Maritime Infrastructure and Trade Week 

By John Bradford

Introduction

The People’s Republic of China (PRC) has embarked on a massive investment spree and established a meaningful stake in the control of global maritime infrastructure. These investments include the construction of new ports, the expansion and modernization of cargo handling facilities, the purchase of port management rights, and the establishment of control over the operations of petroleum storage and transshipment depots. Much of the capital is formally sourced from the PRC’s One Belt One Road Initiative, but major investments are also being made directly by state-owned, PLA-linked, and other Chinese enterprises. The scope of control over global maritime infrastructure has become sufficiently large to be of concern. The U.S. Navy’s 2021 Chief of Navy Operations NAVPLAN warns that China is, “extending their infrastructure across the globe to control access to critical waterways.“¹

There is growing concern that the PRC has, or could, use its investments to deny infrastructure access to its rivals. To date, PRC enterprises have not overtly denied access to others, but they are creating business models that advantage their partners over their commercial competitors. These advantages could have acute impacts for rivals should colluding PRC enterprises be able to establish themselves as a maritime infrastructure cartel or monopolize a specific market segment. However, PRC investment will have to grow considerably more before either of these options available. In contrast, infrastructure investments are already an important element of the PRC’s growing geo-economic influence over its partners. What deserves greater attention is the implications of PRC investments in global maritime infrastructure by specifically focusing on questions involving the potential denial of competitors’ infrastructure access.

The Scope of PRC Investments in Global Maritime Infrastructure

The infrastructure investments in question are distributed globally and concentrated along the PRC’s main trading routes. The most well-discussed examples along the PRC’s Maritime Silk Road that stretches across the Indian Ocean to Europe include Koh Kong (Cambodia), Melaka (Malaysia), Kyaukpyu (Myanmar), Hambantota (Sri Lanka), Gwadar (Pakistan), Doraleh (Djibouti), and Piraeus (Greece). Looking south and east from China, high-visibility examples include Darwin (Australia); Asua (Solomon Islands); and Luganville (Vanuatu). The chain of PRC maritime infrastructure investments also reaches across the Mediterranean (e.g., Venice, Italy; Tangier, Morocco, and Valencia, Spain), north into Europe (e.g., La Havre, France, Odessa, Ukraine, and Zeebrugge, Belgium), and across the Atlantic (e.g., Freeport, Bahamas and Colon, Panama). Especially noteworthy are the investments around key maritime chokepoints. Colon is at the Caribbean entrance to the Panama Canal. The PRC is also playing a key role in the development of Egypt’s Suez Canal Economic Zone while COSCO Shipping Port company owns a minority share of Suez Canal Terminal.²

The extent of this investment spree is sufficiently large that it is difficult to catalog. Dr. Geoffrey Gresh of the U.S. National Defense University notes that two-thirds of the world’s top 50 container ports have received PRC investments.³ In 2019, Hong Kong-based Hutchinson Port Holdings was the world’s second-largest container port operator, running more than 50 terminals worldwide. Third place COSCO Shipping Ports runs fewer ports but handles more total cargo. China Merchant Ports Holding operates nearly 40 ports in around 20 countries.⁴

Other PRC firms staking out control over global maritime infrastructure include China Harbor Engineering Company, Qingdao Port International Development, Shanghai International Port Group, the Ningbo-Zhoushan Port Company, Dalian Port Corporation Limited, the Guangxi Beibu Gulf International Port Group, the Shenzhen Yantian Port Group, and the Rizhao Port Group. The AEI/Heritage Foundation China Global Investment Tracker, one of the largest public databases to register this sort of PRC activity, includes over 100 investments in the shipping subsector that total around $2 trillion U.S. dollars. This does not include maritime infrastructure investments filed into the database under categories such as construction, logistics, or energy.⁵

A great deal of analysis examines the impact of these investments on the naval balance of power. The U.S. government has been clear in its concerns. For example, the U.S. Department of Defense’s 2020 China Military Power Report notes that the PRC concept of Fundamental Domain Resource Sharing dictates that these maritime infrastructure investments are required to provide dual-use functionality and will have important implications “as the PRC seeks to establish a more robust overseas logistics and basing infrastructure to allow the PLA to project and sustain military power.”⁶ The report specifically states that the PRC has probably already made overtures toward the establishment of such military logistics facilities in Namibia, Vanuatu, and the Solomon Islands, and has likely considered Myanmar, Thailand, Singapore, Indonesia, Pakistan, Sri Lanka, United Arab Emirates, Kenya, Seychelles, Tanzania, and Angola.⁷ The December 2020 U.S. tri-service maritime strategy similarly warns: “Chinas One Belt One Road initiative is extending its overseas logistics and basing infrastructure that will enable its forces to operate farther from its shores than ever before, including the polar regions, Indian Ocean, and Atlantic Ocean. These projects often leverage predatory lending terms that China exploits to control access to key strategic maritime locations.”⁸

In comparison to the military aspects, much less reporting and analysis are openly available regarding the commercial implications of the PRC’s global maritime infrastructure investments. There are anecdotes and rumors about PRC-connected port management companies denying access to other nations’ shipping, but this research project was not able to credibly verify these reports. This seems to be because the PRC-related managers are not overtly denying access. Instead, they establish business structures and rules that advantage PRC shipping and thereby force the others to select alternate routing options. These advantages could come in the form of price structures, prioritization for berths, expeditious filing of entry permits and other paperwork, and other measures. These sorts of business advantages would be especially available when the port operator is the same firm as the shipper (e.g., COSCO), but can be assumed to create conditions generally favorable to all PRC operators.

