Governments support industries by use of all sort of subsidies, including favorable financing. Shipbuilding is an industry that receives government support in many of the countries home to large shipyards and even in countries not known for shipbuilding. To support American shipyards, which have shrunk to a small fraction of their historical output and have negligible orders, the United States Maritime Administration has for decades provided loan guarantees to ship owners buying American-built ships. This has not succeeded in reviving the industry.

Merchant Marine Act of 1936

            The United States Maritime Administration, a division of the Department of Transportation, was created by the Merchant Marine Act of 1936. It was formed to support U.S. shipbuilding and create an American merchant marine that can meet future commercial and military requirements. Under Title XI of the Merchant Marine Act of 1936, this support included financing of ships, and later shipyards as well. The Maritime Administration was particularly active in the Second World War; the wartime Emergency Shipbuilding Program charged the agency with quickly increasing American shipbuilding capacity. It succeeded; thousands of cargo ships were built in the U.S. during the Second World War, across fifty-three shipyards.

Title XI and Other Support

            The Maritime Administration helps shipowners secure financing through ‘maritime guaranteed loans’, also called ‘Title XI’ loans. These are loans guaranteed by the Maritime Administration’s Office of Marine Financing and therefore by the U.S. government. Title XI loans are not only used to finance the purchase of an American-built ship but are also granted to fund modernization of shipyards. The loan guarantees are intended to encourage investment in shipyards and offset some of the cost differential in building a ship in the U.S. versus elsewhere. Given that obtaining financing on ships can be expensive and loan interest is paid over quite long lives in a typical loan, this could be a very valuable benefit.

            For these guarantees, the Maritime Administration collects a small fee, just 0.5% to 1% of the principal amount of the loan. The fees can be rolled into the balance of the loan itself. Conforming loans are made for 25-year terms and only 12.5% of the cost of the ship must be funded from the applicant’s other funds. Given the volatile nature of the shipping market, these terms would normally subject a lender to considerable risk so these are favorable terms relative to standards in the private market. Further, borrowers benefit from below-market interest rates given the government guarantee. Until the 1980s, creditworthiness of the borrower did not even receive much emphasis in the provision of guarantees. So, someone wanting to build a fleet with generous financing could, to a considerable degree, do so at the American taxpayers’ expense.

            Besides favorable financing, the government has provided other support to American shipyards. These include import restrictions in the form of the Jones Act of 1920. This law requires that ships engaged only in domestic commerce be built in the United States. The rule remains in place to this day and is one of the most consequential regulations in American maritime trade. A form of support that has been abandoned is direct subsidies provided through the Construction Differential Subsidy. Under this program, the government paid for the difference in ship construction costs between the U.S. and abroad. The Construction Differential Subsidy was discontinued in the 1980s.

Costs

            Unsurprisingly given the lax review of loans, poor credit results and a shipping recession in the 1980s shrank the program, but the Title XI loan program was expanded again in 1994. In 1998, the Maritime Administration guaranteed $1.4 billion in loans, the largest sum of any year to date. In the mid-to-late 1990s, one could have been hopeful for a recovery. Today though, volumes are a lot lower. It turns out even generous subsidies won’t always garner large interest. In the decade up to 2020, some $1.9 billion in loans across nineteen vessels were guaranteed. At the end of 2020, the portfolio consisted of just eighteen loans worth $2.5 billion. This is a sum that still falls short of the volume of guaranteed loans back in 1990.

            Not only does the government provide the guarantee, it also makes the loans in question. Since 2016, another government agency, the Federal Financing Bank, rather than private banks, invest in the guaranteed loans. The Maritime Administration also takes on the monitoring and servicing of the loans.

            The guarantees aren’t costless. Up until the mid-1980s, the program tended to run surpluses as loan defaults were rare. In the 1980s however, amidst a global shipping depression, several loans defaulted prompting a reorganization of the program to consider creditworthiness. In the mid-1990s, loan defaults were rare once again. Yet, in 2001, a company that had received $1.2 billion in guarantees went bankrupt and the economic downturn of the early 2000s led to other loan defaults. Liquidation of vessels could free up some resources to eventually recover the Maritime Administration’s payouts to creditors but these were often insufficient.

            A 2003 audit found that the agency had underestimated default likelihood and overestimated recoveries. Between August 2008 and January 2010, another six borrowers defaulted. Considering that the program wasn’t seeing large demand to begin with, this is a rather disappointing performance.

            Still, some say the program generates far more economic activity than what it costs to maintain. One government-ordered study measured the ratio of resulting economic activity to government investment at 20-to-1. This is a common problem in measuring the efficacy of government interventions, some costs and benefits are obvious and well-accounted for, but others can be diffuse and even immeasurable. This is especially true for subsidy programs like this, which we will see, often have strategic rather than economic basis for existing.

Decline of Shipbuilding

            Despite the protections and subsidized financing, shipbuilding in the U.S. has languished. It is far more expensive to build ships in America than elsewhere due to high wages and lack of economies of scale. Appetizing financing is not enough, nowhere near enough, to make up for these costs. In the 2010s, it was estimated that a Jones Act compliant liquefied natural gas tanker, one built in America, cost up to five times as much to build as one from abroad and $21,000 a day to operate, as compared to $9,500 for a foreign ship. The Jones Act also requires that the crew be American, making operating costs high.

            In the 1970s, American shipyards were building between fifteen and twenty-five new large commercial ships per year, about 5% of the world total. In 1980, there were still twenty-two major U.S. shipyards; just eight of these still existed by 1992. Employment in the industry had fallen by two-thirds in that time. The pace of large commercial ship construction fell to just about five per year in the 1980s; this is less than a 1% market share. Despite a ‘National Shipbuilding Initiative’ launched in 1994, and temporary growth in the number of Title XI loans made, the industry has not experienced a substantial rebound.

