BEFORE THE
UNITED STATES SENATECOMMERCE COMMITTEEState of the American Maritime Industry

March 6, 2019

Testimony of:Matthew Paxton
President
Shipbuilders Council of America
20 F St. NW, Suite 500
Washington, DC 20001

1

On behalf of the Shipbuilders Council of America (SCA), I would like to thank Chairman
Wicker, Ranking Member Cantwell, and members of the Committee for the opportunity toprovide testimony on the state of the American maritime industry, specifically the economic
opportunities in the U.S. and shipbuilding industries. I ask that my entire testimony be submitted
for the record.

I am Matthew Paxton, President of the Shipbuilders Council of America (SCA), the national
trade association of the U.S. shipyard industry. The SCA is comprised of 85 member shipyard
facilities and 105 industry partner member companies that represent the vital supply chain thatmake up the U.S. shipyard industrial base.

From tug boats to aircraft carriers, and everything in between, the domestic shipbuilding industry
is diverse and operates in several sectors including government new construction, government
repair and modernization, commercial repair and modernization and commercial newconstruction. SCA Members and the U.S. shipyard industry build some of the mosttechnologically advanced ships in the world for our government customers including the U.S.
Navy and the U.S. Coast Guard as well as for a vibrant domestic commercial market.

The Jones Act
That commercial market is sustained by the Jones Act by providing certainty and stability. Thislaw, which is provided at no cost to the U.S. government, helps to ensure the existence of adomestic shipbuilding and ship repair industrial base. The Jones Act also ensures themaintenance of a merchant marine that is sufficient to carry our domestic water-borne commerce
and also ensures an adequate number of ships and mariners to meet national security
requirements in times of war or national emergency.
From our industry’s perspective, the Jones Act also ensures that the U.S. maintains critical
shipyard infrastructure and an associated skilled workforce that can build, repair, modernize andmaintain the more than 40,000 vessels of the domestic Jones Act fleet. This industrial base also2

ensures there is a sufficient workforce to support the construction and repair of our criticalnational security fleets.
Simply put, the Jones Act sustains a domestic market for which carriers, operators and shipyards
vigorously compete. When the Jones Act is not enforced or undermined by shortsighted policy,
there can be dramatic influences on that market.
Recently our shipyards completely recapitalized the tanker market due to the oil boom. It is atestament to the Jones Act that the commercial shipbuilding sector was able to rapidly meet themarket demand for domestic tankers and deliver these state-of-the-art vessels for thattransportation sector. It was a true success for our industry.
In addition, our shipyards recently delivered numerous large ocean going containerships andRO/ROs to recapitalize the noncontiguous fleets. Vessel construction for these importantshipping routes is ongoing at several shipyards, but will be completed in the coming years. This
fleet includes world’s first LNG-powered containership. Again, it is a result of the Jones Act that
we have such a capable and robust shipyard industry to build for these markets.
In a contrasting example, a 2017 decision by the Department of Homeland Security to not revoke
a series of letter rulings that have allowed foreign-built, foreign-crewed and foreign-owned
offshore supply vessels to vessels to operate in violation of the Jones Act has created uncertainty
and resulted in the cancelation of numerous new U.S. vessel construction contracts. The
cancellation of contracts dampens our industry’s ability to invest in a world-class workforce andmodern, efficient facilities. I raise this issue as an example of how a decision by an agency to
not enforce the Jones Act can have an adverse impact on commercial shipbuilding thatreverberates throughout the entire shipyard industrial base, further destabilizing its ability tosupport national defense requirements.
LNG Market Emergence
Most recently, the industry has been concerned regarding the Administration’s potentialconsideration of a long-term waiver of the Jones Act for purposes of transporting domestic LNG.
Not only would a long-term waiver be unprecedented, but it would have severe and immediate
impacts to a nascent shipbuilding market.
3

