Phoio credif” Sea-Land /ndustries

Contents

PageOverview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Development of Maritime Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141General History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Policies for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Comparison With Other Transportation Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146U.S. Coast Guard Safety Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Subsidy Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Maritime Regulatory Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

U.S. Shipping Taxation Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Cabotage Po!icies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

TABLES

Table No. Page

39. Comparison of U.S. and U.S.S.R. Merchant Fleets . . . . . . . . . . . . . . . . . . . . . . 14640. Maritime Subsidy Outlays—1936-80 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15441. U.S. Shipyard Orders, 1970-81, Financed Under Title XI Program ....,... 15542. “BuyAmerica” Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Chapter 6

U.S. Maritime Policies

OVERVIEW

An array of Federal policies and programs hasbeen established in the past with the goal of aiding,assisting, or promoting the U.S. maritime industry.It is widely held that most of these policies are in-effective under current conditions and that majorchanges are needed. Some significant changes, mostnotably in funding cuts of subsidy programs andrelaxing of some ‘‘buy America’ provisions, havebeen instituted by the present administration overthe past 2 years. Also, a regulatory measure to pro-vide increased antitrust immunity and greater flex-ibility for U.S. liner operators to compete withforeign shipping is working its way through Con-gress. *

However, many argue that the United States hasno overall, coordinated, consistent, and effectivemaritime policy that is based on today’s challengesand problems of future survival for the U.S. mari-time industry, nor is it directed toward assuringthat future national needs are met. Clearly, existingmaritime policies are a patchwork. The Federal rolein maintaining an industrial base, assuring com-petition, and coordinating national and interna-

“The Shipping Act of 1983 passed the Senate as of Apr. 4, 1983.

tional initiatives, is poorly defined. The administra-tion has spent 2 years in an attempt to articulatea new maritime promotional program. The resulthas been announcements of a variety of programelements with a promise of more to come. 1 Severalof these elements were incorporated in a draft billto amend the Merchant Marine Act of 1936 andwere submitted to the Senate on April 8, 1983.2

The legislative package is being considered in H.R.3156 in the House and in S. 1038 in the Senate,

This chapter will describe briefly the develop-ment of the more significant maritime policies thatexist or are part of major current debates. It willalso discuss some important future considerationscovered in previous chapters and will compare exist-ing maritime policies with other transportation pol-icies. Separate sections will discuss subsidy policy,maritime regulatory policy, taxation policies, andcabotage policies.

‘See “Initial Elements of Maritime Policy Announced by DOT, ”May 1982; and ‘ ‘Lewis Announces Additional Elements in Admin-istration Maritime Policy, August 1982.

‘Letter from Secretary of Transportation to President of the Senate,Apr. 8, 1983.

DEVELOPMENT OF MARITIME POLICY

General History

It is possible to trace maritime policy develop-ment from the beginning of the Nation. For exam-ple, in his second annual address to Congress onDecember 8, 1790, President George Washingtonsaid:

I recommend it to your serious reflection howfar and in what mode, it maybe expedient to guardagainst embarrassments from these contingencies,by such encouragements to our own Navigation as

will render our commerce and agriculture lessdependent on foreign bottoms. . . .

One of the first acts of the First Congress of theUnited States dealt with the promotion of industry,trade, and shipping. Between 1789 and 1828, over50 additional statutes and commercial treaties wereapproved to protect and promote American ship-ping. Since that time, Federal assistance in sup-port of the Nation’s maritime industry has beena constant of Government policy, including theTariff Act of 1789, the Cabotage Law of 1817, the

141

142 . An Assessment of Maritime Trade and Technology

Reciprocity Act of 1828, Government mail con-tracts in 1845, the Subsidy Act of 1891, the MilitaryTransportation Act of 1904, the Shipping Act of1916, the Merchant Marine Act of 1920, the Mer-chant Marine Act of 1928, the Intercostal Ship-ping Act of 1933, Public Resolution 15 in 1934,the Merchant Marine Act of 1936, Public Laws 480and 664 in 1954, the Merchant Marine Act of 1970,and the Trade Act of 1974.3

Since the 1930’s, U.S. maritime policy and thedevelopment of U.S. maritime industries have beeninfluenced heavily by the philosophies of AdmiralAlfred T. Mahan, which were published in 1918in his book, The Influence of Sea Power UponHistory, 1660-J783. In essence, Mahan held thatnational power was dependent on sea power andthat sea power consisted of merchant ships, navalvessels, and the necessary supporting bases and in-dustries.

Prior to the passage of the Merchant Marine Actof 1936, the U.S. merchant marine was at a lowebb. Inconsistent Government policies had discour-aged capital investment, and a subsidy system tiedto mail contracts proved to be ineffective. The Mer-chant Marine Act of 1936 was modeled after theMahan philosophy and provided for Governmentsubsidies to U.S. maritime industries.

Following 1936, the role of the maritime indus-tries was perceived as vital and heroic during WorldWar II and the Korean and Vietnamese conflicts.The performance of the maritime industries inWorld War II enabled America to sustain a two-front war across both the Atlantic and PacificOceans. Due primarily to the running start affordedby the Merchant Marine Act of 1936, the countryproduced 5,500 merchant ships for the war effort.Both the shipbuilding and operating industriescooperated in the construction and operation of thewartime merchant fleet. The merchant marine wasthe only civilian industry directly exposed to thecombat of war. The extent of the involvement isevidenced by the fact that by 1943 there were a totalof 130 ship-operating organizations, called generalagents, serving the U.S. Government. * The U.S.—

‘Irwin M. Heine, “The United States Merchant Marine: A Na-tional Asset’ (Washington, D. C.: National Maritime Council, July1976).

4McDowell & Gibbs, Ocean Transportation (New York: McGraw-Hill, 1954), p. 452.

Army utilized 330 ports of debarkation for over 7million troops and 268 million tons of cargo.5 Withonly 14 percent of the world’s merchant tonnageat the start of World War II, the U.S. fleet grewto 60 percent of the world tonnage after the war.The experience of World War II is relevant becauseit has a profound and continuing influence on thepolicy and performance of our maritime industries.

