The Middle Kingdom Returns to the Sea, While America Turns Its Back—How China Came to Dominate Global Maritime Industry & Implications for the World

Christopher J. McMahon, “The Middle Kingdom Returns to the Sea, While America Turns Its Back—How China Came to Dominate the Global Maritime Industry, and the Implications for the World,”?Naval War College Review?74.2 (Spring 2021): 81–114.

Christopher J. McMahon is a commissioned rear admiral in the U.S. Maritime Service and holds the Maritime Administration Emory S. Land Chair of Merchant Marine Affairs at the Naval War College.

ASSOCIATE PROFESSOR CHRISTOPHER J. MCMAHON (Rear Admiral, USMS) joined the Naval War College faculty in July 2014 as the Emory S. Land Chair for Merchant Marine Affairs – detailed from the U.S. Maritime Administration, U.S. Department of Transportation. He is a member of the Federal Senior Executive Service (SES).

Professor McMahon is a 1977 graduate of the United States Merchant Marine Academy at Kings Point, New York, where he graduated with a B.S. in Marine Transportation, a commission as Ensign, U.S. Naval Reserve and a Merchant Marine third mate (officer) license. He sailed for more than a decade aboard U.S. flag merchant vessels engaged in worldwide trade. He is a U.S. Coast Guard licensed unlimited Master of Steam and Motor Vessels with a Master of Sail endorsement.

Beginning in 1984, in between periods at sea and as a commissioned U.S. Maritime Service officer, Professor McMahon served as an associate professor of Marine Transportation and Nautical Science at the U.S. Merchant Marine Academy and later as Director of Waterfront Activities and Sailing Master. He was founding Director of the Global Maritime and Transportation School (GMATS).

Following the September 11th?attacks on America in 2001, the Secretary of Transportation appointed Professor McMahon as his Special Assistant responsible for coordinating surface transportation security. He was promoted by the Secretary to Rear Admiral (Lower Half), U.S. Maritime Service in 2004 and to Rear Admiral (Upper Half) in 2005. During this period, he was assigned to Iraq as the Transportation Counselor to the Ambassador and Multi-National Forces Iraq and as Director of the Iraqi Reconstruction Management Office of Transportation. In that capacity, he was responsible for rebuilding Iraq’s airports, seaports, railroads, and other transportation infrastructure. He later served as Acting Director of the Department of Transportation’s Office of Intelligence, Security, and Emergency Response. From 2006 to 2008, he served as Deputy Superintendent of the U.S. Merchant Marine Academy. He has held other SES positions with the Department of Transportation as well.

Professor McMahon has graduate degrees from the American University, Long Island University, and Starr King Seminary at the Graduate Theological Union, Berkeley, California. He is an ordained and practicing Unitarian Universalist minister.

Abstract

China soon virtually will control the global seagoing supply chain, with staggering consequences for the United States, its allies, and the world. As a nation dependent on maritime transportation for its economy and the movement of its military forces, the United States must take immediate, decisive steps to promote the reestablishment of a healthy and competitive U.S. maritime industry.

SELECTED CHINA-FOCUSED EXCERPTS:

Since the founding of the United States during the Revolutionary War, nearly every president has recognized and called for congressional support of a strong U.S. maritime industry.1 As the United States supposedly is a maritime nation with a massive international trading economy, it seems obvious that control of, or at least strong influence over, America’s seagoing supply chains is important.2 Through the first half of the nineteenth century, the U.S. Merchant Marine was one of the largest and most efficient of its kind in the world—partly because of public and political support.3 In those decades U.S.-flag clipper ships dominated many trades, including—ironically—the China trade. But the second half of that century saw the industry go into steep decline—in some measure because political support had evaporated. For economic and strategic reasons during the first half of the twentieth century—specifically, immediately prior to World Wars I and II—Congress intervened, taking critical steps to support the industry. But today that past support of the industry has disappeared once again, and the U.S. maritime industry engaged in international trade is in a perilous state of affairs. This has occurred as the People’s Republic of China (PRC) has become, by far, the leading commercial maritime power in the world.

