The SHIPS Act: The Advent of a New U.S. Merchant Marine Fleet?

Back in December, U.S. Sen. Scott Kelly (D-Arizona), U.S. Sen. Todd Young (R-Indiana), and then-Rep. Mike Waltz (R-Florida) (now the president’s National Security Advisor) co-sponsored a bill to revamp shipbuilding in the United States. Entitled the Shipbuilding and Harbor Infrastructure for Prosperity and Security (“SHIPS”) Act, the bill did not pass in the 118th Congress, but every expectation is that it will be introduced again this year. In that event and should Congress enact it, the SHIPS Act will fundamentally transform shipbuilding in the United States.

At one point during World War II, the United States’ capacity to build ships was truly phenomenal. The Liberty ship SS ROBERT E. PEARY was built in four days, 15 hours and 29 minutes. Three new Liberty ships were launched every day in 1943; over 2,700 were built during the war, in addition to over 9,000 naval vessels. By contrast, in 2022, the United States built five merchant ships, and in 2024 commissioned two U.S. Navy ships. Currently, there are only about 90 U.S. flag vessels participating in international commerce, which is supported by a global fleet of more than 110,000 merchant ships.

The SHIPS Act seeks to alter the trajectory of U.S. shipbuilding by creating a fleet of financially competitive U.S. flagged vessels (250 within 10 years) and investing in U.S. shipyards to address the U.S. Navy’s shipbuilding challenges. The act will create a Maritime Security Advisor within the White House to lead an Interagency Maritime Security Board. Importantly, it will also create a Maritime Security Trust Fund, which will be funded by duties, fees, penalties, taxes, and tariffs collected by U.S. Customs and Border Protection (“CBP”). This funding mechanism is reminiscent of the Oil Spill Liability Trust Fund (“OSLTF”) created by the Oil Pollution Act of 1990, which created a $1 billion fund primarily from a per barrel tax on both domestic and imported oil to respond to any major oil pollution discharge in U.S. navigable waters. The beauty of the OSLTF is that it does not require annual congressional appropriations and is readily available whenever needed. Similarly, the Maritime Security Trust Fund will not rely upon congressional appropriations and will be available to support port infrastructure development, as well as programs to support the U.S. Merchant Marine, including the Merchant Marine Academy, the Maritime Administration’s strategic sealift fleet (to support U.S. naval operations), and the investment tax credits discussed below.

The SHIPS Act is designed to streamline the Coast Guard’s regulatory oversight process to expedite the construction of new ships. It also includes a 40.5% investment tax credit for investments to construct, repower or reconstruct eligible oceangoing vessels in the United States, and a 25% investment tax credit for shipyard improvements. As well, it will convert the Title XI Federal Ship Financing Program into a revolving fund with proceeds generated from loans and loan guarantees reinvested back into the program making Title XI financing less dependent upon annual appropriations.

There are a number of provisions within the SHIPS Act that are problematic. It will require that a portion of goods from China are carried aboard U.S. flag ships by 2029 (1% within five years of enactment, and within 15 years, 10% percent of all cargo imported from China must be carried aboard U.S. flag ships built in the United States and manned by U.S. merchant mariners). Assuming such ships exist by then, which and whose Chinese manufactured goods will be carried aboard these ships? How will that carriage be orchestrated? No centralized freight booking system exists to allocate a fixed share onto U.S. flagged vessels. Who will administer such an unwieldy program?

Further, how will contracting of these U.S. flag vessels work to carry the mandated portion of Chinese goods? For example, will a shipper have to charter a separate U.S. flag vessel in addition to a foreign vessel operating common carrier (“VOCC”) or non-vessel operating common carrier (“NVOCC”) to fulfill its proportionate share of Chinese cargo? What if a U.S. flag vessel is not available during heavy capacity demand of a peak season? Will VOCCs or NVOCCs have to charter such vessels? Whose responsibility will it be to meet the mandated quota of Chinese goods aboard U.S. flag vessels? The bill provides that a final rule will be issued four years after enactment determining the parties subject to these carriage requirements. Given that the vast majority of goods coming from China are carried aboard container ships, will these U.S. flag vessels necessarily be container ships? If so, how does that translate into support for U.S. military sealift operations?

Given that U.S. flag vessels cost between 6-to-8 times more to build and 2-to-3 times more to operate than a comparable foreign-flagged vessel, the cost to transport Chinese goods into the United States will necessarily rise leading to higher consumer prices for Chinese goods. Further, U.S. flag vessels employed in other trade lanes likely will not be competitive with their foreign counterparts for the backhaul of goods to the United States. For example, while U.S. flag vessels may be able to carry U.S. export cargoes to Europe or South America, shippers will not find their freight rates attractive compared with foreign counterparts, and so such vessels will be more likely to sail empty back to the United States leading to higher freight rates in an ever upward spiral. How will U.S. flagged vessels ever become competitive with foreign flagged vessels unless the cost of their construction and operation are comparable? That is a fundamental conundrum that the United States has not been able to solve.