How the trade war could blow the Navy off course​

By Commander Michael Borja, USN

Introduction 

The United States is plotting the course to revitalize its shipbuilding industry. The proposed SHIPS for America Act and an executive order entitled “Restoring America’s Maritime Dominance” seek to improve the United States’ ability to counter China’s increasing maritime power. Motivating this effort is a possible conflict with China, which is shaping the Navy’s near-term readiness goals as well as its long-term modernization plans. Separately, there are strong domestic desires to re-shore manufacturing jobs back to the United States, a goal which is being pursued through broad tariffs that have triggered a global trade war. As the nation executes these strategies, the externalities associated with the trade war will create economic headwinds that may blow the Navy’s modernization plans off course. Therefore, Navy stakeholders must work with key decision-makers on U.S. economic and trade policies to ensure the Navy maintains its heading through changing circumstances. 

The Economic Headwinds 

The United States is applying historic tariffs against allied, rival, and neutral countries alike to achieve economic and national security goals. In one prominent instance, the United States imposed tariffs on aluminum and steel from Canada and Mexico to revitalize U.S. domestic production of those commodities and to counter drug trafficking. Observers assess the tariffs will not only increase costs for U.S. manufacturers writ large, but will also raise costs for Navy and commercial stakeholders that comprise the Maritime Industrial Base (MIB). High input costs—notably steel and labor—have been historical constraints for the MIB.   

Prior to the tariffs, the United States courted foreign investments to improve MIB infrastructure and productivity. But if commodity prices rise significantly, foreign firms may balk at the higher investment costs. A reduction in overall trade due to the trade war could depress demand for U.S.-flagged merchant ships and reduce revenue for a proposed Maritime Trust Fund to finance MIB development. Such a scenario would deprive the Navy of the additional infrastructure it needs to grow and maintain its fleet. 

Higher commodity prices may also hurt defense startups supporting the Navy. U.S. law restricts defense firm profits, and enduring the infamous “valley of death” is a major hurdle for newer firms. Some companies are building the infrastructure to produce autonomous systems for the Navy’s new unmanned surface vessel squadrons. But higher costs will increase friction for these innovative firms, dissuade the creation of new ones, and inhibit the growth and deployment of the Navy’s nascent unmanned capabilities. 

Listless in the Status Quo 

The confluence of the trade war’s effects with rigid acquisition priorities and constrained budgets within the Pentagon may also hurt the Navy’s modernization efforts. The Pentagon is prioritizing vessels the United States already has the ability to build, such as the Arleigh Burke-class destroyer. Known as the “backbone” of the Navy, construction of the Arleigh Burke-class is a major source of jobs for certain areas of the United States. The most recent continuing resolution requires the Navy to build a third Arleigh Burke-class destroyer in the coming fiscal year, despite the fact that the Navy did not request funds for a third ship and shipyards currently lack capacity to even build two vessels per year. 

The Arleigh Burke-class’s performance in the Red Sea against Houthi drone and missile attacks suggest it is proven platform despite its foundational design being almost 40 years old. But Chinese researchers are developing sophisticated missile systems that surpass Houthi technology. One of these missiles uses a hypersonic glide vehicle that can carry and deploy multiple smaller reconnaissance, electronic warfare, and kinetic payloads that will complicate naval tactics.  

New capabilities to counter these sophisticated future threats—such as microwave systems, electronic warfare systems, and lasers—need electrical power generation that future iterations of Arleigh Burke-class may not be able to produce. These trends explain the requirements for the Navy’s DDG(X) program, which is an advanced destroyer that will replace Ticonderoga-class cruisers and older Arleigh Burke-class destroyers. While the DDG(X) will be built in the same shipyards as the Arleigh Burke-class and provide jobs, current shipbuilding plans emphasize existing designs. 

Another issue affecting the Navy’s modernization is lack of consistency amongst MIB stakeholders regarding future unmanned capabilities. The Navy envisions a hybrid fleet of manned and unmanned vessels that use distribution to improve survivability against increasingly lethal adversary kill webs. Executive policy prioritizes unmanned capabilities and directs agencies to reduce cost overruns for both manned and unmanned vessels, but there are mixed perspectives on the legislative side. A proposed bill recommends $4.9 billion for certain unmanned vessels, while the SHIPs for America Act contains no vision for unmanned technologies. Some congressional leaders are skeptical of unmanned vessels and have suggested bolting missile systems onto legacy naval vessels and commercial hulls to address near- and medium-term capability gaps. 