The Strategic Elements of PRC Investments in Global Maritime Infrastructure

The centralized nature of the PRC systems would indicate that, while its various overseas maritime stakeholders do not move in absolute synchronicity, they act with support from the national government and under some degree of strategic direction from the Chinese Communist Party. COSCO, Chinese Merchants, and other large state-owned enterprises have CCP committees embedded into their management boards.⁹ However, this is not to argue that all investments are part of a centrally-driven master plan. Nor should the sum of the investments be viewed as a monolithic strategy. Often the maritime infrastructure investments are ad hoc investments or independently viable business opportunities that may involve foreign investments moving through the Chinese firms.¹⁰

While the linkages between the commercial enterprises, the military, the banking sector, and the state enables Chinese intra-national collusion to become more effective, other global maritime infrastructure stakeholders also take advantage of similarly coordinated cross-sector positions. For example, the vertically integrated Maersk family of Danish businesses includes both the world’s largest shipping company and, with 76 ports in 41 countries, the globe’s fifth-largest port operator.¹¹ Providing a clear example of public-private linkage, the world’s largest port operator, PSA International, is directly tied to the Singapore government.

A growing concern is that continued expansion of PRC investment may enable its vertically integrated enterprises to collude to gain sufficient market share necessary to establish a global maritime supply chain cartel. This could undermine the current advantages of other major players, raise global costs, and create access issues for non-PRC shippers. However, the development of such a market share is far from a foregone conclusion. In fact, a Drewry senior analyst argued that the risk has been disproportionately reported and generally overstated. He points out that, “In the Asia region, Chinese terminal operators accounted for a quarter of all throughput in 2018, but their presence is far more limited in the rest of the world.”¹²

The degree to which PRC enterprises collude against non-Chinese players is also unclear. The major shipping alliances that enable slot-sharing and vessel-sharing agreements between the largest carriers are not assembled along national lines.¹³ In August 2020, PRC authorities opened an investigation into whether COSCO (a Chinese company) might be colluding with Maersk, MSC, CMA CGM, Hapag Lloyd, and Evergreen (all non-PRC enterprises) to inflate trans-pacific shipping prices. Similarly, in 2017 the U.S. Department of Justice also raided the biannual Box Club meeting in San Francisco, delivering subpoenas to the assembled CEOs of major international container lines as a part of an anti-trust investigation that involved Chinese and non-Chinese firms. The U.S. closed that investigation in 2019 without prosecutions.¹⁴

Regardless of the parties involved, the United States would be particularly disadvantaged if faced with collusion among maritime supply chain participants because of its reliance upon foreign enterprises. The United States no longer has a significant ownership stake in the shipping sector. COSCO carries about 70 times as much cargo as Matson, the largest U.S. carrier.¹⁵ The largest U.S. port operator, SSA Marine, has a global reach, operating ports on every continent except Europe, but its total throughput is less than one-third that of China Merchant Ports, one-sixth of Hutchinson or COSCO, and one one-seventh of PSA International.¹⁶

PRC government backing is a key enabler of China’s drive for dominance in the maritime infrastructure sector. For example, the opportunity for COSCO to invest in Zeebrugge opened when Maersk’s APM decided to pull out of the relatively small, low-profit port. The concession agreement likely prevented the port’s closure and the retrenchment of its staff. While the agreement was formerly made with COSCO, there is no doubt about the influential role of the PRC government.¹⁷ In 2018 the PRC Ambassador to Belgium addressed the bilateral group of government and private industry leaders gathered to conclude the deal by explaining, “The launch of Belt and Road initiative between China and Belgium in 2014 has laid a solid foundation for today’s signing ceremony.”¹⁸ In 2019 Zeebrugge enjoyed a growth rate of more than 14 percent thanks to its new role as COSCO’s northern European hub.¹⁹

Other PRC investments have been more acrimonious. PRC government loans were essential to enabling COSCO to establish a controlling stake and make investments valued at around $8 billion in Piraeus, Greece.²⁰ The port’s throughput increased significantly because of increased handling capacity, improved connectivity, and the subsequent reshaping of regional trade patterns.²¹ However, local resentment grew as established workers were fired or put on reduced wages.²²

In other cases, the PRC-backed projects have received more problematic resistance. In the early 2000s, the PRC invested hundreds of millions of dollars to finance the expansion of Pakistan’s Gwadar Port. In 2007, PSA International took a 40-year concession to build and operate that port, but immediately faced issues regarding the specific terms of the agreement and the security of the facilities. After only five years, PSA transferred the contract to China Overseas Port Holdings.²³ Pakistani Information Minister Qamar Zaman Kaira explained, “PSA could not develop or operate Gwadar ‘as desired.’ The Chinese will make ‘more investment’ to make the port operational.”²⁴ Although Gwadar’s facilities remain under-utilized and unprofitable, it has grown as a focal point for PRC activities in Pakistan. The initiatives include more port construction, the inauguration of a Sino-Pakistan economic free zone (from with China received 85 percent of the profits), and $800 million in Chinese pledges for projects to support the local population such as the construction of a school, expansion of a hospital, and improvement of the public water treatment system.²⁵ Violent separatists began targeting Chinese workers around the port as early as 2004 and the violence is intensifying. The Balochistan Liberation Army (BLA) attacked the Chinese consulate in Karachi in 2018 and in 2019 three BLA members stormed Gwadar’s Pearl Continental Hotel, killing five people.²⁶ In the wake of these incidents, the PRC is doubling down on its presence by financing the fencing off of over 60km² around the seaport.²⁷

