The Plan to Get America Building Big Ships Again

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0:45In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Hey there, Odd Lots listeners. It's Tracy Alloway. And Jill Weisenthal. We are very excited to announce that Odd Lots is going to Washington. That's right. For the first time, we are going to do a live public Odd Lots recording in our nation's capital. That's going to be March 12th in Washington, D.C.

1:25at the Miracle Theater. and guests will be announced in the coming days. But in the meantime, you can find a ticket link at Bloomberg.com slash OddLots.

1:36Bloomberg Audio Studios. Podcasts. Radio. News.

1:52Hello and welcome to another episode of the OddLots podcast. I'm Jill Weisenthal. And I'm Tracy Alloway. Tracy, let's get back on the supply chain, shipping, and industrial policy beat. I love it. I've been waiting for us to get back on that. Although actually, OK, so I'm excited about this for two reasons. One is I enjoy talking about supply chains and talking about how goods are actually transported. And I think I've told you before, I actually wanted to be a commodities reporter because Like there's this element of romanticism to shipping actual things, moving actual stuff around the world.

2:29But then secondly, the reason I'm excited for this conversation is because this is a rare example or instance of something that has bipartisan support. Yes, that's right. And so obviously during the last administration, we saw these things. There was the CHIPS Act, there was the Inflation Reduction Act, which primarily focused on energy, a lot of alternative energy. There's been some question, obviously, with the changing of the guard in D.C. Are we going to see some more activist efforts to shore up certain aspects of the U.S. industrial capacity? There's a lot of anxiety about that right now, but it's obviously an open question where that's going to go.

3:11But one of the things that has come up in some of our conversations that we haven't dived too deep into is American maritime capacity specifically. And it comes up when we reference the Jones Act and it comes up when we talk about port automation. And we've talked a little bit about icebreakers and things like that and how sort of atrophied U.S. capacity has become. And so then there's this question like, you know, A, what can we do about it? And B, how urgent is there a reason to rebuild this capacity? I was kind of wondering how long it would take for us to bring up the Jones Act in this conversation.

3:45And the answer is about one or two minutes. But I think this is it's a really interesting topic from an odd lots perspective. We have done shipping episodes in the past and obviously everyone learned during the pandemic that shipping costs are really important. But also I'm just interested in this discussion from a sort of policy design perspective. How do you go about actually designing something like this that at first glance seems absolutely sprawling and complicated and touching on all these different things? Well, I'm excited to say we really do have the two perfect guests for this conversation.

4:21We're going to be speaking with Republican Senator Todd Young from Indiana and Democratic Senator Mark Kelly from Arizona. Senator Kelly is a trained Merchant Marine. I see a class of 86, the Merchant Marine Academy. So like I said, truly the perfect guests. Senators Kelly and Young, thank you so much for coming on OutLots. Thanks for having us. Yeah, thank you, Joe and Tracy, for having us on. Why don't we just start, why don't you describe, one of you or both of you, describe the existing state of America's maritime capacity and just like why it's something that we need to, in your views, address.

5:03Joe, this is Mark Kelly. You know, just to start, I would say, big picture, the state of our maritime industry is really, really poor. I was in a brief just yesterday with the Admiral, the four-star Admiral, Admiral Paparo, who's the head of Indo-PACOM. And we're talking about the Western Pacific. And he was talking about the Military Sealift Command and how it is in bad shape materially and also from a workforce perspective. But when you consider where we were and where we are today. So when I graduated from the U.S. Merchant Marine Academy in 1986, as you mentioned, I made about 400 U.S. flagged ocean going vessels.

5:46And that was down, by the way, from thousands after World War II. Today, that number has fallen to 80. So 80 U.S. flagged vessels in international commerce flying the U.S. flag. China, our peer or near-peer adversary, has 5 ,500. And most of the cargo that comes to the United States can come on Chinese ships. So if you remember what happened in 2021, 2022 with supply chains and bottleneck at seaports, especially on the West Coast, I mean, if China wants to do that similar effect to us, They can, on any day, President Xi could say, hey, no Chinese ships take cargo to the United States anymore. And it would essentially shut down our economy.

6:39So this is a problem. It's a national security problem. We've got to fix it. So how did this happen? I mean, 80 U.S.-flagged vessels versus 5 ,500 out of China is a pretty stunning statistic. What are the things that went into making, I guess, the U.S. less competitive when it comes to shipbuilding? Todd, I don't know if you want to take that or I could kind of. Yeah, I'll speak at a high level. I mean, what we have seen over the years is China in a number of different sectors of the economy. They've subsidized their activities in furtherance of national security and domestic job creation and to master certain technologies and crafts so that they can leverage those for geopolitical purposes and also for commercial purposes to put other industries and other countries out of business.