The lack of a vibrant U.S. maritime industry engaged in worldwide trade places the strategic and economic interests of the United States and its allies in grave jeopardy. This is particularly so given that the PRC now dominates most sectors of the world’s maritime industry, and consolidation in all sectors is occurring at a rapid rate that benefits the PRC. The influence and the effectiveness of the PRC’s political and governmental intervention and funding in all sectors of China’s maritime industry are causing numerous other companies in the global industry simply to cease operations or suffer absorption by Chinese companies. There is a strong prospect that within little more than a decade, or even sooner, China virtually will control the world’s seagoing supply chain. The consequences of this happening for the United States and the world as a whole are staggering. As a nation dependent on maritime transportation for its economy and for the movement of its military forces, the United States must take decisive and immediate steps to promote the reestablishment of U.S.-flag shipping and further enable all sectors of the U.S. maritime industry to compete in a significant way in the global industry.

ONCE UPON A TIME?

It was the winter of 1979–80. A buzz was going around the offices of the New Orleans–based Lykes Brothers Steamship Company (also known as Lykes Lines) and through its fleet of forty-five vessels. Word had it that SS?Letitia Lykes?was loading full and down on the West Coast of the United States with eighteen thousand tons of cargo bound for Shanghai, China.?Letitia?would be the first U.S.-flag ship to call on a mainland Chinese port since World War II. This event was the result of the ongoing rapprochement between the PRC and the United States that followed President Richard M. Nixon’s historic visit to China in 1972 and follow-on efforts by Presidents Gerald R. Ford and Jimmy Carter. The opening of this new market indeed was cause for celebration.4

At the time, Lykes was one of dozens of U.S.-flag ocean-shipping companies. With its forty-five vessels, Lykes was one of the larger U.S. companies, but not the largest; that honor fell to SeaLand Services Corporation, which in 1979 was by far the largest container-shipping company in the world. But in 1980, even with more than 860 merchant ships, the U.S.-flag industry operated only about 3.8 percent of the world’s merchant vessels, which then totaled about 22,872 ships.5 That percentage was down from a 1946 high, when the United States operated some 70 percent of the world’s commercial shipping.6 By 1960, this number had fallen to 16.9 percent of the world’s fleet. Even so, in 1980 U.S.-flag shipping still was significant. Plus, the U.S. maritime industry had made massive technological innovations that revolutionized the industry, such as the introduction of container shipping and lighter-aboard-ship (or LASH) vessels.

SS?Letitia Lykes,?like all Lykes ships, had been built in a U.S. shipyard, supported by the Maritime Administration (MARAD) through the Construction Differential Subsidy (CDS) program. U.S.-flag shipping companies were owned and operated by American citizens without any foreign corporate interests in- volved. Profits stayed in the United States. U.S. shipping companies, particularly SeaLand Services, owned or leased and operated dozens of container terminals in U.S. ports and in ports throughout the world. While the United States at the time was in the process of implementing a treaty to turn over operation of the Panama Canal to Panama, the United States still exercised significant influence in the canal’s affairs.7

Although in these years the United States did not possess the largest merchant marine in the world, the size and influence of its industry still were considerable in global maritime affairs, and with its large navy the United States rightfully could be called a maritime nation, according to the criteria of naval historian Captain Alfred Thayer Mahan, USN, as laid out in his influential book?The Influence of Sea Power upon History, 1660?1783. Mahan believed that history demonstrated that a truly maritime nation required a sizable merchant marine in addition to a powerful navy.8 … …

THE GLOBAL MARITIME WORLD CHANGES—THE U.S. MARITIME INDUSTRY TODAY

When SS?Letitia Lykes?departed Shanghai on the transit back to the United States from its historic voyage in the spring of 1980, its cargo holds were nearly empty. In those years, the Chinese had little to sell to a U.S. market. With only twenty-six PRC-flag vessels in international trade, the Chinese shipping industry was equally insignificant.18 While Chinese shipyards built some small coastal trading vessels and fishing boats, they produced no large vessels. There were few or no Chinese companies operating in other countries, and certainly no Chinese companies operating ports and terminals outside China.