The PRC’s commitment to Gwadar demonstrates that the maritime infrastructure investments are driven by more than a simple desire to expand the profitability of China’s international trade. Indeed, while Gwadar may someday become a profitable commercial hub, it seems likely to bring even greater benefit to the PRC as a naval staging area or as an economic anchor holding Pakistan in the PRC’s geopolitical orbit. In fact, Gwadar and other investments are specifically designed to carry geo-economic weight.

A useful academic definition of geo-economics is, “the use of economic instruments to promote and defend national interests and to produce beneficial geopolitical results; and the effect to other nations’ economic actions on a country’s geopolitical goals.”²⁸ Maritime infrastructure investments are particularly powerful geo-economic instruments for several reasons. First, their scale is such that they convey a lot of capital and that equates to a lot of immediate influence, especially with the investor that can control the rate of disbursement.²⁹ Furthermore, the investments are such that they create recurrent sources of wealth in the form of on-sight labor requirements, maintenance requirements, and international trade. However, to a greater extent than other infrastructure (for example, interior roads or schools), maritime infrastructure binds the port community to China. Once the investments are complete, the new or enlarged facilities are reliant on trade to stay active. In extreme cases, the ‘Port-Park-City’ model is employed. Development of the port is followed by a Chinese-funded/managed industrial park, and then the emergence proxy Chinese city.³⁰ However, the investment does not bind China by reciprocal dependency; if the port state were to deny access to PRC shipping, the PRC can rely on its diversified portfolio to reroute shipping via other infrastructure.

The Keys to Controlling Port Access

There is no clear case where the PRC has overtly exercised its geo-economic power to deny competitors port access. However, such a situation is far from unimaginable. The PRC has overtly used its geo-economic leverage, much of which is tied to its investments in Piraeus to persuade Greece to weaken EU statements denounce the PRC’s human rights effort.³¹ There are also unconfirmed rumors that the PRC has quietly used its influence to arranged for denial of access to Japanese ships.³² In contrast, U.S. Navy ships continue to call in Piraeus.³³ While overt action to prevent access would incur costs such as political backlash and increased insurance costs, the PRC will likely expect those costs to diminish as its relative power expands.³⁴ Therefore, should the PRC be faced with a crisis or the appropriate pressures, it would not be surprising if it sought to exercise this option.

The concept of using infrastructure investments to create international leverage is not new. One study explained that “China is updating and exercising tactics used by Western powers during the nineteenth and twentieth centuries.”³⁵ More specifically, the denial of access to maritime infrastructure to achieve political aims is well-established in international relations. These tools have been used by states and the international community in recent years.

United Nations Security Council (UNSC) Resolutions against North Korea currently restrict that nation’s access to global maritime infrastructure. In October 2017, the UNSC took the unprecedented action of banning four ships accused of smuggling North Korean coal from entering any port. In April 2018, the Wise Honest, one of North Korea’s largest cargo ships, was detained in Indonesia and then seized by the United States. When a local Indonesian court allowed the cargo from the Wise Honest to be released, it was loaded onto the ship Dong Thanh operated by Qingdao Global Shipping. Because of its illicit cargo and the use of associated falsified documents, Dong Thanh was denied entry to Malaysia before it called into Vietnam.³⁶ U.S. government cited authorities found in domestic legislation when seizing M/T Courageous, another vessel smuggling oil to North Korea, that has been held in port by Cambodian officials since March 2020.³⁷

The clearest example of a state currently unilaterally acting to prevent another state from accessing maritime infrastructure is recent U.S. sanctions on Iran. The sanctions have been enacted through domestic U.S. legislation and have the stated aim of denying Iran the financial resources to support terrorist organizations and other armed factions, or to further its nuclear and weapons of mass destruction programs. These sanctions do not require other countries to impound any Iranian ships or other cargo, but in September 2019, guidance was updated to state that port bunkering services for Iranian oil shipments could subject firms and individuals to U.S. sanctions.³⁸ Unilateral U.S. sanctions have also created challenges for Iranian shippers to obtain insurance, since a New York-based pool of insurance organizations, the International Group of P&I Clubs, dominates the shipping insurance industry.³⁹

Conclusion

The PRC’s rapidly expanding network of global maritime infrastructure investments is already delivering meaningful commercial advantages. Further expansion of this network could bring it sufficient additional leverage that it can impede rivals’ ability to freely operate. Active collusion between PRC enterprises would make their power particularly problematic. However, the market still appears sufficiently competitive to prevent this from becoming an immediate concern. In the near term, a larger worry is that these maritime infrastructure investments will provide the PRC with sharp geo-economic power to influence the behavior of partner nations. While using that power to deny access to a competitor would come with certain costs, it seems completely plausible that, given the proper incentives, the PRC could consider pushing a port state to take such an action.