            Further illustrating the futility of the subsidized financing, what little of the commercial large-ship shipbuilding industry remains afloat is kept alive by the Jones Act, rather than the Title XI loan program. In keeping with the Jones Act and the lack of competitiveness otherwise, ships built in America are used only in domestic trade, particularly between the contiguous U.S. and Hawaii, Puerto Rico, and Alaska and fuel imports by Florida, which is disconnected by pipeline to the rest of the country. At least as of November 2023, there has not been a foreign order for a large U.S.-built commercial ship in decades and not a single ship in the U.S.-flag international trading fleet is U.S.-built.

Today

            Despite the generous financing provided by Title XI, just about five or fewer container or tanker ships are built in the U.S. each year. The two largest shipyards for non-military vessels in America, one each in Philadelphia and San Diego, together built just thirty-four large ships between 2010 and 2013; other shipyards are few and less active. Compare this to the 1,794 large oceangoing vessels on order or under construction in China in 2022 and the 734 in South Korea that same year. Even these few American shipyards are producing smaller ships than those assembled by large shipyards elsewhere. While the U.S. builds many more small commercial vessels, like tugs and barges, and these employ people with shipbuilding skills, the infrastructure requirements are very different. The country also builds many military vessels; 65% of American shipyard activity is for the military.

Philly Shipyard, formerly Aker Philadelphia Shipyard

            The subsidies may not have been effective at reviving an American shipbuilding industry. On the bright side, the limited interest in American ships limits the demand for subsidized financing, so the amounts involved are not exorbitant either. Between 2012 and 2020, no year saw more than a single approved application for a Title XI loan guarantee. A typical loan was for about $300 million in this period but the amounts varied considerably. To limit investment spending, owners of Jones Act-compliant ships are allowing their assets to age rather than replace them with new ships, suppressing demand. In 2020, the Maritime Administration had just $35 million in reserves available to it which allows the agency to guarantee only about $432 million in loans. Any further guarantees may be funded with the repayment of prior loans but beyond that, new funds would need to be provided to the agency. In any case, the program has limited capacity and limited demand.

            The small amounts involved today may discourage much review of the program. However, if the point of the financing is to revive a large U.S. shipbuilding industry, it is worth considering the costs of considerably higher activity by the Maritime Administration’s Office of Marine Financing. Hypothetically, if the U.S. was building two hundred large commercial ships a year, a more respectable pace among the world’s leading shipbuilding countries, and if exactly half of these ships qualified for and received a guarantee and such loan was for $300 million on average, the per annum volume of guaranteed lending would amount to $30 billion. This is a sum not far off the annual military expenditures of Canada, Israel, or Poland. Given the volatile nature of the shipping industry, there would certainly be many loan defaults over their long lives.

            It’s an open question as to whether the lack of shipbuilding is a bad thing; it’s not exactly a thriving industry. Margins are low, if positive at all, and return on investments in shipyards are unappealing to investors. The number of shipyards active globally has fallen sharply from 699 in 2007 to 301 in 2022 and yet the industry still suffers from overcapacity; bleak numbers abound in this business. Both the subsidized shipbuilders in the U.S. and the far larger firms of Korea and Japan, for all their economies of scale, tend to operate at losses. Even these firms require regular government assistance. Large government bailouts of shipbuilding firms have been a common occurrence in Korea and about half of the largest Chinese yards are state-owned.

            Still, the rationale for these subsidies does not often rest on an economic basis. Cargo ships typically carry 90% of military equipment used in overseas wars. A large fraction of the tankers and cargo ships contracted by the U.S. Department of Defense were constructed in China and a lack of domestic shipbuilding capacity generates some nervousness. Thus, shipbuilding continues to receive a fair bit of strategic interest. Nonetheless, frustration with the seeming ineffectiveness of past government support tempers demand for more. The Title XI loan program was even slated for elimination in the Trump Administration’s fiscal year 2021 budget, but this was not taken up in the final spending bill.

Lesson

             The history of the Title XI program and other support to American shipyards show how subsidies can easily fall short of reversing an industry’s decline, especially if the country lacks a substantial competitive advantage and other countries also resort to subsidies to protect their industries. Unless subsidies can bridge an industry to sustainability, whether by economies of scale, the realization of some other advantage, or otherwise, they are likely to become permanent. Still, they may be justified for strategic reasons. While subsidies often have other-than-economic rationale, they cannot escape economic scrutiny and the potential for industrial sclerosis, misuse of resources, and even corruption that close government-commercial relations can foster.

More from the Tontine Coffee-House

           Read about the recent history of ship finance. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Adams, R. Kevin, et al. “Shipbuilding Industry.” The Dwight D. Eisenhower School for National Security and Resource Strategy. National Defense University., 2014.

2.      Dubner, Barry Hart, and Shirley Kath Waters. “Title XI Loan Guarantees: The Destruction of an Excellent Financial Aid Program for the United States Maritime Industry.” 97, Com. L.J., 1992, pp. 510–539.

3.      “Federal Ship Financing Program (Title XI).” Federal Ship Financing Program (Title XI) | MARAD, Maritime Administration, 18 Mar. 2024, www.maritime.dot.gov.

4.      Frittelli, John. “U.S. Commercial Shipbuilding in a Global Context.” Congressional Research Service, 15 Nov. 2023.

5.      Goldman, Ben. “U.S. Maritime Administration (MARAD) Shipping and Shipbuilding Support Programs.” Congressional Research Service, 8 Jan. 2021.

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