What a difference forty years makes! The U.S. maritime industry has retreated on all fronts, whereas the Chinese industry has exploded in size to become, by far, the largest in the world, in nearly every category. This has been the result of public, corporate, and political apathy in the United States and quite the opposite in China; in the latter, government and industry have partnered for decades to implement strategic plans to grow all sectors of the industry. In the United States, it also is the result of a public and political lack of understanding of the role the maritime industry plays in the strategic and economic health of the nation. The U.S. maritime industry engaged in worldwide trade had been in decline since World War II; however, those American companies still operating ships in international trade into the 1980s entered a?steep?decline at that time, eventually going bankrupt and ceasing operations. … …

THE MIDDLE KINGDOM—HISTORICALLY A MARITIME POWER?

Understandably, given its huge terrestrial presence in Eurasia, for much of its history China primarily has been viewed as a continental nation. However, China also has had a strong maritime connection and has a rich maritime past. Geography encourages China to look toward the sea, particularly in the south, where mountains block easy access to the interior and there are thousands of populated islands off the coast. For centuries, southern seaboard provinces and islands have had large populations, but a dearth of available land has made it difficult to support those populations locally, making the sea critical for transportation, trade, fishing, and communication with other Chinese regions.34

Today, China’s land border is 13,743 miles long, and the country abuts fourteen other nations. Through its thousands of years of history, China has pursued countless wars of both aggression and defense against its many neighbors. Most, but by no means all, of these wars have been fought primarily with land forces. But China also has more than nine thousand miles of saltwater coastline, thousands of offshore islands, and several major rivers that connect to the sea, and the majority of the nation’s population always has resided in coastal regions. Therefore China, to varying degrees, always has kept an eye on its maritime interests. Chinese naval warfare began as early as the tenth century BCE and was common during the Warring States period (475?221 BCE). One story holds that in 471 BCE the great Chinese philosopher Confucius sought a leadership position with the Kingdom of Yue but was turned down because he lacked knowledge of naval operations.35

Throughout most of its very long history, China has been a major manufacturing power, oftentimes the world leader. For thousands of years countries across the Eurasian landmass have sought Chinese goods. The long, overland passage called the Silk Road emerged as the major east–west trading route in the fourth century BCE.36 Over the centuries that followed, the Silk Road continued to be a major trading route between China and the Middle East, and even to Europe; Chinese goods found their way to the Roman Empire. Eventually, the Silk Road expanded to include seagoing routes across the Indian Ocean to Middle East- ern and African ports. In his book?China as a Sea Power 1127?1368,?author Lo Jung-pang notes that “China tried to become a seapower (in centuries past); in particular, during the Qin and Han dynasties and later during the Sui and Tang dynasties.” He further notes that during the three centuries from the Southern Song to the early Ming period (twelfth century CE to fourteenth century CE), the maritime and overseas activities of the Chinese were so great that China was more of a sea power than a land power. It was by using its naval and maritime power, across many centuries, that China went abroad to trade, and even to colonize other Asian lands.37

Chinese maritime power in centuries past reached its height during the first Ming period (1405?33), and especially during the reign of the third Ming emperor, Yongle (1402?24). He dispatched the renowned military commander Zheng He (1371?1433), known as the “Ming admiral.” From 1405 to 1433, Zheng completed seven extraordinary voyages, during which he sailed with as many as 250 ships and upward of thirty thousand men to destinations in southern Asia, the Middle East, and East Africa.38

The main purposes of these military-oriented voyages were to expand Chinese influence throughout the Indian Ocean area and the Middle East, seek tribute for the Chinese court from local rulers, expand Chinese cultural influence, and improve trade. According to Naval War College professor Andrew Wilson, a key difference between European and Chinese efforts to seek trade during the early European age of exploration is that the Ming voyages did not seek trade so much as “the gravitational pull of the Chinese market (from these voyages) brought trade to [China]”—a phenomenon seemingly similar to the dynamic favoring China in the twenty-first century.39