John Bradford is a Senior Fellow in the Maritime Security Programme at the S Rajaratnam School of International Studies and the Executive Director of the Yokosuka Council on Asia Pacific Studies. Prior to entering the research sector, he spent 23 years as a U.S. Navy Surface Warfare Officer focused on Indo-Pacific maritime dynamics.

References

[1] M. Gilday, CNO NAVPLAN, Jan 2021 <https://www.navy.mil/Press-Office/Press-Releases/display-pressreleases/Article/2467465/cno-releases-navigation-plan-2021/#.YIERS3QoZiU.link>

[2] Claudo Ferrai and Alessio Tei, “Effect of BRI strategy on Mediterranean shipping transport,” Journal of Shipping and Trade, 5:14, 2020, p. 12 and Jevans Nyabiage, “Why China is banking on Suez and plans for a new Egyptian capital,” South China Morning Post, 10 Apr 2021 <https://www.scmp.com/news/china/diplomacy/article/3129000/why-china-banking-suez-and-plans-new-egyptian-capital>

[3] Geoffrey Gresh, To Rule Eurasia’s Waves: The New Great Power Competition at Sea, London: Yale University Press, 2020, p. 11

[4] “Top 10 Box Port Operators 2019,” Lloyd List, 01 Dec 2019 <https://lloydslist.maritimeintelligence.informa.com/LL1130163/Top-10-box-port-operators-2019> and Gresh, p. 65

[5] China Global Investment Tracker <https://www.aei.org/china-global-investment-tracker/>

[6] U.S. Department of Defense, China Military Power Report 2020, p. 19.

[7] U.S. Department of Defense, p. 120.

[8] U.S. Department of the Navy, Advantage at Sea, p. 4.

[9] Charles Lyons Jones and Raphael Veit, Leaping Across the Ocean: The port operators behind China’s naval expansion, Australian Strategic Policy Institute, pp. 4, 8, 14 and 25.

[10] Ferrai and Tei, p. 7.

[11] “Top 10 Box Port Operators 2019;” Jones and Veit, p. 10; and “Biggest shipping companies: Top ten by TEU capacity,” Ship Technology <https://www.ship-technology.com/features/the-ten-biggest-shipping-companies-in-2020/>

[12] James Baker, “Chinese ownership of foreign ports concerns are ‘overstated’, Lloyds List, 03 Dec 2019 <https://lloydslist.maritimeintelligence.informa.com/LL1130247/Chinese-ownership-of-foreign-ports-concerns-are-overstated>

[13] “Newly Formed Ocean Alliance has Huge Impact on Container Shipping,” Atlas Logistics Network <https://atlas-network.com/newly-formed-ocean-alliance-has-huge-impact-on-container-shipping/> and Ocean Alliance, JOC.com <https://www.joc.com/maritime-news/container-lines/ocean-alliance>

[14] Costas Paris, “U.S. Drops Container Shipping Cartel Investigation Without Charges, Wall Street Journal, 26 Feb 2019 <https://www.wsj.com/articles/u-s-drops-container-shipping-cartel-investigation-without-charges-11551200327>

[15] Matt Woodley, “Top 30 International Shipping Companies,” MoverFocus.com, 27 Sept 2019 <https://moverfocus.com/shipping-companies/>

[16] “Top 10 Box Port Operators 2019.”

[17] Joanna Kakissis, “Chinese Firms Now Hold Stakes in Over A Dozen European Ports,” National Public Radio, 9 Oct 2018 <https://www.npr.org/2018/10/09/642587456/chinese-firms-now-hold-stakes-in-over-a-dozen-european-ports>

[18] “COSCO Shipping Ports Signs Concession Agreement with Port of Zeebrugge Reach MOU with CMA for Strategic Partnership,” press release, COSCO Shipping, 23 Jan 2018 <https://ports.coscoshipping.com/en/Media/PressReleases/content.php?id=20180123>

[19] “Port of Zeebrugge 2019:14.2% Growth” Port of Zeebrugge, 1 July 2020 <https://portofzeebrugge.be/en/news-events/port-zeebrugge-2019-142-growth> and Gavin van Marie, “Cosco Launces Move to Make Zeebrugge its North European Hub,” 01 May 2010 <https://theloadstar.com/cosco-launches-bid-to-make-zeebrugge-its-north-european-hub/>

[20] J Jonathan Hillman, “Influence and Infrastructure: The Strategic Stakes of foreign Projects,” CSIS Reconnecting Asia Project, Jan 2019, p. 9; Jones and Veit, p. 13; and Ferrai and Tei, p. 11.

[21] Ferrai and Tei, p.2.

[22] Hillman, p. 19.

[23] Gresh, p. 122.

[24] “Pakistan OKs PSA International’s Exit from Gwadar,” 01 Feb 2012, <https://www.joc.com/port-news/terminal-operators/psa-international/pakistan-oks-psa-internationals-exit-gwadar-port_20130201.html>

[25] Gresh, p. 123.

