25 percent duty - gone on large ships

1. Halifax Shipyard is expected to launch Atlantic Condor next week.

The federal government has finally dropped the 25% duty on foreign built ships. In the works for several years, and promised earlier this year, the drop will be retroactive to January 1, 2010 plus two notable exceptions.

B.C. Ferries will get a multi-million dollar rebate on four ferries built in Germany in 2009. The windfall results in an immediate 2% drop in fares, and the start of a major upgrade program.

Algoma Central will also get a handsome rebate for its two tankers built in Turkey last year.

Shipowners are praising the announcement, stating that the duty had been a huge disincentive to fleet replacement. The Canadian merchant fleet (particularly the Great Lakes fleet) is an aging one, with many ships nearing the end of their productive lives. In fact three lakers have gone to scrap in the last three weeks, and at least three more are awaiting. Algoma says its Great Lakes ships average 36 years old.

The federal government states that it is dropping the duty to promote free trade and to encourage ship owners to modernize. Certainly Algoma, CSL and Marine Atlantic have acted as if the tariff were already gone, ordering new or rebuilding foreign ships for completion this year.

Algoma also says it is closer to announcing a major replacement program. The government says that the tariff drop only applies to ships that cannot be built in Canada. They mean cannot be built competitively with foreign yards. And therein lies a bit of a rub.

One shipbuilder was quoted as saying that a ship can be built in China for 40% of the cost of a Canadian built ship. This would be a hard number to prove, since no significant ships have been built recently in Canada. However his point is made. Foreign yards enjoy all sorts of advantages over Canadian yards. Not the least of which are lower wages and lower tax and regulatory (including worker safety) regimes. Foreign yards also benefit from volume production and economies of scale, massive government intervention and subsidies and funds for modernization and training.

As might be expected the shipbuilders are not quite as enthusiastic about the elimination of the duty. They want to build ships, but the government has long considered shipbuilding a sunset industry with no future. Now faced with a pent up demand for government vessels such as naval and Coast Guard vessels and domestic (i.e. is small) ferries, they are being forced to face up to the fact that Canada needs a shipbuilding industry badly. For years governments of both stripes have put off ordering needed ships until the deferred list is a long as your arm.

Some yards have been able to make investments in shipbuilding, thanks to profits on building ships. Halifax Shipyard and Easatisle in Georgetown PEI are examples of this. Others such as Port Weller and Davie have been struggling for want of work and both have been in creditor protection (Port Weller came out but has had only repair work since.) However all Canadian yards need modernization and upgrading. There are some very capable west coast yards, but they have also been starved for work.

Perhaps the government will be making promised announcements about new government shipbuilding orders in the near future that will revitalize the yards so that they will be able to build ships. Perhaps then they may even become more competitive with foreign yards.

The elimination of the 25% duty (and I believe it is only being forgiven, or ignored, not actually eliminated) will apply to cargo ships, tankers and ferries of over 129 meters in length.

Small ferries, such as those needed in Quebec, Newfoundland and BC will still have to be built in Canada or face duties. The new Grand Manan Adventurer, currently under construction in Panama City, Florida is 85.5 meters in length, so will, I assume, still be subject to the duty.

The launch next week of the supply vessel Atlantic Condor at Halifax Shipyard may still be a rare sight in Canada, but let's hope that the flip side of the duty business is more work for Canadian yards.

Free trade agreements with Norway (where this ship was designed) and other shipbuilding nations were not mentioned in the federal announcements. It is expected to result in smaller vessels entering Canada duty free no matter what the tariffs may say. So shipbuilding is not out of the woods by any means.

.