In all statements of policy or purpose of past ma-jor maritime legislation, the national defense ismentioned first. This is not surprising when thetiming of the acts is considered. The Shipping Actof 1916 followed the outbreak of World War I inEurope in the summer of 1914. At the time, theUnited States was dependent on foreign-flag vesselsfor 90 percent of its foreign trade. As foreign vesselsdisappeared from the sea lanes, U.S. cargoes wereleft rotting on the piers. In August 1914, Congressacted to allow the registration of foreign-built ships.By 1916 the experience was fresh in the minds ofboth the public and the legislators. The motivesunderlying the legislation of 1916 were stated inhistorical texts as “fear of trusts and monopolies;realization of inadequacy of the U.S. fleet for com-merce, particularly in times of emergency. . . .‘‘G

The Merchant Marine Act of 1920 was enactedbasically to dispose of Government-owned shipsconstructed for World War 1, most of which weredelivered after the war was over. Here again, thispolicy was conceived and enacted in a war envi-ronment.

The Act of 1936 was passed at a time when Eu-rope was on the brink of war, and the United Statessaw the need to prepare. The Act of 1936 resultedafter 15 months of debate and the compromise ofmany disparate points of view. Although the pend-ing war was the primary motivation behind passageof the act, it included promotional features whichencouraged investment in both the operating andbuilding industries.

In retrospect, the Act of 1936 was most appro-priate for the times. The policy it espoused servedthe Nation well in the ensuing 10 years. It was un-doubtedly the headstart afforded by the Act of 1936that allowed the United States to respond so rapidly

51bid. , p. 445.‘Ibid., p. 412.

Ch. 6—U.S. Maritime Policies ● 143

to the merchant ship demands of World War II.The Act of 1936 was a useful policy for its time,but many believe that its time is past.

Policies for the Future

In the future, the most effective U.S. maritimepolicies will be those that can respond to changingconditions of the industry and competition, chang-ing conditions of trade and technology, and chang-ing conditions in the international arena.

Virtually all maritime nations provide direct orindirect aid to their merchant fleets and ship-building industries. Assistance may include oper-ating subsidies, construction subsidies, trade-inallowances, official low-interest loans, interest sub-sidies, official loan guarantees, accelerated deprecia-tion, tax-free reserve funds, duty-free imports ofrequired materials, cargo preference, and cabotage.In addition, social, economic, and political assist-ance may be provided. Examples include schoolsfor training merchant seamen, hospital and medicalcare for seamen, social security family payments,and laws requiring that materials and componentparts for ships be acquired from domestic sources.

A recent report prepared by the Maritime Ad-ministration (MarAd)7 describes maritime policiesof 48 nations. It contains examples of many ap-proaches to industry assistance, reflecting the con-cern of other nations for the support of their mer-chant marine. It should be recognized that theinternational competitive nature of shipping andshipbuilding makes it imperative to consider relativeinfluences of many other governments on the via-bility of the U.S. maritime industry.

Industrial Changes

Some recent analyses have concluded that ma-jor changes have taken place in industrial America.Plants and factories that closed because of reducedconsumer demand are being replaced by modern,more automated facilities or, in many cases, thework has been exported to low-cost foreign coun-tries. Several recent studies claim that the UnitedStates is in a transition period from an industrialsociety to an information-based society and that the— — —

‘U. S. Maritime Adm inistrat ion, ‘‘Maritime Subsidies, February1983.

production of industrial hardware is irretrievablymoving out of the country toward those countrieswith low wage rates.

The same studies project that the U.S. economyis moving away from self-sufficiency and that allthe industrialized countries, including Japan andGermany, are deindustrializing. There appears tobe some evidence of this in the maritime field withKorea emerging as the second largest shipbuilderin the world and with significant amounts of itsbusiness diverted from Japan.

The predictions about U.S. deindustrializationcould significantly affect the maritime industries.An example is the well-known disadvantage of high-cost labor in both our ship-operating and ship-building industries. Despite a myriad of studies withproposed solutions, the problem remains as chronictoday as when it was first perceived. Therefore,some believe that the tide of inevitable change inour maritime industries will be met from the bot-tom up by entrepreneurs and scientists with creativenew solutions.

It appears that if U.S. ship operators are to com-pete in the future, it will require new breakthroughsin vessel design and system operation that increaseefficiency and system capabilities. Shipyards, aswell, will become competitive only through inno-vative approaches, products, or marketing. Futurepolicies— if they are to benefit the Nation—mustallow and encourage a high degree of innovation.

National Defense

The future of the maritime industry is impor-tant to the national defense. The Department ofDefense (DOD), with assistance from MarAd, isin the process of defining specific national defenseneeds for ships and shipbuilding. Two separatestudies were initiated early in 1983. One addressesthe possible wartime demands for and existing capa-bilities of the U.S. shipyard mobilization base, andthe other examines similar demands and capabilitiesof the U.S. sealift (merchant shipping) base. Nei-ther was released as of September 1983, but initialfindings of the shipyard study were discussed in apaper in May 1983.8 Policy proposals in that paper

— —‘R. V. Buck, ‘ ‘Maritime Policy Formulation: Preservation and

Enhancement of the Maritime Industrial Base, ” presented to theSenior Officers’ Forum, Naval Amphibious School, May 1983.

144 ● An Assessment of Maritime Trade and Technology

varied from support for broadly based cargo pref-erence to preserving the Jones Act to suggestionsfor more study.

The second study—examining sealift needs andcapabilities— is based on a projected scenario speci-fying military requirements to deploy and supportforces under wartime conditions. The requirementsdo not include support to U.S. mainland industryor civilian activities. The study assumes that shipsof several fleets-Military Sealift Command (MSC)fleet, U.S.-flag active commercial fleet, U.S.defense reserve fleet, fleets of U.S. allies, and theU.S. Effective Control fleet-all would be avail-able under appropriate time constraints. The gen-eral conclusion of the sealift study, as discussed in-formally, is that the collection of all shipping assetsthat probably would be available to the UnitedStates in a national emergency are “marginally in-adequate .

Following the release of both of these reports,DOD intends to conduct a separate analysis ofspecific national objectives to support a certain leveland type of a shipbuilding and sealift base to meetthe defense needs described. The method of sup-port of those objectives are key elements in anyfuture U.S. maritime policy. The release of bothreports is scheduled for late 1983. They should serveto clarify defense needs and identify approaches tomeet those needs.

Although there is continuing discussion of theneed for an active shipbuilding base and a strongmerchant marine to serve the national defense, theconcepts most often discussed are those of WorldWar II and before. In a future war, there may bevery different needs. Major conflicts today mightresult in the use of nuclear weapons; limited con-flicts would require an existing force. This lattercapability, insofar as it involves merchant vessels,probably can be met through continuous purchasesof new and existing vessels for both operations andreserve. Whatever scenarios are postulated, policiesmust include a realistic appraisal of shipping andshipyard capabilities, a commitment of resourcesto maintain acceptable levels, and careful and con-tinuous evaluation and support of the necessaryreserves.

