Trade Is Not What Matters Most

The trade war between the United States and China is fundamentally different from other ongoing commercial disputes. China is in a “friendship of steel” with Russia, which has invaded Ukraine. It is a diplomatic and economic supporter—including arms provisions—of Iran and North Korea. China has used capital and technology transfers, as well as expanded industrial capacity supported by trade surpluses, to position itself as a peer geopolitical challenger that threatens not a trade war, but a real war, to achieve its regional ambitions.

By cutting off rare earth exports, China has put to rest whatever survived of the post–Cold War–era notion that global trade would provide necessary materials to all economies, therefore making location of production irrelevant. China has pursued control of crucial resources, including the most sensitive inputs for advanced technologies that are vital for the defense industry.

With the return of geopolitical competition, control of steel mills, shipyards, research labs, energy plants, supply chains, and raw materials is of great strategic concern. Trade is no longer the proper focus; industrial policy is key. Major powers must act to create and fund their strategic industrial bases, and shipbuilding is crucial. A case brought during the Biden administration shows that the United States is finally beginning to understand this, as an issue that was first addressed as a trade violation has become a matter of industrial policy during the Trump administration. As Washington focuses on renewing its shipbuilding capacity, it also must enlist the help of allies such as South Korea to strengthen its fleet.

The Consequences of Commercial Shipbuilding Dominance

The Office of the U.S. Trade Representative’s (USTR’s) last finding under the Biden administration was a Section 301 case on “China’s targeting of the maritime, logistics, and shipbuilding sectors for dominance.”

The USTR determined that, “For nearly three decades, China has . . . employed increasingly aggressive and specific targets in pursuing dominance” in these sectors with great success. “China’s shipbuilding market share [increased] from less than 5 percent of global tonnage in 1999, to over 50 percent in 2023; increasing China’s ownership of the commercial world fleet to over 19 percent as of January 2024; and controlling production of 95 percent of shipping containers and 86 percent of the world’s supply of intermodal chassis, among other components and products.”

The 170-page report that accompanies the USTR findings gives a detailed description of Beijing’s top-down industrial policies, with its explicit and consistent aim over the decades “to make China the world’s preeminent advanced manufacturing power before the 100th anniversary of China in 2049.” Beijing seeks control over international supply chains to support its military buildup.

The report adds that China’s dominance in shipbuilding “burdens or restricts U.S. commerce because it creates economic security risks from dependence and vulnerabilities in sectors critical to the functioning of the U.S. economy.” The report includes an analysis of China’s global network of ports, noting “efforts to increase investment and control over ports, terminals, and logistics services networks spread distortions stemming from China’s maritime economic model and create potential dependencies and influence risks.”

The report’s weakness is in its origins. It stems from a case brought by United Steelworkers alleging that unfair competition from state-backed Chinese shipyards had ruined the U.S. commercial shipbuilding industry, which now accounts for less than 1 percent of global construction. The union’s focus is jobs, and the USTR frames its deliberations mainly on anti-competitive behavior that harms the mythical free market. That approach showed the United States continuing to miss the strategic importance of shipbuilding.

In fact, classical free-trade arguments never applied to shipbuilding. In The Wealth of Nations, Adam Smith held shipbuilding as an exceptional activity that formed the basis of the Royal Navy and thus the foundation of British security. Smith embraced the Navigation Acts, which gave British-built ships a trade-carrying monopoly within its global empire by limiting trade activities to either its own ships or those of the country where imports originated.

Now, China’s preponderant share of global commercial shipbuilding provides it an industrial base that also supports naval shipbuilding. This is more than a matter of commercial competition. The industry is at the center of an arms race that will determine the balance of power and condition the risk of war.

New Policies at Home and Abroad

On 9 April, President Donald Trump signed an executive order, “Restoring America’s Maritime Dominance,” which cited the USTR report in Section 5. The order sets out an industrial policy, not a trade policy. The aim is “to revitalize and rebuild domestic maritime industries and workforce to promote national security and economic prosperity.” It cites as a problem the ability of China (and others) to build ships faster and cheaper than the United States.

While the order states U.S.-built ships should be “competitive in international commerce,” that competitiveness will have result from the same kind of subsidies China uses. The aim is to have the ships needed. Government will not be subsidizing commerce; commerce will subsidize industrial policy.

It will take time to bolster U.S. shipbuilding. For this reason, the United States must consider turning to allies for help. Three days after his November election victory, Trump talked to then-South Korean President Yoon Suk Yeol. Among the topics discussed was closer cooperation between the allies on shipbuilding. The April order includes an effort to attract more foreign investment in domestic U.S. shipyards. The initial discussion centers on maintenance, repairs and overhauls, areas in which the U.S. Navy is dangerously behind schedule. But Trump has also raised the idea of ordering warships from South Korean shipyards that have available capacity and already build warships similar in design and technology to U.S.-built vessels (but do so faster).

Buying foreign warships has been considered a threat to domestic shipbuilding, but the issue can no longer be treated as a matter of jobs creation or trade balances. Congress has shown a willingness to give U.S. shipbuilders more orders than they can fill. The Navy must grow faster than the current constraints of the U.S. industrial base allow. Foreign orders are not a substitute for expanding production capacities at home, which must remain the top priority. But they can help the Navy grow its capabilities fast, somewhat balancing China’s ability to draw on a huge domestic shipbuilding base to grow what is already the largest naval fleet in the world.