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The Future Of American Shipbuilding

The problem for American shipyards is almost entirely driven by the decisions made by the U.S. Government over the past 12 years. American yards became dependent on the Government market when the Reagan Administration ended the commercial shipbuilding subsidy program in 1981.

Prior to that time, the industry had delivered, on average, about 20 commercial ships per year (1955-1985).

The workload offered an alternative to the U.S. Navy as a customer.

This was particularly important when the Navy workload declined, as it did, following the Vietnam War. In 1974, for example, only three Naval ships were delivered. By contrast, in 1973/1974, there were nearly 100 commercial ships on order and, in fact, commercial shipbuilding accounted for about twothirds of the total shipbuilding workload from 1973-1978. By 1978, the Naval market had also begun to pick up and at the end of the 1970s, American shipyards employed 187,000 people in shipyards on all three coasts and the Great Lakes. However, 1981 was the watershed year. Driven by a desire to 54 remove the Government from private markets, the Reagan Administration terminated funding for the construction differential subsidy program and, with that termination, the commercial shipbuilding market collapsed in the U.S.

This policy decision meant that U.S. yards became a one-customer industry. The structure of the market shifted to meet the requirements of the military. This meant that the 1980s saw the industry shed 40,000 production jobs and, for all practical purposes, the collapse of the commercial sector.

As economic theorists will claim, there are two extraordinarily unstable market conditions; when there is a single supplier (monopoly) or when there is a single buyer (monopsony). In a monopoly, the single producer can distort prices, manipulate supply, and thereby make the consumer's decision-making risky and costly. In a monopsony, the buyer is in control of the market. The suppliers are left to make uneconomic decisions regarding production pricing that can lead to bankruptcy and financial failure. In economic theory, the natural result of a monopsony market is that the buyer, through his or her decision-making, will inadvertantly drive all producers, but one, out of the market. Thus, the theoretical end result is that the monopsony market becomes a monopoly market.

Thus, the 1981 decision that caused the commercial market collapse made the industry more dependent on Government, rather than less dependent. The downsizing that will come with the decline in defense spending will mean that twothirds of the shipbuilding capability will disappear. The marine equipment supplier base will be even more adversely affected. The Shipbuilders Council of America estimates that the total impact on our industries will mean the loss of 72,000 shipyard production jobs, 60,000 supplier jobs, and an additional 48,000 jobs in second-tier and supporting industries. The total nearterm impact, by 1998, will mean more than 180,000 Americans added to the unemployment rolls. Since 1981, the combined industry job loss will total over 300,000 by 1998.

Shipbuilding is a fabrication process that requires inputs of raw materials and components from other industries. Thus, economic activity in shipbuilding means that industries that manufacture turbines, propulsion control systems, navigation systems, telecommunications, and so on will benefit from the activity in shipbuilding. Not surprisingly, our competitors in Japan, Korea, and Europe understand this basic economic principal. But past Administrations have failed to understand this fact. They deluded themselves into thinking that shipbuilding was a free market, unaffected by government actions. But in their own domestic market, through the military shipbuilding program, they should have understood that market distortions were plentiful. If we couldn't make our domestic market distortion-free, how could we expect the international market to be free from distortions? The Council began the reeducation process in 1989, when it filed a trade petition with the Bush Administration to show that market distortions were real. The Japanese, Korean, and European Governments made it a standard practice to support their shipbuilding subsidy programs. The Bush Administration understood our point. They attacked the problem by launching negotiations to get our trading partners to terminate their practices. Unfortunately, those negotiations failed, although the draft trade agreement, which had been accepted by the U.S. industry as important, meaningful, and effective, was a powerful document. Now the survival of the industry hinges on the ability of the Congress to pass legislation to punish those countries that place American yards at a disadvantage.

Why do we care about foreign subsidies? Because the U.S. industry is largely unsubsidized. And the international market is where our future is. The market for new ships will grow dramatically in the 1990s. Coupled with the capacity reduc- A Commitment to Excellence A Reputation for Achievement KB Electronics designs and manufactures a complete line of fully hardened and ruggedized static power conversion equipment in the 1 to 10 KW power range for military and critical commercial applications.

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NICS (1989) LIMITED of Power Conversion Equipment I, Bedford, Nova Scotia, Canada B4B 1G9 Fax: (902) 835-6026 tions that were achieved in the 1980s, there will be a tight squeeze between demand and the availability of capacity to meet that demand. Therefore, prices will increase. This is a perfect market for a new market entry to make an effort to access that market. Therefore, the whole strategy of the Clinton Administration should be to focus on achieving market access for U.S. shipbuilders. The projected military workload will be insufficient to support the industry. We need to build 30 to 50 commercial ships per year to utilize present physical capacity. Eventually, to achieve financial health, U.S. shipbuilders must have 10 percent market share. The Administration is looking at shipbuilding.

They understand that shipbuilding jobs are good-paying, skilled industrial jobs. They understand the multiplier effects of the shipbuilding economic activity. The problem they face is that the Treasury has been depleted to such an extent that seeking funds in more than a limited way will be difficult. Thus, governmental policy will be needed to help the industry out of the mess that previous Administrations have created. First, the campaign on foreign subsidies must become tougher and more disciplined Re-start the negotiations, but sup port passage of legislation that wil retaliate against those countries thai continue to subsidize their indus tries. Second, support efforts to brin£ new technologies to the shipbuild ing production process. This includes working with the Advanced Research Projects Agency to refine anc sharpen the focus of the Nationa Shipbuilding Initiative, an expandec research and development effort Third, improve the availability o1 funding within the Title XI progran (the ship mortgage guarantee fund and make it available for export customers. Fourth, until the foreigr subsidy programs are terminated provide a short-term war chest thai will target competition in those countries that continue to refuse to enc their subsidy practices. The shortterm transition fund should be focused on achieving the benefits oi series production. The approach defined above will mean that a shipbuilding and repair capability can survive the transition process. Not only does the country need a shipbuilding capability from an economic perspective, it also needs to maintain a capability that will be available to renew the Naval fleet when the Navy re-enters the market in the year 2006-2010 time frame. Even with a fleet of 300 ships, new ships will have to be built to replace those that age. But with the cuts in force structure that are taking place and recognizing that we have built 353 naval vessels since 1972, we have a pretty young fleet now, but it will be older in the 2010 time frame. How will we replace that fleet if our capability to build is gone? The transition from defense to commercial markets can be achieved. The shipbuilding industry needs to diversify in order to reduce its dependence on government, and the government needs a shipbuilding industry because of its economic character and its defense utility. The 1990s can be a prescription for renaissance.

 
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