‘Meet ing with staff of the Secretary of Defense, Office of ProgramAnalysis and Evaluation, July 27, 1983.

Although the Merchant Marine Act of 1936 citeda ‘‘Declaration of Policy, the exact meaning neverhas been defined in terms of specific national goalsfor maintaining a merchant fleet adequate to servein a national emergency. Many believe that rela-tively few ships under U.S. registry today have thegenuine capability to meet military needs. Contain-erships rarely are equipped with cranes to handletheir cargo. There are few heavy-lift, breakbulk,or roll-on/roll-off (RO/RO) ships under U.S. reg-istry, though these types are very useful for carry-ing military cargo. Industry spokesmen have sug-gested that defense features should be incorporatedand continually maintained on the U.S.-flag fleetand that DOD should bear the cost of these fea-tures.

One of the most expensive national defense fea-tures (for large merchant ships) is the requirementthat they be able to maintain cruise speed with aU.S. Navy task force deployed in time of war. Inlight of current design trends, it appears that theability to maintain such cruise speed at adequaterange will not always be present in ships constructedto be competitive on the open commercial market.

Such considerations of defense requirementsneeds to be more completely defined to devise na-tional and international policies to satisfy thoseneeds.

The U.S.S.R. Comparison

The Soviets have a large, modern, and diversi-fied oceangoing merchant fleet consisting of 1,727ships totaling about 19 million deadweight tons(dwt) (as of April 1983). While the number of shipsis over three times the U.S.-flag fleet, the total ton-nage is nearly the same. The Soviets, however, ap-pear to have been much more successful than theUnited States in developing and maintaining astrong merchant fleet that has substantial militarysupport capabilities. In addition, the Soviets recent-ly have expanded their capabilities of serving com-mercial worldwide trade and, by offering low rates,have made substantial advances as cross-traders.

After the Cuban missile crisis in 1962, theU.S.S.R. carried out a series of fleet expansion and

IOSee ‘ ‘Recent Figures and Movements of Soviet Merchant Ma-rine, a research department report by Mitsui OSK Lines, Ltd.,November 1982.

Ch. 6—U.S. Maritime Policies 145

modernization plans. As a result, the Soviet mer-chant fleet showed a fivefold increase to 1981. Thegrowth in size of the fleet has slowed in recent years,but there appears to be a trend toward moderniz-ing and diversifying—especially with additions ofnew flexible types of ships—RO/ROs, barge car-riers, heavy-lift ships, and containerships—all ofwhich have significant military adaptability as well.

The Soviets have been quick to recognize the mil-itary significance of these new commercial-typeships. Their fleet contains 50 RO/ROs totaling510,000 dwt (the third largest RO/RO fleet in theworld) plus a number of smaller vehicle/train fer-ries. The RO/ROs have stern ramps and decksstrengthened to carry tanks. The newest designs,some of which are now under construction, haveservice speeds of 20 knots and ranges of up to20,000 nautical miles. This compares to the U.S.fleet of 25 RO/ROs, totaling 380,000 dwt.

“% “ ?$l

The Soviets possess five heavy-lift ships and fivebarge carriers of two types, both constructed inFinland. The lighter-aboard-ship (LASH) typecarry 26 barges. The smaller type can carry eitherbarges or patrol craft, and have heavy-lift capabili-ty. They are equipped with 350-ton-capacity gan-try cranes. Also, construction of a new nuclear-pow-ered LASH is almost completed. The Soviet con-tainership fleet consists of about 125 vessels. Nearlyall of their containerships have the ability to off-load without port assistance.

The Soviet’s new Five-Year Plan (1981-85) in-cludes construction of many modern specializedships replacing the older, smaller, general cargoships. The trend is toward a smaller number oflarger, more specialized ships with only modestgrowth in total fleet tonnage. To be completed by1985 are about 250 vessels, including 50 container-ships, 64 RO/RO ships, heavy-lift and barge car-

.\

1 -

.

Photo credit: U.S. Navy

The Russian fleet of RO/RO ships is one of the largest in the world

146 ● An Assessment of Maritime Trade and Technology

riers (including nuclear-powered icebreaking de-signs), and over 1 million dwt of tankers.

Table 39 shows a comparison of the U.S. andU.S.S.R. merchant fleets as of April 1983. Ofcourse, the Soviet merchant fleet is operated by theState under a system different from that of a freeeconomy. This means that commercial operatorsfrom the United States and the rest of the free worldcannot compete on an equal footing. Most of theSoviet merchant fleet is maintained within theU. S.S. R Navy’s budget, and crewmen of merchantand naval ships are regularly exchanged to trainseamen in line with naval strategic objectives.

The Soviet fleet does not operate on a commer-cial basis but exists to fulfill specific national goalsof: contributing to military strategies, expandinginfluence over developing nations, strengtheningmaritime transport capacity for its own trades, andearning foreign currency through cross-trades.Many of these are similar to U.S. goals, but theU.S. Government is far less involved in any com-mercial activities. Therefore, the competitive posi-tion of U.S. operators may be influenced substan-tially by future Soviet actions, especially as theyadvance more and more into commercial shipping.

Table 39.—Comparison of U.S. and U.S.S.R. MerchantFbets (vessels 1,000 gross registered tons and upward)

U.S. active U.S.S.R.Type ship (numbeddwt) (numbeddwt)

Cargo. . . . . . . . . . . . . . . . . . 271/4,948,000 1,355/11,647,000Tanker . . . . . . . . . . . . . . . . . 272/16,167,000 308/7,884,000Passenger. . . . . . . . . . . . . . 11/62,000 64/142,000

When built:Cargo:

1982 and prior . . . . . . . .1983 through 1972 . . . . .1973 through 1983 . . . . .

Tanker:1962 and prior . . . . . . . .1983 through 1972 . . . . .1973 through 1983 . . . . .

Passenger:1982 and prior . . . . . . . .1983 through 1972 . . . . .1973 through 1983 . . . . .

8611570

1404587

740

255706394

58159

91

291520

Speed by type: 14 knots or more:Cargo. . . . . . . . . . . . . . . . . . 261 884Tanker . . . . . . . . . . . . . . . . . 259 197Passenger. . . . . . . . . . . . . . 11 60NOTE: The US. fleet includes only the privately owned, active oceangoing fleet

(no reserve fleet). The Russian fleet includes only active oceangoing ships.

SOURCE: U.S. Navy, April 1983

U.S. maritime policy must be developed with aclear understanding of Soviet capabilities and par-ticipation in world maritime trade.