Several U.S. LNG export facilities have begun operations in the last two years. These facilities
are already fully subscribed to foreign customers. It is expected over the next 5 years that
potentially 11 additional domestic LNG export facilities could come online. As they do, there
may be sufficient capacity to be able to service a nascent domestic LNG market. As a result,
there are presently several inquiries being made in U.S. shipyards regarding the construction ofsuch vessels which can be constructed well ahead of time to meet that market demand.
A Jones Act waiver is not necessary for the domestic LNG trade. In fact, MARAD has reported
that there are 52 LNG carriers in the world that would qualify under existing 1996 legislation totransport LNG from the contiguous United States to Puerto Rico. Opponents of the Jones Act
have countered that this is a false because “the law still requires these vessels to be U.S.registered and U.S.-crewed.” One supposes from this that the Jones Act opposition wants to skirt
all US regulations and taxes.

The LNG market in Boston is a spot market (several cargos during the winter) and is likely toremain so. As such, regardless of where the LNG might get loaded in a ship, in Louisiana,
Maryland or Qatar, it will be delivered at world price and at a price the market will bear. The
best example of that case is happening right now as there has been an LNG carrier sitting off
Boston harbor for over a month waiting for a cold snap to cause a regional natural gas price hikebefore the ship lands the gas.
Thus, unless it is the Congress’s intent to suspend all US regulations and taxes for vessels
operating in coastwise trade, then there is no need to waive the Jones Act. Gas customers in theNortheast will not receive any advantage and there are ships in the world today that could serve acoastwise trade to Puerto Rico if there was a market to justify it.

Waiving the Jones Act to allow coastwise trade by foreign vessels will serve no purpose otherthan to destroy the Jones Act and the American maritime industries it supports and ultimately
damaging national security.

Instead of seeking to undermine the Jones Act and undermine the critical shipbuilding
manufacturing sector, the United States should be promoting policies that actively support the4

expansion of the shipyard industrial base. As the United States has become the world’s leader inenergy production, so to should we encourage that our domestically produced natural resources,
including LNG, be transported on U.S. vessels under such policies as proposed by theChairman’s Energizing American Shipbuilding Act. Not only would that help us regain afoothold on the international shipping market where we’ve ceded ground to heavily subsidized
and government-backed shipyards, but there is a direct relationship from the construction ofLNG tanker vessels to the recapitalization of our strategic sealift fleets because of thestabilization it would bring to the shipyard supplier base and shipyards generally.
If you do not think that our adversaries are not making investments maintaining their same
industrial base, consider that last month, Russia adopted their own version of the Jones Act for
purposes of international trade, which would limit the carriage of the country’s nationalresources, including gas and petroleum to Russian-built, owned and flagged vessels.1
The Commercial Shipyard Industrial Base & National Security
In a 2016 Force Structure Assessment (FSA) the Navy called for a fleet of 355-ships –substantially larger than the current fleet and also larger than the Navy’s previously stated goalof 308 ships. The Congress, under the leadership of Chairman Wicker, made 355 ships thepolicy of the United States in the FY2017 National Defense Authorization Act.
Simultaneously, the United States Coast Guard is undertaking efforts to recapitalize essential
assets such as the Polar Security Cutter (also known as the Polar Icebreaker), Offshore Patrol
Cutters (OPC) s, and the waterways river tenders that ensure the safe navigation of inland marinetransportation.
To note, the recapitalization of the Coast Guard’s fleet is an excellent example of how the Jones
Act supports our government fleets. Most shipyards engaged in the construction of Coast Guard
assets or are bidding to do so, have engaged in the construction of commercial Jones Act vessels.
These yards have benefitted from stable commercial shipbuilding markets to leverage materials
and workforce skillsets to develop the capability and capacity to build the most sophisticated
Coast Guard vessels in the world.

