US-China Naval Gap and Shipbuilding Decline - Opportunity for South Korea? < Video < Article

[Min Jae Lee, Anchor] The United States is known for its powerful military, but its naval strength is reportedly declining.

[Kyung Pyo Hong, Reporter] The U.S. shipbuilding industry has fallen to such a low level that it's hard to call it a superpower. As of last year, its market share was just 0.1%, essentially negligible. This decline is attributed to the Jones Act, which allowed domestic shipyards to monopolize the construction of military and commercial vessels, reducing investment incentives. Other factors include decreased demand for naval vessels due to the easing of Cold War tensions in the 1980s and reduced government support. The number of shipyards in the U.S. has dwindled from over 400 to just 21 today.

In contrast, China has seen a significant expansion in global trade volume since joining the WTO in 2001. The Chinese government provided massive financial support to foster its shipbuilding industry, ultimately leading China to become the world's top shipbuilder.

The disparity in shipbuilding capabilities between the two countries is widening the gap in naval power. Since 2015, China's naval fleet size has surpassed that of the U.S., and by 2030, the difference is estimated to expand to about 135 ships. To counter China's growing maritime dominance in areas like the South China Sea, the U.S. needs to enhance its naval power through improved shipbuilding capabilities.

[Anchor] It's also problematic that the U.S., despite being the world's largest economy, has a very low proportion of domestic commercial vessels.

[Reporter] The share of U.S.-flagged vessels in American maritime trade was only 2.6% last year, indicating a high dependence on foreign ships. The number of U.S.-flagged commercial vessels has dropped to 185, a significant decrease from the 1960s. This decline is partly due to the deterioration of U.S. shipbuilding capabilities, with annual commercial vessel construction falling from 70 ships in 1975 to fewer than 5 last year. Notably, despite the U.S. shale gas revolution leading to increased LNG exports and liquefaction terminal investments, there are currently no U.S.-flagged LNG carriers.

Under international law, vessels registered to a specific country are not only necessary for maintaining maritime trade competitiveness during peacetime but are also strategic assets for transporting essential goods and military cargo during wartime. The personnel required for military maritime transport are also sourced from the country's commercial shipping sector. The high dependence on foreign commercial vessels for energy transportation and national trade structure could lead to security issues in times of crisis. Consequently, there's an increasing need for the U.S. to expand its commercial fleet to strengthen maritime trade competitiveness and maintain national security.

[Anchor] It seems the U.S. has significantly lost its grip on the seas. The U.S. is unlikely to sit idly by in this situation.

[Reporter] The U.S. is expected to compensate for its declining shipbuilding infrastructure and naval power through cooperation with allied countries that have superior competitiveness in the shipbuilding market.

Most of the U.S. shipbuilding infrastructure is outdated or dismantled, and the scale of cooperating companies and skilled workforce has greatly reduced. This makes it difficult to rebuild and meet the demand for commercial and naval vessels in the short term.

As a result, the U.S. is pursuing outsourcing to South Korean and Japanese shipyards in the relatively unrestricted field of naval vessel maintenance and repair (MRO) under federal law. While U.S. Navy ships are generally not allowed to be repaired or maintained at foreign shipyards, exceptions are made for overseas-deployed vessels or littoral combat ships.

Although there are no precedents yet, there's a possibility of ordering U.S. military vessels and ships from allied countries. While military vessels and their key components cannot be built at foreign shipyards, exceptions can be made with the U.S. President's approval for national security and interests.

Additionally, a bill has been introduced in the U.S. Congress to allow construction at foreign shipyards. This would permit the U.S. Navy and Coast Guard to build vessels at foreign shipyards located in NATO member countries or Indo-Pacific countries with mutual defense treaties with the U.S. The U.S. government is expected to adopt a strategy of meeting short-term naval demand through cooperation with allied countries like South Korea or Japan, which can immediately respond with their current shipbuilding capabilities.

[Anchor] The U.S. also plans to introduce strong measures to counter the rising China, correct?

[Reporter] The U.S. is expected to implement various sanctions to counter China's shipbuilding and naval power. First, in January this year, the U.S. Department of Defense listed China's key global shipping companies and shipbuilders as Chinese military companies.

This prohibits direct transactions with the U.S. Department of Defense, and from 2027, it will be impossible to procure goods and services that include these companies in their supply chain. This is based on the view that purchasing Chinese ships could potentially fund threats to U.S. national security. The aim is to stifle China's shipping and shipbuilding businesses.

According to a recent investigation by the U.S. Trade Representative into China's unfair support and practices in the shipbuilding industry, it was determined that China has undermined the market competition system and abnormally increased China's dependence within the industry, raising economic security risks for the U.S. Based on this, regulations on the Chinese shipbuilding industry are expected to be possible, leading to high-intensity follow-up measures.

[Anchor] While suppressing China, the U.S. has plans to catch up, right?

[Reporter] The U.S. plans to expand the scale of international commercial vessels and naval ships over a long period to narrow the gap in shipping and naval competitiveness with China.

According to the "SHIPBUILDING Act" proposed bipartisanly in the U.S. Congress last December, the plan is to increase the number of U.S.-flagged international commercial vessels from the current 93 to 250 by 2034. Notably, about 55% of U.S.-flagged commercial vessels are aging, and without new orders, this percentage is expected to reach 100% by 2034, creating additional replacement demand.