Comparison With OtherTransportation Policy

Ocean transportation is a unique transportationindustry, particularly in the foreign trades. Al-though some parallels can be found between foreignand domestic transportation, as well as internationalair and ocean transportation, in most cases the cir-cumstances differ greatly, and meaningful compar-isons are possible only in the academic environ-ment.

To understand the differences, similarities, andbases for transportation regulation, it is firstnecessary to examine the history. The regulationof transportation in the United States can be traceddirectly to the late 1800’s when American railroadswere pushing into the last of the western frontiers.Between 1865 and 1870, there was an unprece-dented burst of construction, centering on the Mid-western and western grain States. Competing lineswere run adjacent to each other, and railroads wereactively recruiting homesteaders to settle the sur-rounding land in hopes of creating business to payfor their investments. However, by the mid-1870’s,the expectations of the new homesteaders had notbeen realized, and the railroads rapidly fell intodisfavor. As one text noted, railroads ‘‘were nolonger the pioneers of dawning civilization or theharbingers of increased prosperity; they were thetools of extortion in the hands of capitalists. 11

Antagonism toward the railroads and big busi-ness eventually culminated in the Act to RegulateCommerce (1887). This act—now the InterstateCommerce Act (ICA)—has served as the founda-tion of U.S. transportation regulation from 1887until the present. The areas of rate regulation in-cluded in the Act of 1887 focused on such railroadabuses as unreasonable rate levels, service discrim-ination, rebates, and combines that destroyed com-petition. The act created the Interstate CommerceCommission (ICC). Part I of the 1877 Act appliedto railroads; part II, added in 1935, applied to— .

t 1 F~ir ~d willi~s, The fionomjcs of Tmmportacion (New York:Harper, 1959), p. 429.

Ch. 6—U.S. Maritime Policies ● 147. — .

motor carriers; part III, related to water carriers,was added in 1940; and part IV, treating freightforwarders, was enacted in 1942. Air carriers werethe only domestic mode of interstate commerce toremain outside the act.

A rise in freight rates at the turn of the century,plus continued abuses by powerful business inter-ests, spawned a new round of regulatory bills. In1903, the Elkins Act sought to improve the enforce-ment against rebating. The Hepburn Act of 1906also focused on rebating and allowed the ICC toset maximum rates. Also, it prohibited carriers fromcarrying articles they produced. The Panama CanalAct of 1912 forbade railroads to own, lease, operate,control, or have any interest in water carriers oper-ating by way of the canal.

It was against this background of active domesticregulation of transportation that the Nation beganto focus on waterway transport. At the turn of thecentury, there were two aspects of ocean transpor-tation that differed substantially from today. First,there was an active intercostal and coastal linertrade that was in competition with the railroads,and second, the United States, prior to World WarI, was an extremely insular country, with little in-terest in foreign trade.

The Shipping Act of 1916, the primary regula-tory law affecting ocean transport, was promptedby two specific conditions—the shipping shortagecaused by the initiation of hostilities in Europe in1914 and the country’s general economic philoso-phy toward free and open competition. One partof the Shipping Act of 1916 applies to domestictransportation, the other to foreign transportation.

For domestic trades, the act applied similarprinciples of regulation to domestic water carriersas were applied to railroads competing for the sametraffic. In the domestic sphere, the 1916 Act fol-lowed the lead of the ICA by setting maximum ratesand prohibiting rebates, This authority over coastaland intercostal water carriers was shifted to theICC by the Transportation Act of 1940 (part 111of the ICC Act).

For international water transportation, theShipping Act of 1916 applied some uniquely Amer-ican regulatory principles to an internationalmarketplace, However, the so-called AlexanderCommittee prepared an Investigation of Shipping

Conditions under H. Res. 587 that preceded pas-sage of the Shipping Act of 1916 and concluded thatconferences and cooperative industry agreementsshould be allowed. The following statement was of-fered in the Alexander report:

To terminate existing agreements would neces-sarily bring about one of two results: the lineswould either engage in rate wars which would meanthe elimination of the weak and the survival of thestrong, or to avoid a costly struggle, they wouldconsolidate through common ownership. Neitherresult can be prevented by legislation, and eitherwould mean a monopoly fully as effective, and itis believed more so, than can exist by virtue of anagreement. Moreover, steamship agreements andconferences are not confined to the lines engagingin the foreign trade of the United States. They areas universally used in the foreign trade of othercountries as in our own.

Based on the Alexander report, U.S. ocean car-riers were allowed antitrust exemption in the 1916Act under the provisions of section 15. The U.S.Shipping Board, predecessor to the Federal Mari-time Commission (FMC), was given the power togrant antitrust immunity to shipping conferencesand to approve, cancel, and modify proposed agree-ments.

The 1916 Act required all carriers by water inforeign commerce to file rates on all commoditiesexcept those carried in bulk. The remainder of theact gave considerable attention to the prohibitionof rebating and discrimination.

Any comparison of regulatory and promotionalpolicies among various transport industries mustbe based on the recognition that both are in tran-sition. The domestic air, rail, and motor industrieshave been deregulated, including prohibitions con-cerning common ownership of various modes. Boththe domestic offshore and foreign merchant fleetsare the subject of pending legislation and admin-istrative review.

The term ‘ ‘deregulation, however, has differentmeanings and connotations when applied to differ-ent industries. For example, domestic air, rail, andtrucking deregulation recently has been enacted asquid pro quo for the reduction of antitrust immuni-ty while, in foreign ocean shipping, the legislativeconcept currently under consideration proposeslesser regulatory controls plus greater antitrustimmunity.