During the Ming period, China’s navy and merchant marine clearly were the largest and most powerful in the world, and their sphere of influence expanded wherever Zheng’s fleet landed. At the time, Chinese maritime technology far surpassed that of the Europeans. For example, the Chinese invented the compass and the rudder, which were huge innovations that enabled mariners to navigate and control vessels better on long voyages. Zheng’s fleet included ships over four hundred feet in length. (By comparison, Columbus’s?Santa María?

was somewhere between sixty-two and eighty-five feet in length.) It is reasonable to assume that, had the Chinese wished to pursue ocean exploration and trade into the Atlantic and the Mediterranean and to Europe and even the Americas in the decades after Zheng’s voyages, they likely would have become the dominant maritime power on earth, eclipsing European efforts.40

For a complicated set of reasons, however, the Chinese abandoned their efforts to pursue great voyages beyond local Chinese waters after the death of Emperor Yongle. Following Admiral Zheng’s seventh and final voyage, the new Ming emperor had the fleet destroyed, after which harsh punishments were decreed and imposed on those who even attempted to trade beyond Chinese waters.41 One law imposed the death penalty for building a ship with more than two masts, and a later law did the same for a ship with more than one mast.42 In essence, except for coastal trade and fishing, the Chinese, under the second Ming dynasty, largely abandoned the ocean.

This happened at the time when European countries were on the cusp of the age of exploration that was made possible by the development of new maritime technologies—many of which were based on lessons learned from Chinese nautical technological innovations such as the compass and the rudder. As the Europeans came to dominate global trade in the seventeenth through nineteenth centuries, the Chinese would pay dearly for their lack of maritime power. Their navy was largely ineffective and they no longer possessed a capable merchant marine by which to trade with other nations. For centuries this enabled the Europeans increasingly to impose countless demands on the Chinese and control Chinese seagoing trade, eventually resulting in “the century of [humiliation]” (extending from the mid-nineteenth century to the mid-twentieth century).43 This fact has not been lost on the leadership of the PRC in recent times, and it helps to explain why the Chinese have taken such great steps to become not only?a?global maritime power but?the?dominant maritime power in the world today.

European control of China’s seagoing trade continued into the twentieth century, following the collapse of the Qing dynasty in the early 1900s.44 The world wars, Japanese occupation in the 1930s and ’40s, and the civil war between the Nationalists and Communists decimated the Chinese economy. Following World War II, virtually all Chinese seagoing trade, both foreign and domestic, was carried in foreign-owned and -flagged ships. In 1950, the PRC merchant marine officially consisted of only seventy-seven ships, and the majority of these were

either unseaworthy or lying at the bottom of rivers and ports. Through the 1950s, China enjoyed a rather close relationship with the Soviet Union, and the Soviets encouraged Polish ships to carry Chinese seagoing trade; in fact, for many years the Polish merchant marine was China’s primary provider of ocean transportation. During these years, there actually were no Chinese-flag ships engaged in international trade. As far as PRC ports and shipyards went, the picture was equally dismal in the 1950s. There were no shipyards capable of building oceangoing ships, and ports were hugely inefficient and few in number.45 The Chinese did not own, lease, or operate any port terminals outside the mainland.