7:39So examples. One example would be semiconductors. And it's not just the Chinese. Many other Asian nations understood back, you could point to the 1980s. They understood that having some measure of control and expertise over semiconductor technologies was important to their growth and also important to their military. using these technologies, embedding them in different military platforms. And so they invested in them. We instead, we have a more efficient economic model that doesn't lead to the sort of overinvestment and waste by our capital markets and others that the Chinese do. We also don't look at economic exchanges historically through a military lens.

8:30Well, the disadvantage of that is when other countries are subsidizing their businesses, in this case shipbuilding, and we're not subsidizing, they will undercut us on price. And given enough practice, sometimes undercut us on quality. So we have gotten out of the business in the case of semiconductors of making them. And over time, we became vulnerable to interruptions in the supply chain. The interruption that we might experience in shipbuilding or our maritime industry that Mark just alluded to is one we're trying to prevent. We don't want a situation, whether it's a pandemic or a military conflict, in which we are dependent on our chief adversary, China, to move materiel and personnel to other places.

9:21And on a day-to-day basis, as our government leaders are making foreign policy, we don't want to be coerced into making certain decisions by the mere threat of Chinese interruption of our economy. So that's why at the highest level, this is very important and why some sort of government intervention is needed, because this in the end is an economic security issue and also a national security issue. And Tracy, to add on to that just a little, in the 1980s, we used to do this differently and before. There was some more government involvement. We got out of that, kind of left the maritime industry totally on its own.

10:02And it just decayed over decades, over the last 40 years. And the other concern here about, it's not only the number of ships, But, you know, the Chinese ships, the ocean going, their ocean going vessels, 5 ,500 or so that they have requirements put on them by the PLA Navy. So these ships are, you know, well equipped and configured to be what they need if they were in a conflict with us. Now, we rely on the military sea lift command for our initial capacity to move combat equipment and troops, in some cases, troops overseas. But those numbers are rather limited. And the reason why you want a large maritime fleet is not only, you know, peacetime to move, you know, cargo and it's healthy for our economy and it also helps U.S.

11:03shipbuilding. But the other reason is in time of conflict, we might have to rely on this capacity of ocean-going merchant vessels to get combat power across the Pacific or Atlantic. Sorry, I was just going to build on Mark's point and emphasize the capacity that Mark just alluded to. What we're essentially trying to do is we're trying to train more mariners, build more ships, and then create more yard space in our existing yards and perhaps some older yards that need to be refurbished. Create more yard space that can support additional military shipbuilding and repair during a wartime situation.

11:46Thank you.

12:16optimized every drop of water? How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants over 100 ,000 nationwide, all through a single vendor. In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform.

13:00Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. It's interesting, you know, we're having this bipartisan conversation, And you laid it out, the sort of tension very well, which is that sort of American economic philosophy has been optimized for efficiency and profit. And obviously, we're extraordinarily wealthy as a country, probably in large part of that. But A, there's the geopolitical risks that emerge with losing basically the ability to build stuff. And you mentioned semiconductors and ships, and there's a lot of this. And so, A, you know, you run the risk, it's overseas.

13:37And then over time, perhaps they don't even need the subsidies anymore because they just have years and years and years of practice getting better and better at it. Do you see this sort of framework, this sort of lens with which to view economic policy is fundamentally changing in D.C.? Because we're trying to sort of understand how much momentum and continuity there will be for just this general notion of what people call industrial policy. I do. I believe a lot of minds have been changed and policymakers' penchant for embracing these sorts of policies has fundamentally changed. Mark was helpful to me as we tried to push through the Chips and Science Act dealing with the semiconductor challenges.

14:27And I think through that exercise, many of us had to make some what were challenging arguments to colleagues about why we needed to bake in a national security premium to the price of certain products, knowing that if we didn't make them here, had the capacity to make them here in the future, there would be national security consequences to that. And we've done that on so many other technology areas in the past. The only difference now is that we have an adversary that does not really look at any commercial transactions through a purely commercial lens. There's always a geopolitical or military overlay to it.