1

https://www.pacmar.com/story/2019/02/01/features/russias-arctic-more-than-promise/675.html

5Additionally, the Maritime Administration is currently recapitalizing its school training ships thatsupport our state Maritime Academies and train the American mariners of the future. In thecriteria for awarding the shipbuilding contract for the procurement of those ships, the Maritime
Administration specifically requested the shipyards bidding on the contract have commercialexperience. The Administration, through this request, recognizes the value in commercial
shipbuilding best practices to “leverage existing marketplace expertise targeting companies’
experience in production of innovative U.S.-built ships.”2Another area of significant concern for government fleets is the recapitalization of the nation’sstrategic sealift fleet, which ensures that unitized military cargo can be delivered to the war front.
Currently the average age of the ships in this fleet is nearly 40 years3 old, and the number ofships that will reach the end of their programmed service lives over the next 10 years will reducesealift capacity by over 25 percent. The Navy, in partnership with TRANSCOM and MARAD,
is working through a plan to recapitalize that fleet through a combination of service life
extensions, acquiring used commercial ships, and investing in new-build construction at U.S.
shipyards.4 The U.S. shipyard industry is already vigorously competing to build and convert
these ships.
In order to build and maintain these ships in as timely and affordable manner, stable and robust
funding as well as stable construction rates and long-term procurement vehicles are necessary tosustain those industrial capabilities which support Navy, Coast Guard and other government
shipbuilding and ship maintenance and modernization programs. These programmatic attributes
provide the horizon and incentives required by industry to make risk-balanced investments insupport of our national defense needs.
To meet the demand for increased vessel construction while maintaining the vessels we currently
have will require U.S. shipyards to expand their work forces and invest in their physicalinfrastructure in varying degrees depending on ship type and ship mix. This is a requirement ournation’s shipyards are eager to meet however, meeting the national objectives is made more2

https://www.maritime.dot.gov/newsroom/press-releases/maritime-administration-issues-request-proposal
https://www.gao.gov/assets/690/686733.pdf
4https://www.secnav.navy.mil/fmc/fmb/Documents/19pres/LONGRANGE_SHIP_PLAN.pdf
36difficult by unstable procurement and sustainment appropriations and associated procurement
strategies.
Unfortunately, any debate within the Administration or in the Congress of repealing or waiving
the Jones Act adversely impacts financing for the industry undermining the commercial market
substantially. This reverberates across the industry and financial markets, directly impacting ourindustrial base supply chain and that supply chain’s ability to support the demands of our Navyand Coast Guard fleets and incrementally erodes the national defense intent of the Jones Act.
Many of our shipyards and suppliers that compete to build these national security assets are
sustained by commercial shipbuilding and repair so they are viable when the time comes to build
and repair the national security fleets. Companies that would be bidding on contracts for LNG
carriers are the same shipyards and suppliers that the country will look to help recapitalize thenation’s strategic sealift fleets. Therefore, undermining the Jones Act through lack of proper
enforcement or through broad, unnecessary waivers will directly impact the ability of the nation
to meet our own national security objectives.
International Competition in Shipbuilding
The most consistent argument I hear is that we should do away with the Jones Act and outsource
the construction of some of our Coast Guard assets, such as the polar icebreaker, as well as
commercial vessels, such as tankers and LNG carriers to foreign shipbuilders because of price.
Along with the significant national security implications of such sentiments, that argument
ignores that the U.S. does not compete on a level international playing field in shipbuilding.

Over the last twenty plus years, with significant government policy and financial assistance, theworld shipbuilding capacity grew dramatically, primarily in Asia. At its peak Asian shipbuilders
had captured 92% of the world commercial shipbuilding market. In the recent severe andsustained downturn in the world commercial shipbuilding markets, Asian governments havedoubled down on the support of their shipbuilding industries.
For example, in 2015 alone South Korea’s Daewoo shipbuilding took on more than $1.9 billion
in government-financed debt, as it racked up cheap orders, likely at zero margin. Additionally,
South Korea provided financial aid totaling just over $10.7 billion, from 2015 to 2017 to keep7