Despite the poor condition of the Chinese maritime industry in the early years of the PRC, the Communist Party’s leadership fully grasped the importance of the industry and placed great emphasis on building a capable maritime industry in all sectors: ships, ports, shipyards, and mariners. It was clear to Mao Zedong’s government that China needed a domestic maritime industry, particularly in coastal and river trades to compensate for the poor quality of roads and rail- roads.46 With Soviet maritime expertise and the use of Soviet-built equipment, particularly engines, China began building domestic ships in the early 1960s. The initial building rate reached ten ships a year in 1960, but this fell to two following the deterioration of Sino-Soviet relations. The shipbuilding picture remained poor for many years because of the lack of Chinese technology and engineering capability and the inability to develop and build critical elements such as ship engines. In terms of ship ownership, in 1961 the state-owned China Ocean Ship- ping Company (COSCO) was formed under the Ministry of Communications. COSCO owned and controlled vessels under both Chinese and foreign flags. (In the 1960s the PRC began relying on foreign flags to operate many Chinese-owned ships. At the time, this included use of the British and Somali flags.)47 The first voyage of a PRC-flag ship outside Asian waters was by SS?Heping,?which carried cargoes from China to the Republic of Guinea in West Africa in 1962. The Chinese merchant marine continued to grow through the 1960s, reaching more than three hundred ships by the early 1970s. Shipbuilding during this period remained a very limited industry, particularly since China did not have the expertise to develop and build nautical equipment and engines.48

Through the 1970s and into the 1980s, the PRC continued to emphasize the development of its maritime industries, including shipping, shipyards, and ports. The number of PRC ships engaged in international trade doubled during this period. More ships were added to the Chinese flag-of-convenience fleets, particularly using the Somali and eventually the Panamanian flags. During these years, PRC ships began “cross trading,” which involved carrying cargoes to and from ports other than China, and charging freight revenues in U.S. dollars, making the practice a good source of hard currency. In 1978, the number of PRC ships?in international trade surpassed that of the United States, and by 1982 China’s merchant fleet ranked seventh in the world in size.49

Of particular note during these years was the development of China’s port and shipbuilding industries. Major efforts were undertaken to modernize Chinese shipyards, and with technical assistance from European, Japanese, and Singaporean shipbuilders the Chinese began building ships for domestic and export markets. Costs per ship were so low and demand was so high that Chinese yards had to suspend order books until shipbuilding capacity could be increased. During this period, ports also radically improved in capacity and capability. From 1959 to 1979, there was a 3,750 percent increase in cargo throughput in Chinese ports, but dock capacity had increased by only 30 percent. Given this serious situation, major efforts were undertaken to develop and build port infrastructure, including the introduction of container-handling equipment.50 Through the next three decades, Chinese leaders continued to increase the capability and capacity of their maritime industries dramatically, in ship ownership, shipbuilding, port development, and a multitude of related industries. Today, China’s maritime industry, in all sectors, is the largest in the world by far, and it still is growing rapidly.

THE CHINESE MARITIME INDUSTRY TODAY

The PRC government’s decades-long support of the Chinese maritime industry has included substantial, even aggressive, financial subsidies, laws, and policies designed to enable all sectors of the industry to grow at phenomenal rates. Currently, with more than 5,500 merchant ships engaged in international trade, Chinese companies (including Hong Kong?based companies) own more ships than those of any other nation on earth.51 Chinese container-shipping companies combined carry more containers than the world’s number one carrier, Maersk Line. This represents nearly 20 percent of all the containers carried by the top twenty carriers.52

Chinese companies own or operate more ports and terminals around the world than those of any other country.53 These Chinese companies include Hutchison Ports, COSCO Ports, China Merchants Ports, Shanghai International Port Group, and Qingdao Port International.54 In fact, by 2015 “two-thirds of the world’s top fifty container ports had some degree of Chinese investment in them, if not majority ownership and control, and this number is growing.” These ports handle 67 percent of the world’s shipping containers.55 Chinese port companies in all ports around the world handle 39 percent of the total volume of containers—nearly double the share of the next largest port operator, which is headquartered in Singapore.56 Of the top twenty ports in the world by cargo throughput (2016?17), fourteen are located in China.57 Almost “under the radar,” Chinese port companies acquired 49 percent ownership in France’s CMA CGM port operations, which has given Chinese companies operational control of Houston’s Terminal Link port and South Florida Container Terminal in Miami.58 COSCO has long-term lease/operations stakes in the ports of Los Angeles and Seattle as well.59

