The right of innocent passage, first drafted by Dutch jurist Hugo Grotius in his 1609 Mare Liberum, has been the guiding spirit for the world of commercial shipping thereafter. However, this venerable principle was seriously threatened in 2023, just as the industry was anticipating a post–COVID-19 trade recovery. Every facet of global shipping came under great stress in 2023—from natural causes as well as rising geopolitical volatility and regional instability.
The International Maritime Organization (IMO) Secretary General’s appeal to protect commercial shipping from becoming “a collateral victim of geopolitical conflicts” and for member nations to work together to promote “unhindered and safe global navigation” seems to have had limited effect. Even the U.S.-led Operation Prosperity Guardian—formed in December 2023 to protect freedom of navigation in and round the Red Sea—has not restored industry-wide confidence in being able to navigate safely and evade drone and missile attacks by the Iran-sponsored Houthi militants based in Yemen.
The Global Shipping Market
Recent projections from the International Monetary Fund/Organization for Economic Cooperation and Development have world gross domestic product (GDP) growth declining from 3.5 percent in 2022 to 2.7 percent by 2024, with a modest uptick in 2025. U.S. GDP growth is forecast to drop to 1.5 percent in 2024 and recover in 2025. High interest rates, weakening industrial output, commodity price volatility, and rising antiglobalization policies and jingoistic rhetoric are hurting international trade and the demand for shipping services. Rising regional tensions and threats to choke point transits are further affecting the free flow of commerce.
COVID-19 supply chain pressures in the liner sector eased in 2023, and container freight rates fell from their all-time highs to near normalcy. Nonetheless, shipping companies were under severe financial pressure for most of 2023, mainly from a record increase in new shipping capacity. Perhaps counterintuitive, the Houthi attacks on shipping and the resulting circuitous deviation around Africa soaked up some of that excess capacity, and shipping companies got a temporary financial reprieve. Rising shipping charges also provided some relief, although not for customers using the shipping services. Though damaging for product companies, the deviations provided the shipping companies with some relief. The market for tankers and dry bulk ships remained fair in 2023, with tankers poised well for 2024. Operators will incur additional costs to comply with new decarbonization initiatives and new 2024 Emissions Trading System (ETS) payments if serving European Union ports. These requirements may incentivize slowing down the ships, which could then lead to longer inventory cycles.
Liner Market
The liner market is under severe stress from two opposing developments. First, in 2022, operators earned well over $200 billion in net income through COVID-19 era high freight rates. With rates dropping substantially in 2023 and a simultaneous dramatic increase in the supply of new-built container ships for the next two years, 2023 earnings were projected to plunge by 80 to 90 percent and inactive container capacity to rise by more than 1 million 20-foot equivalent units. Market leaders announced extensive cost-cutting measures, including laying off thousands of employees and pleading with competitors to avoid a destructive price war.
Second, Houthi militant attacks in the Red Sea have disrupted trade. Although Operation Prosperity Guardian has been in place since late December, attacks have increased, and major shipping companies such as Maersk Lines have switched to a circuitous route around southern Africa for the foreseeable future. The Red Sea exodus will alter all short-term forecasts and potentially raise the baseline for the 2024 freight rate negotiations. Kuene+Nagel, the European logistics provider, estimates $225 billion in trade was affected as of the end of 2023. The longer route increases fuel costs and transit times. Although the excess capacity currently held by operators should help offset the unexpected demand spike, the additional costs will trickle down to consumers and affect trade dynamics.
The European Commission’s decision to end liner operators’ antitrust immunity goes into effect in April 2024. The exemption was intended to allow carriers the flexibility to coordinate vessel operations through the formation of alliances, referred to as consortia in the EU. While most shippers vehemently opposed the exemption, carriers argued that such coordination helps rationalize shipping capacity and lower the freight rate. Many of the expanded authorities given to the Federal Maritime Commission through the bipartisan 2022 Ocean Shipping Reform Act are now in effect. Overall, although the Houthi-driven deviations may give a temporary financial reprieve, operators will face increased operational challenges and regulatory oversight in 2024.
Tanker Market
The tanker market showed remarkable resilience in 2023 despite numerous challenges, including the prolonged Russia-Ukraine war and sanctions against Russian oil exports; the continuing presence of a “dark” fleet of old tankers to circumvent the Russian sanctions; the midyear Organization of Petroleum Exporting Countries (OPEC+) decision to cut back oil production and manipulate price; and the recent commitment made by world leaders at the 28th U.N. Climate Change Conference to transition away from fossil fuels. The market is now far more stable and profitable than expected.
The Russia-Ukraine war continues to have a greater effect on oil movements than the Houthi attacks in Red Sea. Tanker owners benefit from oil movements that make up for the sanctioned Russian oil because they involve longer distances; in addition, the demand for oil has gone up. Non-OPEC producers have more than offset any effect of Saudi-led supply manipulations and are expected to continue their record level of production in 2024. The gradual reentry of Venezuelan oil into world markets is an added supply option. U.S. and NATO allies also have stepped up action against the Russian sanction offenders.2 This has led to high demand for legitimate tanker tonnage, especially for the very large crude carriers. In contrast, new tanker construction has been subdued, with only 22 ships entering the trade through 30 November 2023 and even less new tonnage scheduled for 2024.
