What happens to sea level when a ship sinks?
It would go down. 

In order to float, an object must displace a volume of fluid that weighs the same as the boat. In the case of a ship, this volume is less than the gross volume of the boat, including the air inside it. That's why it floats with the gunwales comfortably above the water. So when the boat is floating, it displaces some volume V, so relative sea-level goes up (second panel, below). 



However, when the ship is submerged and full of seawater, it displaces a smaller volume than it originally did. If it didn't, it wouldn't have sunk (assuming it hasn't changed in weight).

Since it displaces a smaller volume after sinking, relative sea-level must go down. But it will still be higher than it was before the ship was launched.