By 2017, China was the number one shipbuilder in the world, as measured by the number of ships completed, new orders, and pending orders. Over 40 percent of the world’s commercial ships now are built in China, and this percentage is growing as shipyards in other countries no longer can compete and are shuttered.60 (Notably—and troubling from a USN perspective—during a mere eight-year period, from 2009 to 2017, the Chinese developed and built eighty-three warships for the Chinese navy, which now is the second-largest navy in the world, and within a few decades or less is expected to be the largest.)61 With 150 modern cutters and hundreds of other vessels, the China Coast Guard is the largest such service in the world.62 Numbered at more than two hundred thousand vessels, China’s fishing fleet also is the largest in the world.63

One of the secrets of Chinese successes in the incredible growth of the nation’s maritime sector is the Chinese emphasis on maritime education—in nautical science, marine engineering, and maritime business. More than 115,000 students attend the several Chinese maritime universities and colleges.64 Finally, China is a global leader in ship finance, providing funds for international shipping companies seeking to buy, build, or lease ships, particularly those from Chinese shipyards. In 2008, no Chinese bank was listed in the top ten of the world’s shipbuilding-loan institutions; a decade later, the top two banks were Chinese—both state-owned institutions.65 By 2025, it is projected that Chinese banks will provide 50 percent of all shipbuilding loans.66 This means that, although China may not own or operate large numbers of the world’s commercial ships, it will have influence, if not control, over a majority of the world’s merchant fleet, because it will hold the mortgages on a major percentage of ships owned by companies in other countries.

China has made no attempt to hide its aspirations to influence, if not dominate, the world’s maritime industry. In 2015, the Shanghai International Shipping Institute, a state-owned research institute, released a report, “China Shipping Development Outlook 2030.” The report offers several conclusions. First, “China will remain the largest cargo trader in the world and will take a dominant role in global container shipping.” Second, China will double its shipping engaged in worldwide trade and control at least 15 percent of that trade. To do this, China will become the number one shipowner in the world. (It already is.) Ship operators will evolve to become “global logistics providers” (much like other large containership operators, such as Maersk). The report notes that privately owned Chinese shipping companies will account for “over 70% of China owned ships.” (However, this runs contrary to the current trend in China of state ownership,

which does not allow private-sector companies into the industry.) The report suggests that Chinese foreign-flag fleets will comprise upward of 90 percent of Chinese-owned ships. With regard to ports, the report notes that “throughput at Chinese ports will reach 505 million TEUs [twenty-foot-equivalent containers] by 2030.” Without providing specific metrics, the report indicates that “Chinese enterprises will build port networks around the globe, especially investing in port networks in South America, Africa, Southeast Asia, the Middle East, and other developing countries with strategic cooperation with China.” Finally, the report emphasizes China’s role as a global leader in ship financing and marine insurance.67

HOW CHINA IS REALIZING ITS MARITIME AMBITIONS: CHINESE MARITIME STATE-OWNED ENTERPRISES

China’s Qing dynasty ruled the country from 1636 to 1912, a period of gradual but persistent incursion by Europeans, and eventually by the Japanese, into Chinese trade and influence. The Opium Wars with the British in the mid-nineteenth century saw Chinese military forces destroyed by the British, who then forced the Chinese to allow the British Empire to import opium into China in exchange for Chinese goods. Thus began “the century of [humiliation],” during which Britain, France, Germany, Russia, and Japan essentially carved China up into spheres of influence.68

Following the civil war in China that ended in 1949 with the defeat of Nationalist forces by Communist forces on the mainland and the establishment of the PRC, China’s economy was in complete shambles. For the next several decades, under the absolute rule of Chairman Mao, China essentially pursued a policy of isolationism and self-reliance under which the Chinese people were expected to produce agricultural and manufactured goods without the influence or assistance of outside nations.69 Mao’s policies further destroyed the Chinese economy and caused the death of untold millions of people by starvation.