Despite turbulent times, tanker owners and operators are poised for an even better 2024. However, the average age of their ships is increasing, and scrapping older tonnage has effectively ceased.
Dry Bulk Market
The year did not start well for dry bulk carriers and reflected a tepid Chinese economy, which typically drives the market. Signs of recovery began by mid-year, with rate indices picking up and the market fundamentals improving by the year’s end. The Baltic and International Maritime Council estimates show only a 3 percent increase in new dry bulk tonnage in 2023.
The near normalization of diplomatic relations between Australia and China led to some improvement in the iron ore trade in early 2023, and later in the coal trade as well. Russia’s midsummer decision to terminate the U.N.-sponsored 2022 Black Sea Grain Initiative and reimpose a “temporarily dangerous” zone for foreign-flagged grain bulkers in the northwestern Black Sea caused major disruption. It escalated war-risk premium payments beyond insurable levels for vessels in the trade and prevented grain exports from Ukraine’s Black Sea ports in and around Odessa. In defiance, Ukraine set up its own Black Sea shipping corridor initiative in mid-September. The number of ships carrying Ukrainian grain steadily grew and, by the end of December, monthly exports surpassed the peak reached during the U.N.-brokered grain initiative.
Shipbuilding
China’s meteoric shipbuilding growth continued unabated in 2023. Per Chinese Ministry of Industry and Information Technology statistics, Chinese shipbuilding output rose by 12 percent in 2023 and represented more than 50 percent of the global market share. China’s share of new construction orders is now at 53 percent, and its market share exceeds the combined shipbuilding output from South Korea and Japan.
South Korea has seen similar growth, with current construction orders for 263 container ships, 249 liquefied natural gas (LNG) carriers, 135 tankers, and 67 liquefied petroleum gas (LPG) carriers. South Korea is still the market leader in building the more expensive gas carriers and dual-fuel vessels. More than $34 in of LNG carriers is now on order, and approximately two-thirds of all ships on order will have dual-fuel capability.
Per the Japanese classification society ClassNK, shipyards around the world have a herculean challenge to meet the new greenhouse gas targets adopted in 2023. Based on the allowable lifecycle greenhouse gas emissions, the shipyards should either build new or retrofit 80 million gross tonnage of zero emission vessels each year between 2027 and 2040. Separately, the global fleet of tankers and dry bulk carriers is getting older as market uncertainties and evolving climate regulations have delayed the owners’ fleet renewal plans.
Decarbonization Initiatives
During Marine Environmental Protection Committee (MEPC) 72, held in 2018, the IMO brokered a consensus among member nations to halve the industry’s greenhouse gas emissions by 2050 and lower carbon intensity by 70 percent from the 2008 baseline values. In 2021, members adopted energy efficiency indices for both old and new ships and developed carbon intensity indicators to attain adopted goals. However, the overall rise of maritime trade led to more overall emissions. This led to a set of new strategies adopted at the MEPC 80, held in July 2023, to reduce greenhouse gas emissions intensity and attain net-zero by 2050. The interim checkpoints are: 20–30 percent cutback in intensity by 2030, 70–80 percent by 2040, and net-zero by 2050. Therefore, a new ship entering service should have the capability to run on zero or near-zero greenhouse gas fuels during its service life. Member nations have agreed to develop a marine greenhouse gas fuel standard and a maritime greenhouse gas emission pricing mechanism, adopt them in 2025, and enforce from 2027. By that time, new ships powered only by fossil fuels are unlikely to be built.
In a parallel session at the 28th Conference of the Parties (COP28) UN Climate Summit in November 2023, key maritime stakeholders agreed on a course to deliver on the IMO’s net-zero targets by or around 2050. The chief executives of five leading global shipping lines openly advocated for total elimination of marine fossil fuels. COP28 also saw the creation of the Zero Emission Port Alliance by leading terminal operators to develop and promote the use of affordable emission-free container-handling equipment before 2030.
The EU Emissions Trading System (ETS) directive went into effect in 2024 and will affect all vessels greater than 5,000 gross tonnage entering EU ports. Shipping was added to the ETS cap-and-trade system in 2022 mainly because of the industry’s indecision and lack of global action. The intent is to incentivize decarbonization based on the polluter-pays principle. Vessels visiting EU ports will be required to offset their applicable emissions through the purchase of an equivalent number of EU allowances. Heavy fines are imposed if a vessel emits more emissions than its allowances can cover. The payments are based on emissions reported in the previous year, with 40 percent of emissions to be covered in 2024, 70 percent in 2025, and 100 percent from 2026.
The U.S. Maritime Sector
The U.S. maritime industry has received strong bipartisan support in recent years. However, rapidly escalating geopolitical uncertainties leave it unclear if it can provide the level of logistical support required for U.S. military force projection and sustainment in a contested operating environment with concurrent flashpoints.