[26] “Pakistan Attack: Gunmen Storm Five-star Hotel in Balochistan,” 12 May 2019, <https://www.bbc.com/news/world-asia-48238759>

[27] “’Chinese Colony; in CPEC-Hub Gwadar Draw the Ire of People in Balochistan, Pakistan,” The EurAsian Times, 15 Dec 2020 <https://eurasiantimes.com/chinese-colony-in-cpec-hub-gwadar-draws-the-ire-of-people-in-balochistan-pakistan/>

[28] Robert Blackwill and Jennifer Marris, War by Other Means: Geoeconomic and Statecraft. Cambridge, Massachusetts: Harvard University Press, 2016, p.6.

[29] Hillman, p. 4.

[30] Logan Pauley and Hamza Shad, “Gwadar: Emerging Port City of Chinese Colony,” The Diplomat, 5 Oct 2018, <https://thediplomat.com/2018/10/gwadar-emerging-port-city-or-chinese-colony/>

[31] Jones and Veit, p. 21

[32] Gresh, pp. 66-7.

[33] USS Mitscher Public Affairs, “USS Mitscher Departs Piraeus, Greece,” 17 Apr 2019, <https://www.c6f.navy.mil/Press-Room/News/Article/1816242/uss-mitscher-departs-piraeus-greece/>

[34] Jones and Veit, p. 10.

[35] Hillman, p. 2.

[36] President United Nations Security Council, Note S/2019/691, 30 Aug 2019.

[37] US Attorney’s Office, Southern District of New York, “U.S. Government Seized Oil Tanker Used to Violate U.S. and U.N. Sanctions Against North Korea,” 23 Apr 2021, <https://www.justice.gov/usao-sdny/pr/us-government-seizes-oil-tanker-used-violate-us-and-un-sanctions-against-north-korea>

[38] Kenneth Katzman, “Iran Sanctions,” Congressional Research Service, 18 Nov 2020, pp. 10-11.

[39] Katzman, p. 8.

Featured Image: Chinese trucks carrying trade goods are pictured parked at the Gwadar port, Pakistan. (Photo via AAMIR QURESHI/AFP/Getty Images)

Maritime Infrastructure and Trade Topic Week

By Benjamin Clark

Introduction

Predictions of impending climate catastrophe have prompted policymakers across the world to declare a climate emergency and advocate to enact sweeping reforms to energy, transportation, and infrastructure. Without immediate action to rapidly and dramatically overhaul the energy system to eliminate the use of fossil fuels, these predictions envisage worldwide crises of food and water insecurity, habitability, extreme weather, and other shocks to civilization which would make the planet less habitable. Based upon these predictions, many Western governments have made avoiding this crisis priority number one for government policy, and most importantly, are allocating resources to meet the challenge.

However, the security-related risks of the United States pursuing decarbonization merit further scrutiny, especially with respect to decarbonization’s impact on the shipbuilding industrial base and its ability to contribute in a protracted great power conflict. Examples abound of the American decline in relative industrial strength and that of western nations generally. But unique to this point in time are the defense risks brought on by the proposed path to decarbonization and its likelihood to accelerate these trends.

Industrial Capacity and Decarbonization

A nation’s ability to wage a large-scale, prolonged, multi-theater, conventional war is heavily predicated on its industrial capacity. Planning must assume that losses of ships, aircraft, and equipment will occur and must be replaced in an operationally relevant timeframe. In such a protracted conflict, the order of battle at the commencement of hostilities is less critical than the nation’s industrial capability to repair and replace damaged and destroyed assets over time. With this as a foundational assumption, adversaries will assess their ability to fight and succeed in a prolonged conflict in part by comparing their relative strength in industrial capacity and the integrity of their supply chains for critical resources. There are a multitude of political scenarios in which a large-scale war could develop, some of which, it must be assumed, include situations where the U.S. would be forced to fight without significant material assistance from major allies and relying primarily on its own industrial strength to sustain engaged forces.

The U.S. domestic shipbuilding industry has been in steady decline, both in metrics of completion and market share since the 1950s, with the most dramatic declines occurring in the 1970s and 1980s. These coincided with the rise of large-scale subsidies in Korea and Japan. The U.S. shipbuilding industry holds approximately 0.35 percent market share worldwide as of 2015.¹ By comparison, Korea is still the world leader in shipbuilding market share with 43 percent, but is followed very closely by China at 41 percent, where orders and market share continue to increase.²

A decline in shipbuilding capacity is a clear and troubling trend, especially for those working in the U.S. maritime industry, and it is critical to assess the challenges this decline creates for the country’s ability to wage a protracted maritime war. It may not be possible in a crisis situation to execute a rapid ramp-up of shipbuilding capacity to support military operations.

Planned decarbonization could put this possibility out of reach, because industries relying on traditional fossil fuel sources will feature greater reliability and output compared to industries undergoing an uneven transition toward more novel renewable energy sources. Substantial increases in subsidies for grid-scale wind and solar generation demonstrates a reliance on the large-scale deployment of these sources to push the decarbonization of the electrical power sector. The intermittent nature of these sources, with capacity factors for wind and solar at 33 percent and 22 percent respectively, and the large proportion of subsidies that make up the investment costs, makes the levelized cost of energy (LCOE) very difficult to compare directly with fossil fuel power plants. But the economic impacts can be seen as countries adopt a greater proportion of renewable energy.