Following Mao’s death in 1976, Deng Xiaoping came to power and relentlessly pursued a policy of opening up China to the rest of the world by boldly seeking foreign investment and trade. Knowing that he could not abandon the fa?ade of communist/socialist ideology, but likely knowing the failures of pure communism and socialism, Deng adhered to a strict policy of pursuing what he called “socialism with Chinese characteristics.”70 The Chinese Communist Party continues to use the phrase today. It is purposefully imprecise, but in broad terms it refers to an economy that the state essentially controls while allowing varying degrees of private investment and ownership.

Under Mao’s leadership, state-owned enterprises (SOEs) were established in all sectors of the economy. These SOEs essentially operate as companies owned by the state. SOEs, in China, typically are managed at a provincial or even municipal level. Others are managed at the central government level by the State- Owned Assets Supervision and Administration Commission (SASAC).71 The problem—as is typical of many government organizations worldwide—is that SOEs, lacking financial incentives, are inherently inefficient and often become bloated with choking bureaucracies and unproductive workers.

Deng knew this, and therefore introduced market-based reforms, including the potential for private investment and ownership. Notably, Deng focused on commercial shipbuilding as a critical industry, and under his leadership in 1982 the China State Shipbuilding Corporation (CSSC) SOE was established. In 1999, a second SOE was formed out of CSSC: the China Shipbuilding Industry Corporation (CSIC). These two SOEs dominated shipbuilding in China.72 In 2019, they were reunited into one larger SOE.73

Over the decades since Deng, the role of SOEs has continued, with them exercising control over certain sectors of the Chinese economy but with private in- vestment in SOEs being introduced to varying degrees and with varying success. (Of Chinese SOEs, 66 percent are listed on the Chinese stock exchange.) Today, privately owned companies actually employ more workers than SOEs, and these privately owned companies account for the majority of China’s gross domestic product (GDP).74 However, in certain sectors SOEs maintain absolute control. One such sector is the maritime industry, which China views as a strategic industry vital to the interests of the nation.75 Despite statements in 2015 from Jin Jiachen, a director at the Shanghai International Shipping Institute, that Chinese ocean-shipping companies would privatize to a large degree, there is little evidence this has happened or will do so.76 Furthermore, under Chinese president Xi Jinping there is new emphasis on and support of SOEs and less interest in privatizing many industries, including Chinese maritime industries.77

COSCO is an SOE. The company operates a fleet of well over fifteen hundred vessels calling on over a thousand ports worldwide. The COSCO fleet includes most types of merchant ships, such as tankers, bulk ships, roll-on/roll-off (RO/ RO) vessels, and containerships. In 2015, COSCO merged with the SOE China Shipping Group, retaining the name of China COSCO Shipping Corporation.78 COSCO expanded further in 2017 with the government-funded $6.7 billion acquisition of Orient Overseas Container Line (OOCL), a public company formerly based in Hong Kong. COSCO now is the third-largest containership operator in the world.79 Even before its acquisition of OOCL in 2017, COSCO for a time had taken the lead as the number one container-shipping company in the world. With its acquisition of OOCL and its continued aggressive expansion policies, it is quite possible that COSCO will take the number one spot in container shipping permanently.80

For years, the global trend in the container-shipping business has been in- creasing consolidation, leaving fewer and fewer container-shipping companies. China has taken full advantage of this trend, using the power of COSCO. A United Nations think tank associated with UNCTAD contends that there are now too few container-shipping companies left to ensure adequate competition.81 By mid-2018, the top ten container-shipping companies carried 75 percent of the world’s shipping containers, with COSCO as the number three carrier, carrying over 12 percent of the world’s containers. The UNCTAD report notes that the top container companies have formed three alliances that effectively are cartels. On the positive side, these alliances potentially reduce costs and rationalize service, which can lower freight rates; on the other hand, according to UNCTAD, they instead can create a serious risk of establishing corporate oligopolies that will reduce competition and constrain service.82 The Ocean Alliance consists of COSCO and CMA CGM (of France); the 2M Alliance links Maersk (of Denmark) and Mediterranean Shipping Company (MSC, of Switzerland); THE Alliance combines Hapag-Lloyd (of Germany), Yang Ming (of Taiwan), and ONE (of Japan). An effort by Maersk, MSC, and CMA CGM in 2014 to form an alliance to be known as the P3 Alliance was blocked by the Chinese government—a clear example of governmental intervention designed to support COSCO. Notably, in 2015 the Export-Import Bank of China (CEXIM) agreed to provide a billion dollars in loans or credit to the French CMA CGM to build new ships—in Chinese shipyards. Since that time, Chinese ties between COSCO and CMA CGM have continued to deepen.83