148 ● An Assessment of Maritime Trade and Technology—

Domestic waterway transportation has been reg-ulated historically by the same principles as domes-tic rail and motor carrier transportation. There aresome differences and anomalies:

●

●

●

●

●

Where rail and motor carriers have been reg-ulated by one agency, domestic water carriershave been controlled by two agencies—theICC for Great Lakes, inland, and coastal; andthe FMC for noncontiguous areas. For allpractical purposes, there has been very limitedICC-regulated service because of the demiseof the coastal and intercostal liner carriageand the lack of Great Lakes package services.Inland waterway service generally has con-sisted of bulk carriage, which is exempt. In re-cent years, increasing levels of Alaska trailerand container traffic have moved under ICCtariff as substitute water-for-motor carriage.Recent court decisions also have permittedICC regulation of rail/water and motor/waterintermodal carriage in the offshore trades (e. g.,Puerto Rico),Regulation of domestic water carriers, whereit has been exercised, has been primarily inmaximum rate regulation, financial respon-sibility of passenger carriers, and in collectiveagreements, However, there are no confer-ences in the domestic trades. Historically,other domestic modes have been subjected toa higher degree of rate regulation, plus entryand abandonment regulation.Domestic water carriers are required by theJones Act to employ U.S.-built vessels,manned by U.S. citizen crews, and owned byU.S. citizens. This restriction does not applyto the same extent to domestic rail, motor, andair carriage.In terms of promotion, domestic water carriershave had the benefit of Government aid in har-bor improvement and aids to navigation. Sub-sidized vessels, however, are not allowed toserve the domestic trade except on waiver.Motor and rail carriers also have received sig-nificant Government aid in the form of high-way construction and maintenance and inoriginal land grants to railroads.The comparison of domestic water carrierswith domestic air carriers is less relevant be-cause the latter is engaged primarily in pas-senger transportation, while domestic water

carriers engage almost exclusively in cargobulk transportation. Historically, domestic aircarriers have been more closely regulated thandomestic water carriers, although the regula-tion of’ air carriers has been greatly reduced.

Regulation and promotion of the shipbuildingindustry can be compared with the aerospace andtransportation equipment industries. Generally,there are few differences in terms of regulation,albeit different agencies are involved in approvingthe safety of the products they produce. In the pro-motional area, both the aerospace and shipbuildingindustries benefit from military spending. The ship-building industry is unique in that it has been sub-sidized in the past through a construction differen-tial subsidy (CDS) awarded to operators to coverdifferences in cost between U.S. yards and com-petitive foreign yards. The U.S. shipbuilding in-dustry also is afforded a captive market by the JonesAct and benefits from other ‘‘buy America’ policiesnot prevalent in the other transportation equipmentindustries.

In the international sphere, U.S. ocean carriersare subject to the provisions of the Shipping Actof 1916 and regulated by FMC. In comparison withdomestic surface carriers, the U.S. international-ocean-carrier industry operates in an internationalmarket with unlimited entry, numerous state-owned or state-subsidized carriers, and a long his-tory of accepted traditions and business customs.

The U.S. international air carriers are similarto U.S. international ocean carriers in that theyoperate in an international market, but they aredissimilar in that their major concentration is inpassenger services as opposed to cargo services. Inaddition, international air carriers operate withina regime of bilateral agreements setting the rulesfor air commerce, while in shipping there are fewintergovernmentally agreed on rules of competition.

In comparing domestic-surface-carrier regulationwith U.S. international-ocean-carrier regulation,the differences have been primarily in the regula-tion of the entry of carriers and in rate regulation,with the domestic regulations being the more strin-gent. FMC has no authority to set or approve ratesof ocean carriers in foreign trade but does requirethe filing of tariffs. Relative to the international-air-carrier and domestic-surface-transportation in-

Ch. 6—U.S. Maritime Policies . 149

dustries, the U.S. international-ocean-carrier in-dustry has been comparatively unregulated.

U.S. Transportation RegulatoryConcepts v. an International Market

The principal point in comparing domestic andinternational regulation is that the regulatoryremedy for a domestic industry where all playerscan be regulated equally is completely differentfrom the international arena where most of the play-ers do not recognize American rules and usuallycannot be forced to comply. The area of antitrustprohibitions and rebates has been the most trouble-some. Even though the legislative history of the Actof 1916 shows that the framers of the act recognizedthe unique nature of international shipping andgave authority to the regulatory agency (i.e., FMC)to grant antitrust exemptions, the Justice Depart-ment frequently has fought the granting of such ex-emptions. Foreign carriers serving the U.S. tradesare more likely to receive immunity to collaborateand rationalize their services than U.S. carriers.Attempts to do so by U.S. carriers have been metwith stringent and frequent Justice Departmentprotests and Government-initiated and financedlitigation, as in the case of the attempted U.S.

Lines/R. J. Reynolds merger. Deferred rebating,a common practice in ocean shipping worldwide,is prohibited in the U.S. trades and stringently en-forced.

Prior to 1977, a number of U.S. and foreigncompanies allegedly engaged in illegal rebating ac-tivities within the established liner conferences ofthe time. FMC investigated these activities and,between 1977 and 1980, settled claims against 27liner operators (21 foreign and 6 U. S.) and againstalmost 100 shippers. The amount of the individualclaims ranged from about $5,000 to $4 million andtotaled $15.6 million. The claims settled with the6 U.S. liner operators totaled $7.4 million and withthe 21 foreign liner operators totaled $5.1 million. 12Many believe that this example illustrates the dis-parity of treatment of U.S. v. foreign operatorsunder U.S. law. Certainly, in this case, foreignoperators dominated the trade (by factors of twoto three times) and were suspected of a major shareof illegal rebating. Yet claims settled were muchless. The contention is that U.S. laws cannot beevenly enforced in such an international business,and U.S. operators have a resulting economic dis-advantage.

IZData on claims set~ed as of Dec. 31, 1980, obtained from the Fed-eral Maritime Commission, GeneraI Counsel’s Office.

.

U ..&

. . *

. . . .. .* . ,, ,

:-.. .m?s-?z!~ -,. ,

.- ’-%%--s--

Photo credit: Pori of New Orleans

A Greek-flag liner ship entering the Port of New Orleans

150 An Assessment of Maritime Trade and Technology.——

The other anomaly involving the application ofU.S. regulatory concepts is the existence and useof the Canadian and Mexican gateways. For in-stance, ocean carriers serving Montreal need notfile tariffs with FMC for U.S. origin or destina-tion cargoes and can form intercarrier agreementsas necessary to serve the U.S. trade without disclos-ing relationships or receiving FMC approval. For-eign-flag carriers serving the United States throughthe Canadian gateway have maximum flexibilityand have been able to charge differential rates, in-cluding marginal (noncompensatory) rates, to ship-pers in order to fill their ships. This same flexibili-ty is not available to U.S.-flag carriers competingout of U.S. ports. In the United States, rates canbe dropped immediately on filing, but rates can-not be increased without a 30-day filing notice.

Comparison of International Oceanand Air Regulation and Promotion

In comparing U, S.-flag international-ocean-car-rier regulation and promotion with international-aviation carriage, there are essentially four areasthat can be examined:

. rates and fares;

. mergers and acquisitions;

. entry requirements; and● promotion.