Great Britain, Germany, Australia, Canada, and the United States have all seen substantial electrical power cost increases over the last 20 years, even while the cost of fossil fuels—still the dominant source of electrical power generation—has decreased over the same period.³ There are still lively debates to be had regarding the advancement of other technologies which would both reduce carbon and increase reliability, such as nuclear power. However, judging only by the current state of the electrical power industry, it is difficult to imagine the requisite investment and regulatory approvals that would have to be completed in time to make these technologies feasible as wholesale replacements for the existing infrastructure of fossil fuel sources. The outlook for dramatic cost reductions relative to fossil fuels is not promising.

This demonstrates the true costs of intermittent renewable energy, even at current levels of consumption, and demand is only set to rise even further with an equally massive effort to electrify transportation. The effects on the market of increased demand coupled with increasingly unpredictable generation will become apparent in the rising cost of long-term power contracts, the instrument most large industrial customers rely on for their electrical power.

These large-scale economic influences will further solidify declining U.S. competitiveness in energy-intensive industries like shipbuilding, or at least until significant technological innovation can make renewable energy as effective as the sources it is replacing. A subsequent and related decline in investment and available capital assets (heavy equipment) will make rapid re-tooling in the event of a national defense emergency much less likely to be successful.

Implications for Great Power Competition

The strategic implications cannot be assumed to have been lost on great power rivals. The push for rapid decarbonization in the west could likely be used as a weapon by revisionist authoritarian powers, China specifically, to gain advantage in terms of access to cheap energy sources and control over technology critical to meet aggressive decarbonization goals. China has very publicly supported international agreements to fight climate change, but has committed to decarbonization at a much slower pace than most western nations under the premise of fighting poverty internally as a developing nation. However, little real policy progress toward decarbonization within China appears to be underway, with more new coal-fired capacity under development than the entire coal power capacity of the United States.⁴

Simultaneously, greater development in electric vehicles and alternative energy manufacturing sets China up as the leading recipient of sizeable capital inflows from the west’s drive for decarbonization. This justifies domestically the massive subsidies granted to these sectors of the economy by the Chinese government. These alternative energy investments are already being paid back strategically, if not financially, with export controls and consolidation of the rare earth minerals industry already causing supply chain concerns for U.S. defense industries. Battery raw materials are another example of Chinese control over the decarbonized future proposed by western policymakers, with 80 percent of the supply chain of advanced battery raw materials such as lithium, cobalt, manganese, and graphite controlled by Chinese companies, despite having relatively low natural reserves in mainland China.⁵

Beijing has made no secret of its intent to address its domestic energy insecurity, and has recently made a point of aggressively asserting its right to develop hydrocarbon deposits in the South China Sea (SCS).⁶ Along with the obvious implications of this policy for regional security in East Asia, it also reveals a broader policy of development of the most cost-effective forms of energy in support of the priority to maintain the high pace of economic development that it has been able to enjoy for the past few decades. Crude oil, natural gas production, and refining capacity continue to increase in China, while demand further outstrips supply.⁷ U.S. refining capacity, while still the largest in the world, has seen negligible growth during the same period. Similarly, energy-intensive raw materials production, such as the steel industry, is dominated by China and continues to grow—with 53.3 percent global market share worldwide.⁸

For the current Chinese administration, home-grown technology development has become a priority, with the end goal of dominating not only heavy industries and raw materials, but also the means to fully utilize industrial capacity for domestic consumption without having to rely on export-driven growth. These policy goals serve to maintain China’s industrial competitive advantage while also ensuring that innovation grows together with production capacity, meaning that in the event of a security-related crisis, little economic retaliation would be effective for any adversary to exploit, and latent capacity for the buildup and reinforcement of industrially-intensive assets such as warships and other military resources will be readily available. Internal logistical resources, such as rail connections, smaller ships for short-distance coastal shipping, and their necessary support networks will also be much more readily available to a national economy based on industrial production, especially one heavily reliant on traditional fossil fuel energy sources, than one based on services or more novel alternative energy sources.

Conclusion

The Chinese military build-up, culminating most recently with the achievement of fielding the largest navy in the world by number of ships, has been well-documented. What is less appreciated is the significant maritime and industrial infrastructure China has invested in to build such a navy, and in a remarkably short period of time. The advantage gained by the simple number of ships may be dubious in certain respects, but the industrial advantages China’s expansive maritime industrial capacity could offer in a prolonged, large-scale conflict cannot be understated.

Prioritizing a policy of decarbonization over all else, when available resources and technological innovation does not support a smooth transition as evidenced by market data, tips the balance of power in certain respects toward nations willing to pursue domestic growth and increased industrial capacity regardless of the undergirding fuel sources. Perhaps this is a risk the western world should be willing to take, given the clear and dire predictions of the costs of inaction on climate change. But there may be a middle-road policy to balance aggressive decarbonization goals against national security risks, and those risks must be better understood and appreciated by military professionals and policymakers alike. Such an understanding can only begin to be achieved with a more realistic evaluation of the dual challenges faced by western democracies as they simultaneously attempt to rapidly decarbonize their economies while still maintaining the established international order.