15:08So we have to extend the longstanding philosophy to other areas of our economy in order to protect our people. So if we continue to make the arguments, I think more people in Washington will embrace what most people across America already intuitively understand, which is, yes, I remember during the global pandemic when I tried to go to Walmart and buy a consumer electronic and the shelves were half empty. They understood why that was and why it's hard to run a modern economy without more resiliency and a little more just in case instead of just in time. So one of the things that comes up quite a lot on this show is the importance of institutional knowledge.

15:55So, you know, you can have people in D.C. agree that the U.S. should build more big and complicated things, whether those are semiconductors or ships. But you actually need people who know how to do that. And if we haven't been building these things for decades, then there probably aren't that many people around who have practical knowledge or experience of how to do this. And in fact, I don't think there's any major shipbuilder that is actually headquartered in the U.S., although there are some subsidiaries. How do you actually go about building up institutional knowledge for shipbuilding? Tracy, so one of my classmates from the U.S.

16:34Merchant Marine Academy in 1986 is a woman named Jennifer Boykin. She's the president of Newport News Shipbuilding. And before I was in this job, I remember going down there to visit her and talking about some of the workforce issues. She builds aircraft carriers and Virginia-class submarines, one of the preeminent shipbuilders in the world when you consider just the capability of these vessels. A U.S. aircraft carrier or the Ford-class aircraft carrier and the Virginia-class attack submarines are, you know, there's nothing better. So we can build really, really good and capable ships. But one of the challenges, you know, the chief faces is what you're talking about is the workforce, you know, constantly trying to find people that will do these jobs and do them well and have the skills.

17:24Now, they train a lot of their own people, welders and pipe fitters, electricians, but they often run into challenges in finding people to go into these jobs. And when they need people that are trained already, that ecosystem of shipbuilders doesn't really exist anymore in the United States. So part of the benefit of this and in the legislation itself is a strategy to provide help for training programs. So to build the workforce, you can think of this as kind of a three legged stool, one of them being the shipyards, one of them being the U.S. flagged vessels and the third being the workforce. And by supporting the schools like the U.S.

18:15Merchant Marine Academy and the State Maritime Academies, and also the, you know, the schools that train the unlicensed mariners, but then also programs to, you know, help shipyards find pipe fitters and train them and welders and electricians and all those trades will then grow this entire ecosystem. So there's extra capacity of a workforce that existing shipbuilders that build naval combatants can rely on. And then that extends not only to the workforce, but to the companies that build the parts, you know, pumps and pipes. If you grow that, there's a more competitive economic environment. There's more availability.

19:03In some cases now, when they're buying a pump or pipes, they might have only one or two vendors that they can rely on. So the idea here is by building the U.S. merchant, marine, and the shipbuilding workforce, we're also going to help our naval shipbuilding. Well, this is actually just a good moment. Why don't you describe what – give us the outline of the Ships for America Act. How much do you want to spend? And what does it hope to achieve? What would the U.S. industry look like if all successfully implemented? Well, it's a 300-page piece of legislation. It touches every aspect or nearly every aspect of the maritime industry.

19:48I guess I'll just start kind of in a random place here, provide for a maritime security advisor within the White House who would lead an interagency maritime security board to make some whole of government strategic decisions on how to implement a national maritime strategy. It also establishes a maritime security trust fund that would reinvest duties and fees that are paid by the maritime industry into maritime security programs and infrastructure programs. With the goal here of having 250 ocean going merchant vessels in 10 years, we would create a strategic commercial fleet program. We would change or establish a rulemaking committee on commercial maritime regulations and standards.

20:39And then we would do things like requiring government-funded cargo to move on U.S. flagged vessels and requiring a portion of the cargo imported from China to go on U.S. flagged vessels starting at a later time. There's tax credits, There's Title XI federal ship financing. There's shipbuilding financial incentive programs in the legislation. There's also a part of this that's about manufacturing and innovation and coming up with the next generation of ships and ship energy systems. And I could go on. Yeah, the bill in its official format is actually 344 pages long. And I will confess, I did not read all of it.

21:24Did you upload it to ChadGPT? I did not. That's a good idea, actually. Yeah, I did. One of the things I was wondering is, you know, this is kind of a devil's advocate question, but a lot of the act, as you just outlined, is about creating incentives to build ships through things like tax credits or providing some subsidies for construction or training. Why can't the U.S. government just fund ships directly? If ships are so important for national security and trade, why even try to leave it to private capital to build? Well, that's a good question. I mean, I guess that's what China does, right?