As noted earlier, in the port sector China is the global leader in owning, leasing, and operating ports and terminals around the world. Most Chinese companies in the port and terminal business are SOEs; these include COSCO, Shanghai International Port Group, China Overseas Port Holdings, and China Shipping Group. China Merchants Holdings and Hutchison Port Holdings are additional Chinese companies engaged in global port ownership and operation that ostensibly are private companies but have Chinese government investment and oversight.84 In 2013, China Merchants purchased a 49 percent share of France’s CMA CGM’s Terminal Link, which operates in many countries, including the United States. Of particular note, reports in September 2019 indicated that China Merchants Holdings was in discussion with CMA CGM to invest further in that company’s port assets. These actions give rise to speculation, if not concern, regarding how much more of CMA CGM’s shipping and port operations the Chinese will purchase.85

China’s shipyard sector grew from the 1980s through the first decade of the twenty-first century, with some 1,647 shipyards built in China. By 2010, China had become the number one shipbuilder in the world.86 As noted earlier, the largest Chinese SOEs in the shipbuilding business were CSSC and CSIC; they merged in 2019. Following the financial downturn in 2008, many Chinese private-sector shipyards went bankrupt, while the shipbuilding SOEs received massive government loans and subsidies. By 2014, three-quarters of all new orders went to Chinese SOE shipyards.87

Despite possible, if not probable, inefficiencies within maritime SOEs, they enjoy numerous advantages over private-sector companies. They have easy access to huge loans and subsidies from the central government. In 2017, for example, the Chinese government announced it would invest $26 billion in COSCO over the five-year period ending in 2022. Given that COSCO already is number three in container shipping, an investment of $26 billion easily could propel the company into the number one spot, possibly leaving in its wake the bankruptcy of other major container-shipping lines, which already are becoming fewer in number each year owing to ongoing consolidation.88 In addition to the possible infusion of substantial state funds to help SOEs compete with private-sector Chinese and international companies, SOEs also enjoy blanket protection in times of fiscal downturns and uncertainty, as well as huge preferences in terms of government policies and regulatory treatment.

China can use its substantial market power in shipping to achieve dominance over its competitors. A classic example of this involves the Brazilian corporation Vale SA. Vale is a large iron-ore mining company based in Brazil. As a major consumer of iron ore, China has been a crucial customer of Vale for many years. No doubt to save transportation costs and better manage logistics to China, late in the first decade of the twenty-first century Vale’s leadership made the decision to build ultralarge iron-ore bulk carriers instead of chartering vessels to carry the company’s iron ore to China.89 Vale chose Chinese shipyards to build these vessels. However, when the vessels were completed and began carrying iron ore to China, Chinese officials would not let the Vale bulk ships enter Chinese ports, citing their immense size as a “safety issue.” Vale was forced to sell the vessels to COSCO, which in turn leased them back to Vale on long-term charter.90 Presumably this somehow must have made the ships safer, because they then were allowed to enter Chinese ports. This is a clear example of protectionism; COSCO’s leverage as an SOE prevented Vale from entering the trade except on terms that COSCO accepted.

Chinese government banking entities clearly support the Chinese maritime industry in all sectors, including shipping, ports, and shipbuilding. Huge sums of capital have been made available to the industry for projects that promote Chinese geostrategic goals, not merely normal business investment. The $26 billion that Chinese banks provided to COSCO, mentioned earlier, is a good example of this. In 2017, the chairman of SASAC noted “the importance of SOEs as a mechanism for the government to direct the economy and achieve political objectives.”91 … … …

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