Furthermore, the U.S. Navy plans to increase its fleet by about 364 ships over the next 30 years and has requested a massive budget of $1 trillion from Congress. Consequently, the demand for U.S. commercial and naval ship construction is expected to expand significantly in the medium to long term.

[Anchor] If so, what impact will this U.S. shipbuilding revival policy have on South Korea's shipbuilding industry?

[Reporter] With the U.S. strategic expansion of commercial vessels, short to medium-term orders centered on LNG and tanker ships are expected. The U.S. plans to supply cheap energy based on fossil fuels in the future to stabilize prices and strengthen manufacturing competitiveness. As a result, the supply of oil and natural gas, which can be produced on a large scale at low cost since the shale revolution, is expected to expand, and overseas exports will increase.

In particular, the Trump administration is expected to use tariff increase proposals as leverage in trade negotiations with major LNG importing countries such as China, Japan, South Korea, and Taiwan to demand increased purchases of U.S. LNG. Given that there are currently no LNG carriers and few tankers in the U.S.-flagged commercial fleet, it is anticipated that the strategic commercial vessel program will focus on expanding the fleet centered on LNG carriers and tankers, considering the future increase in energy transportation demand.

[Anchor] In the end, for the U.S. to build commercial vessels, it seems they have no choice but to collaborate with South Korea's shipbuilding industry.

[Reporter] Given the poor shipbuilding capabilities of the U.S., cooperation with allied countries is essential to expand strategic commercial vessels by 2034, and South Korea and Japan are likely to be the target countries.

In the shipbuilding industry, which is dominated by China, South Korea, and Japan, if we exclude China as the target of containment, only South Korea and Japan remain. The recently proposed SHIPBUILDING Act also allows foreign-built ships to be included in the strategic commercial vessel program until 2029, suggesting that ship orders to allied countries are being considered in the initial stages.

Looking at the current construction share of LNG carriers and tankers, which are expected to be the main types of ships for the strategic commercial vessel program, South Korea ranks first. This puts us in an advantageous position for U.S. commercial vessel orders.

[Anchor] It seems that South Korea will also benefit in the field of strengthening U.S. naval power.

[Reporter] There is a possibility of winning U.S. naval vessel maintenance and repair (MRO) projects and naval ship construction orders when entering the U.S. market. As the U.S. outsources the MRO field, HD Hyundai Heavy Industries and Hanwha Ocean have entered this business domestically. These two companies acquired qualifications for naval vessel MRO business bidding last year, and subsequently, Hanwha Ocean successfully won the MRO project for the U.S. Navy 7th Fleet's supply ships and tankers.

Considering that the U.S. Navy's 7th Fleet has been outsourcing MRO services to Japanese shipyards due to their proximity to the Japanese naval base where it is stationed, this contract is seen as a foothold for domestic shipyards to enter the MRO market. Also, since President Trump publicly expressed the need for cooperation with South Korean shipyards in the naval vessel MRO field after his inauguration, related business orders are expected to continue in the short to medium term.

However, direct naval vessel orders need to be watched more closely. The Jones Act, which prohibits the construction of commercial and naval vessels at foreign shipyards, needs to be amended. However, considering the recent SHIPBUILDING Act's temporary allowance of foreign construction for the strategic commercial vessel program and the policy trend prioritizing U.S. national interests, it is expected that the U.S. will actively attract shipbuilding infrastructure investments from allied countries like South Korea with superior shipbuilding capabilities.

In fact, Hanwha Group's acquisition of the Philly Shipyard in the U.S. has been finalized, raising expectations for South Korean shipbuilding companies' entry into the U.S. market. If domestic shipyards directly invest and enter the U.S. market, they can expand their business base significantly, extending not only to U.S. naval vessel MRO but also to construction projects.

[Anchor] There's an analysis that the U.S. containment of China could also bring indirect benefits to South Korean shipyards.

[Reporter] The U.S. policy to counter China's shipbuilding industry is expected to be a variable that will determine the growth trend of South Korea's shipbuilding industry in the future. The gap in shipbuilding market share between South Korea and China has widened since 2019, reaching 25.4% last year. This is seen as a result of China's production capacity expansion and aggressive orders centered on container ships and tankers.

Although South Korea focuses on high-value-added ships, it has been somewhat pushed back by China's human wave tactics and price dumping.

However, with the U.S. announcing the results of its investigation into China's unfair support for the shipbuilding industry in January this year, it can now implement sanctions based on Section 301 of the Trade Act. Considering the political uncertainty this brings, major shipping companies may avoid placing orders with Chinese shipyards in the future for risk management reasons. They might consider alternatives to avoid potential trade restrictions with the U.S. due to poorly chosen vessel purchases.

Therefore, the extent of benefits to the domestic market will be determined by the content and intensity of sanctions against the Chinese shipbuilding industry, necessitating close attention to future changes in U.S. shipbuilding policies.

(Yonhap Infomax Broadcasting News Department, Kyung Pyo Hong)

※This content is from the video news covered in the Yonhap Economic TV's "Economy ON" program on Thursday, February 20th at 4 PM. (Featuring: Kyung Pyo Hong, Yonhap Infomax reporter, hosted by Min Jae Lee)

kphong@yna.co.kr

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Kyung Pyo Hong kphong@yna.co.kr