Hi - the rules regarding unrestricted naval warfare puzzled me for a long time too, so these are good questions to ask. (Note that the term used in the game is "unrestricted naval warfare", not "unrestricted submarine warfare").
On the first turn of the game, the Central Power player is given a Decision Event (DE-610) which gives them the choice whether or not to engage in unrestricted naval warfare against shipping to the U.K. If the CP player says YES, then the effects of unrestricted naval warfare will be triggered by any Central power unit - German or not, submarine or not - that is on or adjacent to any of the red NM sea hexes that are west of the United Kingdom. Most of the time, the CP units carrying out this operation will be German subs, but in my most recent game I used a German destroyer to place naval mines on those hexes with the same effect.
If the CP player says NO to this Decision Event, a second DE (DE-626) pops up later in the game after the United States has entered the war, giving the CP player the option to start using unrestricted naval warfare. At this point, there are no downside risks to the Central Powers for doing so.
If you see the notification "German morale boosted by unrestricted naval warfare" it is because the Central Powers have at least one naval unit on or adjacent to one of those hexes. Germany receives a 75 NM boost each turn that they have a unit in each of the four different zones for unrestricted submarine warfare: the North Channel, the St.George's Channel, the Bristol Channel and the Irish Sea. The UK loses 75 NM for every NM hex that has a Central Powers unit on or adjacent to it. So, if the CP player has four different units on four different NM hexes, the UK will lose 300 NM per turn. If those four different units are each in a different zone, then Germany would gain 300 NM; if they are all in the same zone, then Germany only gains 75 NM.
Equally valuable for the CP player are the effects on U.K. supply lines of having naval units on or adjacent to those hexes. Each turn that there is one CP unit engaging in unrestricted attacks in:
- the North Channel, the ports of Glasgow and Liverpool each lose 1-2 supply points;
- the St. George's Channel, Liverpool loses 1-2 supply points and Bristol 0-2 supply points
- the Bristol Channel, Bristol loses 1-2 supply points and Liverpool loses 0-2 supply points
- the Irish Sea, Bristol loses 1-2 supply points, Liverpool loses 1-2 supply points and Glasgow 0-1 supply points
These UK ports have a default strength of 12, but if unrestricted naval warfare drives any of them below 5, they cease to be able to receive convoys. This creates a big hit to the UK's MPP income until the CP naval units are driven off those hexes and the port rises in strength to 5 or above.
Note that while the CP player knows in which zones and hexes they are carrying out these unrestricted attacks, all the Entente player sees is a general notification that Germany is using unrestricted naval warfare. The Entente player can partially work out where the attacks are coming from by observing the impact on UK ports, but to be sure the Entente player will have to send units to scout those sea-lanes for German naval units.
In terms of spotting subs, moving a friendly ship adjacent to an enemy sub in silent mode will spot it. Aircraft will spot a silent sub as well, which is why airships and maritime bombers are so useful for scanning sea areas within range of land. Note that their spotting ranges increase dramatically with investment in airship tech or long-range aircraft tech, so use of these aircraft for maritime patrol is one important Entente strategy for combatting unrestricted submarine warfare. Seaplanes can also be very useful for spotting enemy naval units including subs on the high seas beyond the range of land-based aircraft. The great advantage of using airships or airplanes for this purpose is of course that they do not trigger a surprise combat - unlike ships that spot a previously hidden sub.
A good way of experimenting to see how these effects of naval combat work is to start a campaign in Hot Seat mode and play both sides with the FOW on. The 1917 campaign is useful for this purpose, as more naval units on both sides start at sea and you do not have to click through all the initial mobilization notifications as you make your hot seat moves.
Is this counted for every turn just like sieges of resources, I.e. on both the Central powers and Entente turns, or just one of them?