CHAPTER 4

OPPORTUNITIES TO MORE EFFECTIVELY AND

ECONOMICALLY ACHIEVE NATIONAL SHIPPING

AND SHIPBUILDING GOALS

LINK BETWEEN MERCHANT FLEET AND

SHIPBUILDING SUPPORT

Government support of the shipbuilding industry is linked to merchant fleet support by the provisions of the Merchant Marine Act of 1936, as amended. The act specifies that only U.S.-built ships can be eligible for operating differential subsidies and that only ships which will be U.S.-owned and U.S.-registered are eligible for construction subsidies. Therefore, as stated by the Shipbuilding Commission, "the health of the shipbuilding industry and of the merchant marine are inextricably interwined."

Most U.S.-flag merchant vessel operators must receive an operating subsidy to be economically viable in foreign trade. To be eligible for that subsidy and other forms of Government assistance the U.S.-flag ship must have been built in the United States. A competitive U.S.-built ship ordinarily needs to be constructed under the CDS program because of the relatively higher ship construction cost in U.S. yards. Because of this "inextricable intertwining" MA must choose between supporting a merchant fleet having the characteristics desired and accepting whatever shipbuilding industry results or supporting an industry having the characteristics desired and accepting a subsidized fleet limited to the construction capabilities of that industry.

To insure meeting the objectives for either the fleet or shipbuilding, the objectives for one or the other must be subordinate. Although it is possible, it is not likely that efforts to insure the objectives of one will also achieve the objectives of the other.

The hearings for the Merchant Marine Act of 1970 indicate congressional concern principally with declining numbers and increasing age of the merchant fleet and with shipbuilding efficiency, rather than with the existing shipbuilding capacity.

A primary objective of this act was to expand and modernize the active U.S.-flag merchant fleet. The fleet had been reduced from 1,145 ships in 1950 to less than 700 by 1971-from a modern fleet to a fleet more than two-thirds of which were or were approaching 25 years old. In addition, the Congress expressed concern about the percentage of U.S. trade tonnage the fleet would be able to carry if this decline continued.

Discussion of Government effort to improve shipbuilding industry efficiency centered on efforts to insure a sufficient expected volume of business to increase industry incentive to modernize. It was expected that improved efficiency would result from modernization investment by the yards if they could depend on avoiding the cyclical pattern of business previously typical of the industry.

However, shipbuilding business is derived primarily from three sources: Navy construction, Jones Act, and MA subsidized construction. To avoid the cyclical pattern of business, one source of business could be adjusted to compensate for changes in the other source. Increases in the volume of business from the Navy and Jones Act have been forecast for the remainder of this decade. Therefore, it would appear that there would be less need for expanded MA subsidized construction to provide the needed volume of business.

The difficulty with adjusting the MA program as just described is the link between adding ships to the subsidized fleet and Government support of the shipbuilding industry. If expansion of the U.S.-flag fleet is to continue under current provisions of the law an expanded MA construction subsidy program must also continue. It appears, therefore, that CDS support of the industry is based more on the Nation's objectives for the U.S.-flag merchant fleet than on a need to provide Government support for developing or maintaining a specific size and type of domestic shipbuilding capability.

COMPARISON WITH FOREIGN
SHIPBUILDING COUNTRIES

The Shipbuilding Commission noted that, "In most Europe an nations, aid to shipyards is independent of the vessel's flag and aid to flag fleet operators is independent of the country of construction."

A large number of the ships that major shipbuilding nations added to their domestic merchant fleets from 1970 through 1973 was foreign built while at the same time domestically produced tonnage was exported for foreign flag registration. Statistics of the Organisation for Economic Cooperation and Development show that over half the tonnage of the 8 largest merchant shipbuildersl (ranked by size of orderbook) was for export. In addition, more than a third of the tonnage added to the merchant fleets of these shipbuilding nations was foreign built. Thus the major shipbuilders were both exporting and importing ships at the same time. Below are the total statistics of these eight shipbuilders compared with those of the United States for 1970-73.

The four constitute all

aThis figure is higher than usual because four container ships were imported by one U.S. company. the imported tonnage for that year.

SOME DISADVANTAGES OF LINKING
FLEET ADDITIONS AND SHIPBUILDING

The requirement that subsidized U.S.-flag merchant ships be U.S.-built and that ships built with subsidy be only for U.S. ownership and registry, can result in (1) the United States not developing or maintaining an industry of the size and capability needed or (2) spending more than necessary to achieve shipping and shipbuilding objectives.

Unstable market for U.S.-built ships

Cyclical variations in demand is a frequently cited problem of the shipbuilding industry. For example, a January 1974 Navy report concluded that,

Japan, Sweden, West Germany, Spain, France, United Kingdom, Norway, and Denmark.

"A widely fluctuating workload in ship construction and ship repair deemed the single most important cause of high costs and inefficiency for both commercial and naval shipyards on an individual basis."

The Shipbuilding Commission also cited unstable, cyclical workloads as one of the "most prevalent ills" of the shipyards. Figure 3 illustrates the changes in shipyard activity as measured by quarterly employment of the nine major yards and provides comparison with the overall industry average. This shows that moderate variations in total yard activity disguise significant instability at individual yard leveis.

Instability of workload affects both the facilities and labor of the shipbuilding industry. Modernization of facilities requires investment which entails more risk if there are important variations in workload. The cost and productivity of labor is affected adversely by undependability of future work. Also, because shipyards are often important local employers, variations in their work force caused by unstable workloads may have a serious impact on local economies.

It would seem desirable, therefore, that Government support of the shipbuilding industry provide, among other objectives, a more steady and predictable volume of business. This leveling could be accomplished, for example, by adjusting CDS support to complement changes in Navy construction and commercial ship demand derived from the Jones Act.

Using shipyard employment as a measure of activity at 6-month intervals between 1955-73, our analysis showed that MA program employment changes complemented those for the two other sources 58 percent of the time. Thus, although the CDS program has partially helped to achieve stability in shipyard employment, there appears to be room for improvement.

Present projections of increases in Navy and Jones Act activity when the MA program is at a higher level indicate that MA activity will not be complementing the impact of changes in other sources of demand on the shipbuilding industry during the next few years.

(A) Whether the change was an increase or decrease was ignored in order to show degree of change rather than net change. (B) The percentage change in each yard was calculated and percentages averaged.