The Risk of Falling Behind China’s Wake 

The combined effect of tariff-induced inflation and policies biased towards legacy designs may ultimately hurt the Navy’s long-term modernization. Critics of this assertion may argue that the Navy’s limited resources should be focused on a potential 2027 Taiwan conflict, and that a revitalized commercial MIB will eventually help the Navy. Such an approach poses risks for the Navy that will be difficult to hedge against.  

Both legislative and executive efforts may reinvigorate the MIB, but such endeavors are predicated on successful trade negotiations with multiple nations. Current policy prioritizes negotiations with allies and partners, but tariffs on countries whose economies depend on both China and the United States have been applied in a manner that might not result in near-term agreements. If successful, such agreements could take at least a few years to implement. For instance, although two major U.S. and South Korean shipbuilding firms agreed to explore collaboration on ship construction, South Korea’s trade minister expressed hesitance on further shipbuilding collaboration because of U.S. tariffs on Korean exports. Korean domestic opposition to a near-term deal might also prevent a politically sustainable trade agreement. 

If trade negotiations succeed and foreign investments into the MIB increase, it will take years for the Navy to benefit from these efforts. And any unmitigated supply chain disruptions and increased costs associated with trade re-balancing may ebb at the limited fiscal resources the Navy needs for near-term readiness, especially if continuing resolutions remain the de rigueur approach to the Pentagon’s budget on Capitol Hill. This runs against the Navy’s Navigation Plan, which prioritizes the fleet’s “readiness, capacity, and capability” in the absence of additional resources. If trade agreements and MIB investments fail to materialize in a timely manner, the Navy will sacrifice near-term readiness and long-term modernization altogether. 

Meanwhile, the China’s People Liberation Army Navy (PLAN) continues to further its blue water capabilities and is projected to grow to 475 battle force ships by 2035. If the global trade war results in a more multi-polar and chaotic world order—as some strategic forecasts predict—it may incentivize Beijing to conclude that the PLAN needs to be more globally postured to protect its interests.  

How to Remain on Course 

As a solution, Navy and shipbuilding stakeholders should have a strong voice in future tariffs and trade negotiations to mitigate economic risks to shipbuilding goals. Such integration allows the Navy and industry the ability to streamline strategic assumptions that inform long-term capital decisions. The United States should quickly negotiate viable trade deals with South Korea, Japan, and other nations to incentivize further investments in U.S. shipbuilding efforts. Failing to do so could allow China to convince Seoul and Tokyo to align with Beijing against U.S. tariffs, which would imperil U.S. shipbuilding efforts along with other national security interests.  

To control costs, national leaders should reconsider current tariffs—as they did in 2019—on Canadian steel and aluminum, especially since Canadian firms are legally defined as part of the U.S. defense industrial base. In 2023, a significant proportion of the steel and aluminum used by the Navy came from Canadian suppliers. Given steel’s importance in shipbuilding, unless domestic firms improve productivity and are willing to let steel prices fall—which they are currently not incentivized to do—reducing tariffs on imported steel and other commodities will be needed to alleviate cost pressures associated with trade re-balancing. 

Lastly, future legislation should consider scaling commercial unmanned technologies for military purposes. Much like the Navy’s manning issues, a shortage of mariners may limit the growth and operation of U.S.-flagged merchant vessels. Despite some current success in Navy recruiting, it remains to be seen if this success can be sustained. Military and commercial sector interests in autonomous maritime capabilities should be catalyzed by policy and foreign collaboration.  

Conclusion 

The trade war will create rocky shoals that the Navy must avoid. The Navy already needs to manage finite resources to maintain near-term readiness for a potential great power conflict while also effectively modernizing for an increasingly lethal future threat environment and a more globally postured PLAN. Although national efforts intend to create an economic foundation to produce the future Navy, the economic headwinds that will be encountered on that journey are fierce. Policymakers have charted a plausible path for revitalizing the nation’s maritime power, but leaders also need to pilot the Navy through the trade war’s inherent hazards. 

Commander Michael Borja is a Navy Federal Executive Fellow at the Center for a New American Security in Washington, DC and an Intelligence Officer in the Navy’s Information Warfare Community. Prior to CNAS, Commander Borja was assigned to Naval Intelligence Activity at the Pentagon, where he led intelligence support for Navy force structure assessments and force design efforts. 

The opinions expressed are those of the author and do not reflect the views or policy of the U.S. Defense Department, the Department of the Navy nor the U.S. government. No federal endorsement is implied or intended. 

The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.