the company afloat. Despite that enormous capital injection, Hyundai Heavy Industries, another
Korean shipbuilder, agreed to acquire a 56% stake in Daewoo this year, with financing comingfrom the state-run Korean Development Bank5, in order to prevent Daewoo from completely
going under.
Comparatively, in the same period of 2015 to 2017, the U.S. Maritime Administration provided$15 million in small shipyard assistance grants and $49.7 million through the maritime
guaranteed loan program, also known as Title XI. 6
While China’s government subsidies are extremely difficult to detect and measure partly becauseinternational trade agreements prohibit direct and indirect subsidies, we know that there is acertain amount of market manipulation based on international news reports and recent studies. A
September 2017 report from the Center for Economic and Policy Research found evidence thatshipyard costs in China decreased implying a subsidy of between 13 and 20 percent between2006 and 2012, leading to “substantial misallocation of global production with no significant
consumer [gains].”7
Additionally, between 2013 and 20178, China operated a “cash for clunkers” program that
increased subsidies for scrapping obsolete ships by 50 percent to help cut overcapacity in themarket. During this period, the Chinese government granted $247 per gross ton for shipping
companies to replace obsolete ships. Chinese shipyards further benefited from this initiative,
because the grants were awarded to shipping companies only after replacement orders had beenplaced in Chinese shipyards. 9
On top of the scrapping incentive, the Chinese government offers more overt support for its
shipyard industry through cash infusions. One such shipyard, Rongsheng, received statesubsidies of the equivalent of $202 million, per year from 2010 to 2012. In that same time5

https://asia.nikkei.com/Business/Business-deals/Hyundai-s-mega-shipbuilder-plan-puts-China-and-Japan-onedge
6
https://www.transportation.gov/sites/dot.gov/files/docs/MARAD-FY-2017-CJ.pdf
https://www.transportation.gov/sites/dot.gov/files/docs/mission/budget/281151/marad-fy-018-cj-budget.pdf
7
Kalouptsidi, Myrto. Detection and impact of industrial subsidies: The case of Chinese shipbuilding. Washington,D.C. : Cetner for Economic and Policy Research, 2017.
8https://www.reuters.com/article/china-shipping/update-1-china-extends-ship-scrapping-subsidy-programme-toend-2017-idUSL3N0Z91FB20150623
9https://www.wsj.com/articles/china-ships-reforms-to-sea-1386684631

8period, reports also noted that the shipyard had laid off 8,000 workers, and yet would still need toappeal for more government aid in 2013.10 Eventually, even state subsidies could not prop up theyard, which went bankrupt and the facility was removed from the government’s white list in
2014.
These are examples of direct and indirect government support that distort the international
shipbuilding market and render moot any discussion of U.S. shipyards competing internationally.
Even with direct government support to shipyards in its various forms and huge government
supported shipbuilding credit pools for ship owners, many Asian shipyards are taking contracts
at zero-margin simply to keep the economic engine of the country going. It is therefore anextreme misrepresentation to compare the blatant manipulation of foreign shipyards to themarket stability provided by the Jones Act.
These countries are investing and financing their shipyard industries because they consider it tobe an issue of national sovereignty.

Future Investment in U.S. Shipbuilding
Looking towards the future, we expect there to be the continued investment by the U.S. Navyand U.S. Coast Guard in their recapitalization of critical shipbuilding programs for their fleets.
Additionally, the Maritime Administration is in the process of recapitalizing school ships which
will support our state maritime academies and we are seeing strong investment in marinetransportation around the nation through expansion of ferry and passenger vessel service.
Concurrently, the commercial market will continue to respond to industry demands for domestic
shipbuilding.

We ask for continued Congressional and Administrative support and enforcement of the Jones
Act because it is essential to maintaining the critical U.S. shipyard industrial base that supports
our national security fleets.

10

https://www.reuters.com/article/us-china-shipping/china-to-aid-ailing-shipbuilders-with-more-subsidiesidUSBRE9B80Q320131209

9

Thank you again Chairman Wicker and Ranking Member Cantwell for allowing me to testify
alongside such distinguished witnesses today. I look forward to your questions.

10