Rates and Fares. —Both the Civil AeronauticsBoard (CAB) and FMC require rate filing forscheduled service, and both recognize conference-type ratemaking, although CAB is backing awayfrom routine acceptance of International AirTransport Association (IATA) airline agreements.By law, both agencies may grant antitrust immuni-ty to ratemaking groups and in practice havegranted this immunity after a hearing and full dis-closure. CAB has authority to suspend or rejectrates that are unreasonable, although the Presidentmay override the CAB decision. CAB seldom sus-pends rates in international service. Also, there areprovisions in most bilateral air agreements thatallow the designated authority to reject rates. FMCcan find that rates are too high or too low and thusimpede the foreign commerce of the United States,and it can order the carrier to discontinue charg-ing that rate. However, it has rarely exercised thispower over rates in foreign trade. Under the Con-

trolled Carrier Act (CCA), FMC can suspend ratesthat it finds unreasonably low, and in fact has doneso in several instances involving the Far-EasternShipping Co., a Soviet-owned cross-trading ship-operating company. Both agencies (CAB andFMC) regulate against rebates, and law dictatesthat both air and ocean carriers must adhere to pub-lished tariffs. According to case law, ocean-carrierrates must cover fully distributed costs.

Mergers. —CAB is required to approve airlinemergers of U.S. airlines, but may be overruled bythe President where international routes are con-cerned. FMC may not approve U.S. ocean-carriermergers that are subject to antitrust laws.

Entry.— There is a basic difference in entryregulation in that U.S. ports are open to all shipsof all nations (with the exception of some securityconsiderations at some ports) that adhere to ourlaws. Air carriers, on the other hand, are subjectto bilateral agreements limiting the number offlights and carriers that can enter a country’s airspace and that are granted landing rights.

Promotion. —Promotion includes subsidy andother measures to assist LT. S. carriers. AlthoughCAB is authorized to provide direct subsidy to U.S.air carriers, as a matter of practice it does not, otherthan premiums on mail rates. The authorized air-carrier subsidy may be paid regardless of where theaircraft were built. On the other hand, most U. S.-flag ocean carriers are paid an operating differen-tial subsidy (ODS) directly by the Maritime Sub-sidy Board (as specified in the Merchant MarineAct of 1936) only on ships built in the United States.The subsidy is technically a contract in which thecarrier agrees to serve an assigned (i. e., ‘ ‘essen-tial’ trade route and observe other specific oper-ating constraints. However, MarAd is moving tophase out ODS by not granting new contracts andencouraging early termination of existing contracts.

As mentionied previously CDS has been paid toU.S. ocean-carrier operators to cover cost differen-tials for vessels built in U.S. shipyards. At the cur-rent time, no new construction subsidy awards arebeing made. There is no construction subsidy coun-terpart in the aviation industry.

Bilateral agreements reserving cargo also are con-sidered forms of promotion. Aviation bilateral

Ch. 6—U.S. Maritime Policies ● 151— . —

agreements usually limit competition to carriers ofthe two countries and selected third-flag carriersbut do not allocate market share. Equivalent com-petitive opportunities are afforded. In the maritimesphere, bilateral agreements tend to specify cargoshares to be carried by each trading partner. Bi-lateral agreements are the rule in international airtransport and are the exception in U.S. ocean trade.

U.S. Government-impelled cargo-reservationpolicies for U.S.-flag ships could also be comparedto Federal aviation policy, which requires all Gov-ernment personnel to use U.S. airlines wheneverpossible on international travel.

U.S. Coast Guard Safety Regulations

The U.S. Coast Guard (USCG) plays an impor-tant role in promoting safety in marine transpor-tation and has specific regulatory responsibilitiesin commercial vessel safety. Some of these safetyrequirements have been criticized by the maritimeindustry as putting undue burdens and excessivecosts on U.S.-flag operators that foreign-flag oper-ators do not have to comply with. Industry exam-ples of these requirements are different for new ves-sels built in U.S. shipyards than conversion of for-eign-flag vessels to U.S.-flag.

The most frequent complaint by the industry re-garding new vessels is the increase in costs of bothmaterials and labor associated with the applicationfor USCG approval. USCG has not required thatmany materials be different from that desired byan owner or required by a classification society orIndustrial Standard. However, the material con-trol costs have increased because USCG require-ments duplicated functions (i. e., certification andfactory inspections) provided by classification soci-eties or Industrial Standards, The net effect is that‘ ‘off-the-shelf’ components have cost more mere-ly because suppliers must provide evidence ofUSCG approval.

Other examples by the industry of burdensomesafety regulations relate to indirect restrictions ontheir choice of suppliers. Although not specificallyprohibited, less expensive foreign components maynot be accepted when USCG does not recognizeaffidavits from foreign manufacturers. Compliancewith USCG regulations has been shown to add ap-

proximately 3 to 4 percent to the construction costof a new vessel. 13

The cost impact associated with USCG regula-tions on the conversion of a foreign-flag vessel toU.S. flag appears to be even greater. Typical in-dustry claims are that some expenses are requiredsolely to comply with USCG regulations and notbecause of the quality or suitability of the existingvessel. Examples of reflagging requirements are thereplacement of all joiner work with approved ma-terials (to meet stringent fire-protection standards);the replacement of lifeboats and lifesaving gear; andthe replacement of electrical wiring. In many cases,new drawings requiring a lengthy approval processmust be prepared to obtain USCG approval. Ship-builders have estimated that USCG requirementscan add approximately 4 to 5 percent to the costof conversion of a relatively new foreign-flag vesselto U.S. flag.

In recent years, USCG has responded to con-cerns that their vessel-safety requirements are tooburdensome compared with other major maritimenations. For example, USCG now accepts theAmerican Bureau of Shipping (ABS) and other in-ternational classification societies’ plan review,material certificates, and onsite inspections for bothnew and reflagged ships. 14

USCG believes that the commercial vessel-safetyrequirements for U.S. ships are coming more inline with international standards, such as those ofthe International Maritime Organization (IMO).IMO, formerly known as the Inter-GovernmentalMaritime Consultative Organization (IMCO), wasestablished in 1958 through the United Nations tocoordinate international maritime safety require-ments. USCG has actively participated in IMOsince its existence and believes that its efforts in theinternational arena have resulted in bringing thesafety requirements of most other major maritimenations up to those imposed by USCG. The CoastGuard notes that some safety requirements in thepast resulted in overregulating, but those have beenreplaced and, in some instances, other shipping na-

— — —-—IJE, K, pentimonti, American President Lines, Ltd. , personal COrn-

munication, Mar. 21, 1983.I +Nat iona] Advisory Committee on Oceans and Atmosphere

(NACOA), Marine Transportation in the United States, January 1983,

152 An Assessment of Maritime Trade and Technology

tions (i. e., Norway) now have more stringent re-quirements than the United States.