Benjamin Clark is a contract electrical engineer for the U.S. Coast Guard, and a five-year U.S. Navy veteran. He earned his Master’s in Electrical Engineering from University of California, Riverside with a specialty in power systems and electrical power markets, and is a 2012 graduate of the U.S. Naval Academy. His views are his own and do not necessarily represent the official views of his employer or the government departments he is associated with. He can be contacted at clarkbenjamin71@gmail.com.

References

[1] Aaron Klein, “Decline in U.S. Shipbuilding Industry: A Cautionary Tale of Foreign Subsidies Destroying U.S. Jobs,” The Eno Center for Transportation, September 1, 2015, https://www.enotrans.org/article/decline-u-s-shipbuilding-industry-cautionary-tale-foreign-subsidies-destroying-u-s-jobs/

[2] KBS World, “Korea Leading Global Shipbuilding Industry,” Hellenic Shipping News, February 23, 2021, https://www.hellenicshippingnews.com/korea-leading-global-shipbuilding-industry/

[3] Mark P. Mills, “THE ‘NEW ENERGY ECONOMY’: AN EXERCISE IN MAGICAL THINKING,” Manhattan Institute Report, March 2019.

[4] Reuters, “China has 250 GW of coal-fired power under development – study,” June 24, 2020, https://www.reuters.com/article/china-coal/china-has-250-gw-of-coal-fired-power-under-development-study-idINL4N2E20HS

[5] Institute for Energy Research, “China Dominates the Global Lithium Battery Market,” September 9, 2020, https://www.instituteforenergyresearch.org/renewable/china-dominates-the-global-lithium-battery-market/

[6] Ralph Jennings, “Why China Plans to Place Its Super Offshore Oil Rig in a Disputed Sea,” Voice Of America News, January 25, 2021, https://www.voanews.com/east-asia-pacific/why-china-plans-place-its-super-offshore-oil-rig-disputed-sea

[7] US Energy Information Agency, “Country Analysis Executive Summary: China,” September 30, 2020.

[8] Statista, “Steel industry in China – statistics and facts,” October 13, 2020, https://www.statista.com/topics/5695/steel-industry-in-china/

Featured Image: Zumwalt-class destroyers under construction at Bath Iron Works in Maine (Photo via Wikimedia Commons)

Maritime Infrastructure and Trade Topic Week

By CDR Michael C. Petta

Introduction

There is widespread recognition that cybersecurity vulnerabilities make the maritime transportation system a soft target. For example, about 10 years ago, a European Union study found “inadequate preparedness regarding cyber risks” in the maritime sector. In 2013, a U.S. Presidential Executive Order announced that cyber threats continue to grow as one of the most serious security challenges for critical infrastructure, such as port facilities. A few years later, an International Maritime Organization (IMO) resolution acknowledged the “urgent need” to address maritime cyber threats. Just a few days after that IMO resolution, Maersk, the global shipping company, suffered a major cyberattack, leading its chairman to admit in an interview that the maritime industry had been naïve with cybersecurity and needs “radical improvement.” Just recently, moreover, the European Union (EU) again spoke on the issue in a 2020 report on Cyber Risk Management for Ports. The EU report found ports continued a “fragmented approach” with cyber security due to inconsistent knowledge, compliance, and perceptions of cyber risks.

Despite the widespread recognition of these vulnerabilities, international port cybersecurity laws remain soft—unenforceable and discretionary. The international community should take steps to harden these laws and therefore harden the targets.

Soft Targets

The term “soft target” is used in law enforcement, force protection, national defense, and industrial security. Its definition has subtle varieties depending on the source. In the United States, a Department of Homeland Security soft target security plan states that soft targets include “locations that are easily accessible to large numbers of people and that have limited security or protective measures in place making them vulnerable to attack.” From a global perspective, a United Nations report on threats against soft targets characterizes soft targets as “locations that are easily accessible and predominantly civilian in nature, often with limited security measures in place.” Meanwhile, a basic online dictionary defines the term as a location that “can be attacked easily because it does not have military defenses.” Whatever the source, uses of the term carry a universal theme—a target is soft if vulnerable to attack, regardless of the reason for its vulnerability.

Some soft targets, like a small town’s water treatment plant, might seem obvious. Other soft targets, such as international port facilities, might be less obvious. This is because port facility infrastructure benefits from global security measures, particularly those established in the International Ship and Port Facility Security (ISPS) Code. Nevertheless, despite the ISPS Code’s benefits, cybersecurity remains the soft underbelly of port facilities.

This soft underbelly should be cause for action because soft targets are easy targets. As one criminologist writes, “terrorists generally attack where their opponents are weakest. As such, terrorists focus on soft sites.” The United Nations Security Council observes the same trend, stating in a recent analytical brief that soft targets “have long been preferred targets of terrorist attacks.”

A disruption to the maritime transportation system (MTS) due to an attack on a soft target could have far-reaching effects. The recent grounding of the container ship EVER GIVEN underscores the criticality and fragility of this global trade system. This single disruption to vessel traffic is estimated to have held up $9 billion in global trade per day. The effects of a cyber-induced MTS disruption would go beyond economics. People’s lives and livelihoods depend on the gasoline, building materials, food, and heating fuel the MTS delivers. The ongoing pandemic underscores this point.

