Could U.S. built and crewed ships help U.S. exporters?

The United States is facing growing challenges exporting agricultural products abroad at a time when it lacks the U.S. flagged vessels to support international trade, according to panelists addressing a Maritime Day symposium entitled “Do U.S. Exporters Need U.S. Ships?”

The presentations were made before the Propeller Club of Northern California on May 16^th via Zoom.

In his welcoming remarks, Jim Patti, president, International Propeller Club of the United States argued that the United States needs to build more commercial vessels as it faces shortfalls in vessel carrying capabilities for exports of agricultural goods and for energy products such as LNG.

U.S. Exporters Will Suffer Again In 2022

Paul Snell, chief executive officer, British American Shipping, Long Beach, California discussed “Challenges for U.S. Exporters in 2022.” He said that ocean carriers will likely not resume their traditional number of sailings at ports such as the Port of Oakland. This will adversely impact U.S. exporters selling to Asian and European markets in 2022.

Snell said there is a serious problem with the lack of infrastructure at ports and he particularly referenced the lack of on-dock rail which has slowed the velocity of imported containers coming into the United States as well as slowing the flow of exported containers.  Snell cited the on-dock rail problem at the Ports of Oakland and Houston.

In 2021, California agricultural exporters lost $2.1 billion partly due to deficient port operations, according to a University of California, Davis and University of Connecticut report.

The report explained: “We found that containerized agricultural exports from California ports were $2.1 billion (or 17%) below their counterfactual level due to port congestion between May and September 2021. California farmers bore the brunt of these losses, with tree nuts, wine, rice, and dairy products suffering significant economic damages. The annualized economic impact is by far larger than that of the 2018 U.S.-China trade war, which caused economic losses of about $500 million to California agriculture.”

Snell suggested that a coastal vessel feeder service linking Los Angeles and Long Beach with Oakland could relieve congestion at the Southern California ports and provide a lower freight rate than the $3,000 trucking cost borne by importers and exporters currently having to access the two ports for imports and exports. The coastal service could also reduce the delay in retrieving chassis from Southern California which has slowed harbor truckloads in Oakland, he said.  

The U.S. Quarterly Profit Fixation 

Lars Jensen, partner, Vespucci Maritime, Copenhagen, Denmark provided a ‘World Container Trade Overview.’ 

He told the Propeller Club audience that there has been a growing gap between import containers coming into the United States and export containers going out. Before the pandemic the ratio was 2:1 in favor of imports, since the pandemic the ratio favoring imports has increased to 4:1. 

The result: “U.S. exports account for about 5% of the revenue in international trades while imports account for 95%. This is symbolic of the small revenue stream generated by exporters.”

Jensen said that if the United States is concerned about having a U.S. flag presence in the international sea trades, it should not have allowed U.S. flag carriers to go out of business or to be merged into other companies: 

“U.S shipping companies are not there anymore because they could not compete with non-U.S. shipping companies. The companies that stay alive are protected by the Jones Act. That’s the extent of it … If I compare the U.S. way of running companies compared to Europe there is an extreme focus on quarterly profitability. Running a shipping company while focusing on quarterly profitability is a very unhappy mix.”

Does China Rules The Waves?

Making matters worse is trying to compete with China where the government supports its shipbuilders and ocean carriers. This was the theme of Bruce Jones, the author of ‘To Rule the Waves’ and senior fellow at Brookings Institution, Washington, D.C.

In his discussion of ‘Does China Rule the Waves?’ Jones said that China’s government has subsidized and supported a long-standing effort to establish its presence as a leading ocean carrier and shipbuilder and now challenges the U.S. Navy in the Pacific Ocean. 

Jones said China sees the U.S. Navy as a threat to China’s international trade lanes and  has built up the People’s Liberation Army Navy (PLAN) to counteract this threat. 

He said China has supported this naval expansion with dual use cargo handling terminals abroad and with dual commercial and naval shipyards at home and is developing container terminal/naval bases along a number of critical sea lanes including Djibouti, Equatorial Guinea, and the Solomon Islands.

At the same time, Jones said there is a growing threat of China seeking to incorporate Taiwan in either a peaceful or non-peaceful manner. That threat to Taiwan comes at a time when the United States is a declining manufacturer, shipbuilder and has only a small merchant marine.

Does The United States Need A New Jones Act?