A 1979 study for MarAd entitled “Cost Impactof U.S. Government Regulations on U.S.-FlagOcean Carriers, found USCG requirement coststo be smaller than generally perceived. In fact, theannual operating costs shown due to Coast Guardregulations were a small fraction of the vessels’ totaloperating costs. The report analyzed the increasedcosts of two different types of vessels and found theincrease to be less than 0.5 percent of the total cost.

Since the analysis was written in 1979, IMO hasimposed additional safety standards that may min-imize the cost differences further.

It appears that what was once perceived as a ma-jor competitive detriment for U.S.-flag carriers isbeing resolved. However, most of the safety re-quirements imposed by the U.S. Coast Guard arebased on statutory law, and if any changes to theexisting requirements are needed, they must bemade through legislation.

SUBSIDY POLICY

The Merchant Marine Act of 1936 has been thebase on which the succeeding 45 years of U.S. Gov-ernment maritime subsidy policy was built. Sec-tion 101 of the 1936 Act contains the following dec-laration of national policy:

It is necessary for the national defense and de-velopment of its foreign and domestic commercethat the United States shall have a merchant marine(a) sufficient to carry its domestic waterborne com-merce and a substantial portion of the waterborneexport and import foreign commerce of the UnitedStates and to provide shipping service essential formaintaining the flow of such domestic and foreignwaterborne commerce at all times, (b) capable ofserving as a naval and military auxiliary in timeof war or national emergency, (c) owned and oper-ated under the U.S.-flag by citizens of the UnitedStates insofar as maybe practicable, (d) composedof the best-equipped, safest, and most suitable typesof vessels, constructed in the United States andmanned with a trained and efficient citizen person-nel, and (e) supplemented by efficient facilities forshipbuilding and ship repair.

To implement this policy, direct construction andoperating subsidy programs, based on U.S./foreigncost differentials, were established through the CDSand ODS programs. Direct cash payments fromthe Federal Government were to be provided toqualified applicants to defray the higher costs ofshipbuilding and operation in the United States.The law required that subsidized vessels be manned100 percent by U.S. citizens, while on nonsubsi-dized vessels the licensed crew had to be 100 per-

cent U.S. citizens, and the nonlicensed crew 75 per-cent U.S. citizens.

An integral part of the ODS program was theconcept of essential trade routes. Subsidy was pro-vided only for vessels operating on assigned routesand observing assigned minimum and maximumsailings in services determined to be essential to thepromotion of U.S. foreign commerce, regardlessof whether these routes were profitable to the lines.

The 1936 Act also included a variety of other eli-gibility, monitoring, and reporting requirementsas a condition for receiving subsidy. These consistedmainly of requirements of corporate financial dis-closure, as well as domestic trading activities,foreign shipownership, and other facts relevant tosubsidy eligibility. Another provision precludedpayment of subsidy in support of any service incompetition with another U.S. carrier except incases where service inadequacy could be demon-strated.

In addition to the direct subsidy aids providedunder the CDS and ODS programs, the act alsoincluded two indirect assistance programs. First,earnings placed in Capital Reserve Funds (annualcontributions were required) for new vessel con-struction were relieved of income tax liability andcould therefore be used to reduce taxation. Second,the Government’s lending program for ship con-struction, which had previously existed, was reac-tivated. Today, the mechanism used is not directGovernment lending but Government guarantee

Ch. 6—U.S. Maritime Policies ● 153

of commercially placed loans. This authority, con-tained in title XI, was added in 1938.

A variety of defense and security provisions alsowere incorporated. Subsidized vessel designs wereto be submitted to the U.S. Navy. Any noncom-mercial design features recommended by the U.S.Navy were to be paid for by the U.S. Government.Subsidized ships were subject to Government re-purchase, and provision was made for Governmentrequisition of privately owned merchant ships underemergency conditions. Finally, MarAd was re-quired to undertake an annual survey of U.S. ship-building capacity with the U.S. Navy to assure theadequacy of the shipbuilding mobilization base.

In the late 1960’s, a comprehensive overhaul ofthe Merchant Marine Act was planned, and on Oc-tober 21, 1970, the President signed into lawamendments to the 1936 Act, known as the Mer-chant Marine Act of 1970. In general, it was a reaf-firmation of the national policy of Federal supportfor the merchant marine. The fundamental policiesremained the same, although several program ad-justments were made in the interest of increasingeffectiveness of the program. A specific pledge ofGovernment support for a 10-year, 300-ship con-struction program was made.

Authorization was made for payment of CDSdirectly to yards, rather than to ship purchasersonly. 15 This was intended to encourage greater ship-yard participation in vessel design. It was hopedthat this would lead to greater shipyard productiv-ity.

Negotiated contracts between shipyard and pur-chaser were allowed for the first time. Previously,competitive bidding was required. It was hoped thatshipbuilding costs would be reduced by eliminatingexpenses associated with bid preparation and thatyards would be encouraged to develop standardmarket designs.

Declining CDS rates (i. e., subsidy as a percent-age of total cost) were imposed as objectives for allCDS awards. The goals were a 45-percent CDSrate in fiscal year 1971 with a reduction in the ceil-ing of 2 percentage points a year until a level of35 percent was reached in fiscal year 1976. These

Is u s, Ocem PO1lCY in the 1970 ‘s: Status and Zssues (WashiwwD.C. :“ U.S. Department of Commerce, October 1978), p. V-38.

rates were required for negotiated contracts, whilethe Secretary of Commerce could waive them incompetitively bid contracts.

A major innovation was the attempt to encouragethe construction and operation of bulk carriers. Al-though CDS construction of bulkships had beenauthorized since 1952, no bulk vessels had beenbuilt with subsidy as of 1970. The major changewas that bulkships could be granted ODS. Also,subsidy-eligibility restrictions pertaining to U.S.owners who also owned foreign-flag vessels wereliberalized to allow bulk operators to replace foreigntonnage with new U.S. ships within a specified pe-riod. Also, restrictions on foreign-to-foreign tradingwere liberalized for subsidized bulkships becauseof the differences between liner and bulk operations.

The 1970 Act also revised the wage-subsidy pro-vision of the 1936 Act to minimize operating sub-sidy and encourage collective bargaining. A wageindex was developed, and wage increases in excessof those allowed by the index were not subsidizable.

