 20 cents in additional industry profit. The world, not China itself, is likely the biggest beneficiary of China’s generosity, through the ability to buy cheaper ships.

“Go for market share not for profit” is usually a very, very, very bad commercial strategy, reminiscent of the South Park Underpants Gnomes:

1. Subsidize to get market share.
2. ????
3. Profit!

Except, of course, profit never comes.

A semi-plausible justification for a market share first strategy is that customers are sticky, and that once you get market share you will have market power over customers who find it costly to switch. But that theory is wildly implausible for big ticket items like ships with sophisticated buyers–as the successive supplanting of British, Japanese, and Korean firms amply demonstrates.

It is a mug’s game to compete with this. The “industrial base” that will result will represent a huge waste of capital that would be far better invested in rejuvenating and expanding the military shipbuilding industrial base. Focus there. That’s where it is needed.

And as I noted above, dividing efforts would be inimical to success in the truly vital area–naval construction. It is an all too familiar phenomenon that reinforcing failure and directing resources to floundering divisions at the expense of successful ones is common in conglomerate enterprises. This is a major justification for spinoffs–to prevent the drowning from dragging down those who can swim. Trying to expand both commercial and naval shipbuilding would be a classic conglomerate mistake, and one with serious national security ramifications.

Don’t do it. The Chinese have bought market share at huge expense and received no real economic benefit. Don’t imitate stupidity out of jealousy. Market share is not value.

So kudos to the administration for recognizing a serious problem and endeavoring to fix it. But I pray that they concentrate on the real problem–naval shipbuilding–and scuttle lost causes–civilian ships.