Soft Law

Port facilities remain soft targets for cyberattacks because the ISPS Code, the regime implemented to protect international port facilities, contains “soft law.” Much scholarly debate exists on the meaning of the term soft law. Professor Dinah Shelton’s 2008 article Soft Law is recommended to those looking to more fully explore this area of international law. For efficiency’s sake, this article adopts the view that soft law is recommendatory and hard law is mandatory. Or, as a more succinct military leader might say, compliance with soft law is “desired but not required.”

The ISPS Code was established by member states of the IMO to protect shipping and port infrastructure around the world. Put into effect in 2004, the ISPS Code is a comprehensive security regime and a component of the International Convention for the Safety of Life at Sea (SOLAS). Although the ISPS Code is part of a binding convention, only the first of its two segments, Part A, is mandatory. Part B is recommendatory.

Part A of the ISPS Code mandates that each facility develops a Facility Security Plan (FSP). The FSP is the foundation upon which a facility’s preventative measures are built. Part A also directs FSPs to address particular security matters, such as measures to limit the entry of weapons, control facility access, protect restricted areas, and safeguard cargo. These physical security obligations in Part A are clear and certain.

What is also clear in Part A is its lack of any cybersecurity requirement. There is no mandate that a separate Cybersecurity Plan be developed. There is no directive that requires cybersecurity to be addressed in the already mandated FSP. In fact, the only reference to cyber in the whole ISPS Code is in Part B, the recommendatory portion. Specifically, there are four Part B provisions, each dealing with security assessments, that state facilities should consider “radio and telecommunications equipment, including computer systems and networks” when assessing vulnerabilities.

Being in Part B, these four provisions are discretionary. These “cyber” provisions are not only discretionary, they are also vague. Certainly, some may question whether the phrase “radio and telecommunications equipment, including computer systems and networks” is synonymous with the term cyber. In 2015, Canada raised this exact point in MSC 95/4/2, a submission to the IMO’s Maritime Safety Committee (MSC). In its submission, Canada proposed amending the ISPS Code to clarify the vague phrase. In MSC 95/22, the MSC decided that an amendment to the ISPS Code was not warranted at the time.

Being both vague and discretionary, the ISPS Code’s “computer systems and networks” language is unenforceable soft law. This attenuated law accommodates an environment in which cybersecurity merely subsists and port facilities remain vulnerable to cyberattacks. It is time to consider a different approach.

Harden the Law, Harden the Targets

Considering the serious impacts of a cyber disruption to the MTS, relying on unenforceable soft law may not be the right approach. The international community can do more to harden the law, and there is a useful model in the Unites States.

Enacted in 2018, the Maritime Security Improvement Act (MSIA), codified at 46 U.S.C. § 70103(c)(3)(C)(v), expressly requires FSPs to “include provisions for detecting, responding to, and recovering from cybersecurity risks.” Importantly, this domestic law prohibits port facilities from operating in the United States without an FSP that addresses such cybersecurity measures.

This U.S. mandate is a hard law, both clear and enforceable. To meaningfully address known cybersecurity vulnerabilities across the world’s port facilities, the member states of the IMO should collaborate and amend Part A of the ISPS Code to include a similar mandate. By hardening the law in this way, member states can establish a consistent, uniform enforcement framework and thus, begin to harden port facilities against cyberattacks.

Commander Michael C. Petta, USCG, serves as Associate Director for Maritime Operations and professor of international law in the Stockton Center for International Law at the U.S. Naval War College. The views presented are those of the author and do not necessarily reflect the policy or position of the U.S. Coast Guard, the Department of Homeland Security, the U.S. Navy, the Naval War College, or the Department of Defense.

Featured Image: Maersk MC Kinney Moller in port (Wikimedia Commons)

By Dmitry Filipoff

This week CIMSEC will be featuring articles submitted in response to our call for articles on maritime infrastructure and trade, issued in partnership with Maersk Line, Limited.

Maritime infrastructure and trade is an often underappreciated element of maritime power, and yet it is the origin and raison d’etre of maritime power. Undergirding the many commercial and military ships that sail the world’s oceans is an expansive network of ports, bases, shipyards, and more that give maritime assets a home and a destination. Infrastructure and trade transcends the tangible, with laws, norms, and cyberspace shaping behavior and controlling for risk. With respect to national security, infrastructure and trade is a soft underbelly of national defense, where chronic underinvestment has led to increasing threats. These matters deserve greater scrutiny in order to reap economic gains and adequately protect critical foundations of international order.

Below are the articles and authors being featured, which will be updated with further submissions as Maritime Infrastructure and Trade Week unfolds.

“Soft Cyber Law Makes Port Facilities Soft Cyber Targets,” by CDR Michael C. Petta
“How the Decarbonization Dilemma Will Impact Shipbuilding and Great Power Competition,” by Benjamin Clark
“PRC Investments in Global Maritime Infrastructure: Implications for Port Access,” by John Bradford
“All of One Company: The Need to Forge a Stronger Bond Between Navies and Commercial Shipping,” by Peter Cook
“The Ship that Launched 1,000 Memes and Nearly Destroyed 12 percent of World Trade,” by Dr. Salvatore R. Mercogliano

Dmitry Filipoff is CIMSEC’s Director of Online Content. Contact him at Content@cimsec.org.

Featured Image: The USS Illinois submarine sits in the main construction hall of General Dynamics Electric Boat in Groton, Conn. (General Dynamics)