Notes to the New Administration Week
By Ben Massengale
Much has been written lamenting the possible economic consequences of raising tariffs and other protectionist methods that could reduce trade with the U.S. However, imposition of those tariffs could provide a window of opportunity to revive the U.S. Merchant Marine by making foreign vessels less competitive in conducting trade in the U.S. This could be done by granting cargo imported by U.S.-flagged vessels a reduced tariff to not only compensate for the additional cost it takes to operate an American ship, but also making its operations significantly more profitable than its foreign competitors. Such incentives could help promote more private investment in American shipping companies and maritime infrastructure needed to support U.S. maritime security.
Previous government actions to support the Merchant Marine have been ineffective because they focused on shielding the Merchant Marine from the market instead of addressing the underlying problems. Most laws supporting the Merchant Marine focused on providing limited subsidies for U.S. operators and expanding cargo preference laws, such as by mandating certain cargo be carried only by U.S.-flagged and/or U.S.-built ships. The last major maritime law passed in 1920 (also called the Jones Act) established the current restrictions that only American-built, owned, operated, and flagged ships could engage in U.S. coastal trade (U.S. interstate commerce). Overseas built vessels could be U.S.-flagged but were banned from the domestic shipping market. Nothing was done to address the issues causing American ships to become more expensive to build and maintain, and therefore less competitive, than foreign ships. By shielding the fleet, Congress inadvertently minimized incentives for private operators or shipyards to modernize their fleets or practices that keep operating costs up. As a result, the number of U.S.-flagged merchant ships has only gone down and the number of operating shipyards has similarly declined.
As of 2024, there are 185 oceangoing U.S.-flagged vessels (of which 59 are containerships), which is insignificant compared to the over 6,100 containerships used globally. As over 900,000 ships visit American ports yearly, even the most generous exemption is unlikely to noticeably impact efforts to revitalize U.S. manufacturing in the medium term that are the tariff’s primary objective. However, assume a tariff relaxation of 15 from 25 percent for goods imported on U.S.-flagged ships (including those built overseas) was authorized. Consumers, in theory, would see a savings of $50 on a hypothetical $500 pre-tariff imported washing machine carried by a U.S.-flagged vessel over a foreign one, but this is unlikely to appear due to the limited capacity of the U.S. Merchant Fleet. It would result in the shipment of 2,500 shipping containers being $27 million cheaper than goods carried by a foreign-flagged vessel (assuming average value of goods per shipping container is $108,000). Given how the U.S.-flagged ships in 2018 were $6.5 million more expensive to operate annually than other ships, this expense would be covered by a single voyage, making subsequent trips drastically cheaper than other ships. Import companies would be heavily incentivized to use American ships for their imports.
Such exemptions would make the U.S. Merchant Marine profitable. If even stronger exemptions were offered for American-flagged and built ships, it would encourage private investment into American shipyards and related manufacturing to improve U.S. shipbuilding and repair capacity. This would also help the U.S. Navy’s efforts to increase its fleet size and readiness by expanding the foundation of the broader maritime industrial base.
It is difficult to determine how long it would take to build new shipbuilding capacity as no new American shipyards have been built in over ten years. Seven years is a reasonable estimate, given it took five years in the 1970s to construct the original Daewoo shipyard located at Okpo, South Korea (today one of the country’s three largest shipyards) and time to obtain regulator approval before breaking ground. Expanding the repair or shipbuilding capacity of existing private shipyards could be done in a smaller timeframe but would likely still take years to complete.
Tariff exemption is not the same as the cargo preference laws Congress has previously passed to prop up the Merchant Fleet. Those laws were intended to ensure guaranteed business for U.S. shipping companies, but also led to higher costs for the government due to the limited number of ships that met the requirements imposed by those laws. That business was largely dependent on the resupply of U.S. military forces operating overseas and American aid programs. A tariff exemption would work with the market instead of the government artificially generating one. American imports have always remained high, which makes them a more sustainable means of business support compared to cargo preference laws.
A tariff exemption will not completely restore the U.S. Merchant Marine by itself. Numerous other issues, such as high cost of labor and building material, still need to be resolved to address demand signals, labor pools, government regulations, the lack of shipbuilding and ship repair capabilities, and other costs imposed by the Jones Act. These are problems that will require Congress and the White House to work together to revamp the laws and policies needed to rebuild America’s maritime capabilities.
However, an exemption will grant U.S.-flagged ship operators more fiscal space to grow their operations and modernize their fleets. It will incentivize other shipping companies to change from their “flag of convenience” to the U.S. flag. These will generate more jobs because of the need to meet crewing requirements while introducing more competition into markets generated by cargo preference laws and lowering the cost of government shipping contracts. By making foreign-flagged ships less competitive in serving the U.S. economy, the new administration could move to strengthen the U.S. merchant fleet, incentivize more private investment in the American maritime industry, and make the Merchant Marine more capable of supporting the nation in times of crisis or war.
Ben Massengale is a Submarine Officer and the AY25 Visiting Navy Fellow to the Stimson Center. He is a graduate of Texas A&M Galveston and holds a Masters in Defense and Strategic Studies from the Naval War College.
The opinions expressed are those of the author and do not necessarily reflect the official views or policy of the U.S. Defense Department, the Department of the Navy nor the U.S. government.
Featured Image: CMA CGM Benjamin Franklin docks at the Port of Los Angeles. (Photo via Wikimedia Commons)