Dr. Salvatore Mercogliano, associate professor of History, Campbell University, North Carolina and adjunct professor, U.S. Merchant Marine Academy, discussed: ‘Wanted: A Maritime Strategy for the United States.’  He said that the genesis of the Jones Act, the Merchant Marine Act of 1920, was that U.S. dependence on British and German shipping caused a recession in the United States when the two European nations went to war with each other in 1914. As a result, United States experienced a shortfall in vessel carrying capacity for its exports and imports and realized it needed to build and support its own commercial shipping fleet. 

This was the objective of the Jones Act: ensure that the United States maintained a sufficiently large fleet of U.S. cargo-carrying vessels to avoid being dependent on foreign ocean carriers in the future.

Unfortunately, after World War II, the United States sold off a number of ships including those Liberty and Victory ships mass-produced at U.S. shipyards during World War II ships. The result is that the United States has become increasingly dependent on foreign flag carriers as the United States embraced deregulation and free trade, he said. 

Mercogliano said that the ability of the United States to maintain a strong Navy and strong Merchant Marine has also dissipated due to the high cost of military hardware diverting funds away from maintaining a competitive merchant marine supported by modern shipyards and cargo-carrying ships. These ships could be deployed to provide military sealift in a wartime emergency and avoid a dependency on foreign ocean carriers, similar to the concept behind the Jones Act in 1920.

One possibility would be to re-establish U.S. coastal feeder ship services. The U.S. government could build and charter the ships until the service could be profitable, he said. 

Mercogliano agreed with Snell’s idea for supporting coastal feeder ships along U.S. coastal routes such as between Oakland and Los Angeles and Long Beach so as to relieve congestion at the Southern California ports. 

Mercogliano described the U.S. Navy’s shipbuilding approach as being akin to a customized and expensive “work of art” approach that avoids the mass production of commercial cargo carrying ships similar to the Victory and Liberty shipbuilding programs of World War II.

The failure to invest in modern shipbuilding practices and shipyards has undermined the U.S. fleet of modern U.S. container ships, Ro/Ro (Roll On/Roll Off) vessels and tankers he said.

This, in turn, places the United States at a strategic disadvantage if a conflict with China were to ensue. 

Mercogliano noted that the U.S. Department of Transportation does not accord the Maritime industry the level of funding and priority that U.S. importers and exporters need. This became obvious in the supply chain crisis of 2020-2021.

Can U.S. Ships Compete In U.S. To Asia Trades? 

Also at the Propeller Club event, a maritime financial consultant, Bo Braestrup, partner, C. Clausen & Company based in Copenhagen, Denmark discussed the possibility of a small U.S. built and crewed vessel service competing in the U.S. West Coast to Asia trade based out of the Port of Oakland.

Braestrup  has produced a projection (requested by this author) that showed that a U.S. built vessel manned by a U.S. crew and carrying 2,500 TEUs (twenty-foot unit containers) could transport U.S. agricultural exports from the Port of Oakland for around $2,000 per forty-foot container to selected ports in Asia. The projections included the transportation cost between the Port of Oakland and the Ports of Yokohama, Japan, Busan, South Korea, Shanghai, China and Ho Chi Minh City, Vietnam. The freight rates for exports would be competitively priced for many, but not all U.S. agricultural exports. 

The challenge, Braestrup found, was that the ships would have to be built for $100,000,000 per vessel or less and the U.S. flag service could face challenges from foreign flag and foreign built vessels with lower shipbuilding and operating costs.

In his projections, Braestrup found: “The estimates are further based on assumed input-elements including operating costs, voyage distances, vessel speed and bunker consumption, freight volumes related to capacity and unit handling costs and voyage scheduling.” 

The C. Clausen & Company study projected the following freight rates for a forty-foot container transported by a 2500 TEU U.S. built and U.S. manned vessel sailing between the Port of Oakland to Korea, Japan, China and Vietnam:

Export Freight Rates

• $1875 for Busan,
• $1950 for Yokohama
• $2200 for Shanghai
• $2500 for Ho Chi Minh City 

Import Freight Rates

• $3750 for Busan 
• $3900 for Yokohama 
• $4400 for Shanghai
• $5000 for Ho Chi Minh City

Conclusion

And so, the United States could rebuild its fleet and follow in China’s footsteps by subsidizing commercial and naval shipbuilding as Jones describes. The United States could also support coastal shipping services between Oakland and Los Angeles and Long Beach to reduce Southern California port congestion and freeway congestion as suggested by Snell and Mercogliano and as supported by the U.S. Maritime Administration. The United States could build ships to compete in the West Coast to Asia trade as Braestrup outlines and Patti urges. Or the United States could continue as it has done, as Jensen describes, and find that the fixation on quarterly profits is not the key to maritime success.