The U.S. deep-sea fleet has about 200 commercial ships, with a deficit of sealift qualified mariners and grossly inadequate shipbuilding and repair capability. Meanwhile, China leads the global shipbuilding market; influences commercial shipping markets through export-led growth; owns a gigantic fleet of internationally trading ships, ports, and terminals worldwide; maintains an iron grip on strategic port infrastructure in many developing countries through its Belt and Road Initiative; has instantaneous maritime intelligence-gathering capability; and has established strategic presence at key choke points in arterial trade routes.1 China has become an international financial crisis manager and lender of last resort for many low-income countries, and an alternative to the World Bank and the International Monetary Fund for borrowers skirting default.2
The lack of a coherent U.S. maritime industrial policy is becoming alarmingly evident. Accordingly, the 2023 National Defense Authorization Act tasked the Maritime Administration (MarAd) to draft a national maritime transportation strategy. The Center for Naval Analyses (CNA) was selected to examine key components of an enduring national maritime strategy that calls for a greater investment in the merchant marine.
An excellent place for CNA to start would be the whole-of-government approach to restore maritime power advocated by Secretary of the Navy Carlos Del Toro. Referencing the dire need for a new “maritime statecraft” strategy, Del Toro brought together four cabinet departments and five separate government shipbuilders for an inaugural Government Shipbuilders Council (GSC) meeting in mid-November 2023. The GSC aims to address common challenges in ship acquisition and maintenance, maximize government savings, share best practices, build the workforce, and support strategic decision-making.
An example of government shipbuilding worth emulating is the first fixed price, on-time national security multimission vessel (NSMV), launched in June 2023. The MarAd approach involved adopting best practices from the commercial sector while meeting government needs. The NSMV class will revolutionize U.S. maritime training capability, increase the pool of capable maritime workers, and improve security interests at home and elsewhere. Its construction supported the Philly Shipyard and created more than 1,400 shipyard jobs in Philadelphia, a city with a rich shipbuilding history but which had no recent government shipbuilding orders.
On the commercial side, the U.S.-flag fleet is now at 92 privately owned, commercially operated, internationally trading ships. Most of these ships participate in the Maritime Security Program, the Tanker Security Program (TSP), or the Cable Security Fleet. Congress has authorized MarAd to increase the TSP to 20 ships, although current appropriation covers only 10. It provides the Department of Defense ensured access to essential product tankers capable of loading, transporting, and storing refined petroleum products for supporting the military. The ships’ operators commit to an emergency preparedness agreement for the duration of the program’s authorization and also must meet MarAd’s new Sexual Assault Prevention and Response program requirements.
In November 2023, MarAd awarded more than $653 million to fund 41 port improvement projects. About a fifth of these grants support electrification of port equipment to improve air quality, 22 percent advance wind-related projects, and 26 percent are to expand the capacity of small ports to move freight reliably and efficiently. Other beneficiaries of federal grant support in 2023 include eight marine highway projects that received nearly $12 million and 27 small shipyards that received $20.8 million. As part of MarAd’s promotional mission, the agency also added flexibility to certain requirements of its Title XI loan guarantee program in 2023. A recent decision to accept vessels supporting offshore wind projects as “vessels of national interest” makes them eligible for this support. As part of the Ready Reserve Force recapitalization strategy, three used ships were acquired in 2023 and are being modified to meet sealift requirements.
The shortage of skilled mariners, first documented by the 2017 Maritime Workforce Working Group Report to Congress, continues unabated. A policy publication in 2023 even makes the case for a U.S.-based second registry crewed partially by “mariners from allied nations” to increase the share of U.S. foreign commerce transported on U.S. hulls.
Addressing these challenges calls for a comprehensive public-private partnership with the role of the government going well beyond its current role in mariner education and training. The Secretary of the Navy’s whole-of-government approach is essential to raise awareness and elevate the crisis to the same level as when a branch of the military does not meet its recruitment quota. There is also a dire need for a dedicated mariner reserve program. All these ideas should be considered while drafting the new national maritime transportation strategy.
A change in industry culture is much needed to make a career at sea attractive for new recruits. The recent government initiatives will succeed only if there is total commitment from the industry and all other private stakeholders. It will require substantive changes to human resource policies, making them comparable to what competing industries offer their new recruits. These policies could include incentives for retention and career progression, work-life balance, pregnancy and parental leave policies, and mental health support besides 24/7 connectivity at sea. All employees, and in particular female mariners, must receive appropriate family support while pursuing their maritime aspirations.
1. For details, see Elaine K. Dezenski and David Rader, “How China Uses Shipping to Spy on the West,” Foreign Policy, 20 September 2023.
2. China reportedly maintains a warchest of $570 billion dedicated toward bilateral swap arrangements to support BRI borrowers in trouble. For details, see David Uren, “China’s Belt and Road Initiative and quasi-IMF lending,” Australian Strategic Policy Institute (ASPI), 19 October 2023.