The conclusion comes after the USTR launched an investigation last year, responding to a petition by five unions.

"Beijing's targeted dominance of these sectors undermines fair, market-oriented competition, increases economic security risks, and is the greatest barrier to revitalization of US industries," USTR Katherine Tai said in a statement.

Tai added that the findings, under Section 301 of the Trade Act, "set the stage for urgent action to invest in America and strengthen our supply chains."

A Section 301 investigation was a key tool President-elect Donald Trump's first administration used to justify tariff hikes on Chinese goods.

Beijing has previously criticized the US investigation as being "full of false accusations."

But Tai said Thursday that the United States builds fewer than five ships each year -- a sharp decline from in the 1970s -- while China builds more than 1,700.

The USTR investigation found China's efforts to dominate the sector "unreasonable" as it displaces foreign firms and creates dependencies on the world's second biggest economy.

The USTR added that Beijing also has "extraordinary control over its economic actors and these sectors."

But a decision on what actions to take would be considered in the next stage of the probe.

On Thursday, Alliance for American Manufacturing president Scott Paul applauded the pursuit of the investigation.

"Failing to take decisive action will leave our shipbuilding capabilities at the mercy of Beijing's persistent predatory market distortions," Paul said.