Matthew Funaiole of the CSIS China Power Project says China’s dominance in commercial shipbuilding is squeezing U.S. allies and fueling its naval buildup. He says the U.S. is responding with trade investigations, potential port fees and legislation like the Ships Act to revive its own shipbuilding industry.
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00:00So just to get started, you know, we do know that China's shipbuilding capacity has expanded greatly since the turn of the 20th century.
00:08What kinds of challenges does this present to the U.S.?
00:11Well, there's really a few different interrelated challenges that it poses.
00:15The one that's getting a lot of attention right now in D.C. is on the economic front.
00:19China is over 50 percent of the market share, and it is just growing and growing and growing, attracting new orders.
00:25And that's really pushing other competitors out of the market.
00:28Now, the U.S. hasn't been a huge factor in shipbuilding for quite some time.
00:32So really, that squeeze is on some of our allies that are leaders like South Korea and Japan.
00:38But on top of the economic issue, there's really some national security concerns that go along with it as well.
00:43China's huge domestic shipbuilding capacity, that's helping to fuel its ongoing naval buildup.
00:48So that's a concern for the United States.
00:50And the other factor is that the shipyards themselves, most of the big ones, most of the major ones that we're looking at, these are dual use facilities.
00:57Meaning that they're producing both commercial ships and military vessels at the same time.
01:02And what we're seeing and what we saw in a lot of our research is that foreign capital is actually flowing into these shipyards in a number of different ways, helping to subsidize the costs for China's ongoing military modernization.
01:14So in what ways is the U.S. trying to counter what's happening in China and has it been effective so far?
01:21Well, there's a lot of momentum for this right now, as you sort of mentioned at the top of things.
01:26But it's not really something that's new.
01:28During the first Donald Trump administration, he kind of started talking about shipbuilding, specifically looking at icebreakers.
01:33There's a lot of momentum during the Biden administration.
01:36And now we're seeing even more interest in it now.
01:38And there's a few different things that are happening.
01:40The U.S. trade representative conducted a 301 investigation last year, looking to see whether or not China had used unfair trade practices to gain an upper hand in the industry.
01:51And then earlier this year, it came up with some recommendations about how to confront that, looking at things like putting fees on Chinese vessels that dock it at U.S. ports.
02:00And that's still underway.
02:01We're still kind of looking and trying to understand exactly how that might materialize.
02:06We also expect there to be an executive order on shipbuilding in the next couple of weeks.
02:10And there's also the Ships Act, which is another piece of proposed legislation to help revitalize the U.S. shipbuilding industry.
02:17One of the key findings of your recent report is that a fair number of U.S. allies, including Taiwan, are looking to China for a significant amount of their fleets.
02:31How is it that these countries became so reliant on China for their shipbuilding needs?
02:35This is this is a big question.
02:37And I think it's similar to the story we've heard a number of different times when it comes to China.
02:41China is able to mobilize its massive economic strength, put state support behind specific industries, behind specific state-owned champions.
02:50And what it does is it squeezes competitors out of the marketplace.
02:53And that's really what we've seen over the last two decades.
02:56If you go back to the early 2000s, China was only 5 percent of the shipbuilding market.
03:00Now it's over 50 percent.
03:01And there's been subsidies been in play.
03:03But also they produce ships quickly.
03:05They produce ships cheaply and they produce good ships.
03:09And so market factors are really just driving companies to China.
03:13But I think we've kind of hit a point now where we can't just let market factors be the only thing we're taking into account when we're looking at this type of engagement with China.
03:22We really do have to think about the national security implications as well.
03:25So given that these are commercial vessels, in what way does their construction by China benefit that country's military?
03:32I mean, there's a few different factors to think about when you're looking at commercial and military production.
03:36Up front, I do want to clarify that they're not the same thing, right?
03:40There's different types of technology.
03:41There's different processes.
03:42There's different personnel that are involved in them.
03:45But what we've seen and we've observed this through years of satellite imagery analysis at CSIS is that China has undertaken a comprehensive effort to consolidate some of its biggest industries, expand those actually out, and blur the lines between commercial and military production.
04:02And there are benefits to that, right?
04:05It's not a perfect system, but there's benefits to that.
04:07A big one is that you help to offset the fixed costs of the shipyards with that foreign capital that you're getting for those commercial purchases.
04:16These are massive enterprises.
04:18These are huge infrastructure projects.
04:19And so if you can have, you know, dry docks and gantry trains and floodable basins, and you're building all those and expanding all those, and some of the costs of those are being offset by foreign capital that's flowing in, well, you're making it cheaper to build up your naval assets that are also using those same facilities.
04:38There's also a cyclical component of this as well.
04:40What we've observed is that when shipyards are getting a tremendous amount of new shipbuilding orders, they'll convert a lot of this capacity over to commercial production.
04:49And when there's a lull in that, we see an uptick in a lot of the military production at these facilities.
04:54And so there's this blurring that's occurring at these shipyards, and it gives China a lot of different ways in which it can leverage that.
05:00It can leverage it for commercial might.
05:01It can measure it for military might.