22:03They build them. You know, they put them out there on the oceans. They really belong to the Chinese government in a way. You know, we are a democracy. We're a capitalist society. We believe in private markets and private ownership. And we believe in, you know, to some extent, maybe helping companies, but eventually getting them to the point where they're on their own, they're profitable, they're creating good paying jobs. These are jobs often that you can raise a family on that do not require a four year degree. So these are, you know, great, you know, jobs that are, you know, provide an economic benefit, not just to the people who work them, but to our country, and they help us grow the economy.

22:47I don't think the government operating its own fleet vessels to move commercial cargo makes a ton of sense because this is an important part of our economy. It's deteriorated over the years, but what you're suggesting would be really like a wholesale pivot to government-owned industry. Let me ask another question. We've done a lot on industrial policy in the past, and one of the preconditions, or industrial policy can fail easily, and you can have cronyism, and you can have companies overbilling the government for mediocre products, and this is just one of the pitfalls of any time there's a lot of public money going to something.

23:37But one way that this gets addressed historically in some markets is this idea of the domestic champion has to be competitive on the global market. And so if you're a car company or a chip company in China or something, you don't have any guaranteed buyers overseas because the chip maker is still competing with Texas Instruments or BYD is still competing with Tesla. What are the mechanisms that you have in place or that you envision to still have that sort of market discipline, so to speak, so that, yes, there is this public money going, but there is still this element that, yeah, we want the ships to be really good and competitive and competitively priced and to sort of win, so to speak, so that we know we're getting value from the spending?

24:26Well, yeah, let me take that. And frankly, this builds off of the previous question. First, I've learned a lot and frankly thought a fair amount about industrial policy in recent years through the CHIPS Act. From a purely economic standpoint, there would be no difference when it comes to direct payments to grantee companies that are charged with building ships on behalf of both our commercial industry and for future national security reasons. But administratively, you can cut down on any concerns over cronyism or waste by having a neutral arbiter. And despite some anomalies over time, our IRS is a pretty neutral arbiter.

25:21So when you are funding this shipbuilding initiative through the tax code, it does provide a neutral arbiter. Sometimes the downside to that approach is that you end up funding through the tax code more enterprises and certain enterprises that you wouldn't otherwise fund. So there are tradeoffs when you make decisions about how you administer your industrial policy. That would be point one. Point two about establishing market discipline is very important. If you look at semiconductors, that market is incredibly distributed and ramified all across the world. We will see for any given semiconductor it going across international borders dozens and dozens of times before it becomes, you know, assembled component.

26:13In the case of ships, of course, you're going to have components going in and out of the country some, but it's less distributed. and it will be the job in the main of our diplomats and of our private enterprises to sell our ships into other markets. We need to open up other markets through trade policy, something I'm also an advocate of and will continue to argue for. In part, and this is a rarely mentioned dimension of trade policy, but one of the reasons we want to trade with the rest of the world is to enforce a certain efficiency and discipline on our own economy. Yeah. So that we will see a deployment of resources efficiently, and we can grow faster and all become more wealthy.

27:00So, I mean, that's how this will be accomplished. But what we have right now is we have a more concentrated shipbuilding industry in particular countries because they see not only the commercial, but also the national security upside to excelling in shipbuilding. And it will take some work from our government to open up foreign markets for our ships down the road. So we're not there yet. We can't wait for that, however. I mean, we own 3 % of the global commercial fleet right now. China owns roughly one-fifth of the world's fleet. And they will, through their bulk carriers, move a far larger proportion of American goods into the United States.

27:50So they've got us at the end of a barrel, frankly. And there is some urgency to us beginning this exercise now, especially in light of many of our national security communities' predictions about Chinese misbehavior vis-a-vis Taiwan or South China Sea, which will require a maritime response from the United States. And at this point in time, we just cannot move enough materiel and enough of our soldiers, sailors, and airmen to win a fight. And that ought to send a shiver down the spine of most Americans. Since you brought up the broader trade landscape, would you expect retaliation from China for this act.

28:39I think it's fair to say at the moment, the relationship between the U.S. and China is pretty frayed given the ongoing trade war. And one of the things this act proposes is creating a commercial cargo preference so that in 15 years, 10 percent of all cargo that's imported into the U.S. from China will need to be imported on U.S. flagged vessels. And I imagine that China might not like that, right? We talked earlier about how they've been supporting their own domestic shipbuilding industry. So clearly, this is important to them. Could they potentially respond in kind with their own restrictions?