The 1970 Act extended eligibility to establish tax-deferred Capital Construction Funds (CCF) to mostU.S. operators, including nonsubsidized carriers.Previously, only ODS recipients had been eligible.Although operators could make use of CCFs, tax-deferred funds could be withdrawn only for con-struction or reconstruction of vessels in U.S. ship-yards for deployment in U.S. foreign commerce,the Great Lakes trades, noncontiguous domestictrades, or fisheries.

The only other major provision was raising thetitle XI guarantee ceiling from $1 billion to $3billion. Subsequently, it has been raised severaltimes, most recently to $12 billion.

The 1970 Act was not successful in achieving fleetgrowth. Rather than 300 ships built under the CDSprogram as envisioned in 1970, 80 were built, withanother 56 converted or reconstructed with CDSfunding.

CDS and ODS were intended to close the gapbetween U.S. and foreign costs. In the recent past,they have not been able to accomplish this. Aftera propitious start in the early 1970’s, when CDSrates on average did fall to the 35 percent goal, ratesbegan to rise again (reflecting both the U.S. infla-tion rate and the depressed state of the industry

25-417 0 - 83 - 11 QL 3

154 ● An Assessment of Maritime Trade and Technology

worldwide). As pointed out previously, even a 50-percent rate—the highest level allowed by law—isinsufficient to close the current differential. (A ratecloser to 65 to 70 percent would be required basedon some recently quoted foreign constructionprices.)

On the operating cost side, the wage index sys-tem, implemented by the 1970 Act in an effort to

reduce costs and encourage efficiency, has meantthat wage differentials are not covered totally. Fur-ther, maintenance and repairs have not been rou-tinely included in recent ODS contracts. Finally,fuel cost, which increased dramatically in the late1970’s to the point where it is a large percentageof total operating cost, is not a subsidizable expense.

Thus, despite substantial expenditures, CDS andODS have not made the U.S. foreign-trade fleet

competitive. Table 40 shows outlays for the two

programs over time.

Shortly after the present administration took of-fice, an interagency task force was set up to examine

current maritime policies and to make specific rec-

ommendations for changes. The first major stepwas the curtailment initially and then the cutoff ofCDS funding. For fiscal year 1982, no CDS fundswere requested ($49.5 million in carryover fundswere made available), compared with an averageannual request of $132 million in the previous 4years. It was announced that this was intended asa phasing out of the CDS program and that in thefuture no funding would be made available. Tem-porary authority (for 1 year) was granted for thebuilding of subsidized vessels abroad.

On May 20, 1982, Secretary of TransportationDrew Lewis announced the initial elements of a newprogram. He stated the administration’s intent tohonor existing ODS contracts, and other matters(see app. A). At this time he also announced thatthe administration would seek support of an exten-sion of temporary authority for subsidized U. S.-flag operators to construct or acquire vessels out-side the United States and still receive ODS.

In August 1982, the Secretary of Transportationagain stated that the Government would honor ex-isting ODS contracts, but that no new contracts

Table 40.–Maritime Subsidy Outlays–1936-60

Fiscal year CDS Reconstruction subsidy Total ODS Total ODS and CDS

1936-55 . . . . . . . . . . . . . . . . . . . $ 248,320,942a

195W0 . . . . . . . . . . . . . . . . . . . 129,806,0051961 . . . . . . . . . . . . . . . . . . . . . 100,145,6541962 . . . . . . . . . . . . . . . . . . . . . 134,552,6471963 . . . . . . . . . . . . . . . . . . . . . 89,235,8951964 . . . . . . . . . . . . . . . . . . . . . 76,608,3231965 . . . . . . . . . . . . . . . . . . . . . 86,096,8721966 . . . . . . . . . . . . . . . . . . . . . 69,446,5101967 . . . . . . . . . . . . . . . . . . . . . 80,155,4521968 . . . . . . . . . . . . . . . . . . . . . 95,989,5861969 . . . . . . . . . . . . . . . . . . . . . 93,952,6491970 . . . . . . . . . . . . . . . . . . . . . 73,528,9041971 . . . . . . . . . . . . . . . . . . . . . 107,637,3531972 . . . . . . . . . . . . . . . . . . . . . 111,950,4031973 . . . . . . . . . . . . . . . . . . . . . 168,183,9371974 . . . . . . . . . . . . . . . . . . . . . 185,060,5011975 . . . . . . . . . . . . . . . . . . . . . 237,895,0921976 b . . . . . . . . . . . . . . . . . . . . 233,826,4241977 . . . . . . . . . . . . . . . . . . . . . 203,479,5711978 . . . . . . . . . . . . . . . . . . . . . 148,690,8421979 . . . . . . . . . . . . . . . . . . . . . 198,518,4371980 . . . . . . . . . . . . . . . . . . . . . 262,727,122

Total ... ... ... ... ... ... .$3,135,809,321

$ 3,286,68834,881,409

1,215,4324,160,5914,181,3141,665,087

38,1382,571,566

932,11496,70757,329

21,723,34327,450,96829,748,07617,384,60413,844,951

1,900,5719,886,024

15,052,0727,318,7052,258,4922,352,744

$202,007,125

$ 251,607,830164,687,414101,361,086138,713,23893,417,20978,273,41086,135,01072,018,07681,087,56696,086,29394,010,17895,252,247

135,088,321141,698,479185,568,541198,905,452239,795,663243,712,448218,531,643156,009,547200,776,929265,079,866

$3,337,816,446 C

$ 341,109,987644,115,146150,142,575181,918,756220,676,665203,036,844213,334,409186,628,357175,631,860200,129,670194,702,569205,731,711268,021,097235,666,821226,710,926257,919,080243,152,340386,433,994343,875,521303,193,575300,521,683341,368,236

$5,824,021,842

$ 592,717,817808,802,560251,503,661320,631,994314,093,894281,310,254299,469,419258,646,433256,719,426296,215,963288,712,747300,983,958403,109,418377,365,300412,279,467456,814,532482,948,003630,146,442562,407,164459,203,122501,298,612606.448,102

$9,161 ;838;288%cludes $131.5 mllllon CDS adjustments covering the Wortd War II period, $105.8 million equivalent to CDS allowances which were made in connection with the Mariner

Ship Construction Program, and $10.8 million for CDS in fiscal years 19!M and 1955.blncludeg totals for fl~al year 1978 and the transition qua~er ending SePt. 30, 1976.clnclude~ approximately $~ Miilion in CDS outlays repaid to the Federal Government as of Sept. 30, 1980. Nearly $25.3 million of this total rePresents subsidy 9rant~

In tha construction of the tanker Stuyvesarrt.

SOURCE: U.S. &f8rWrne Adrn/n/stratlon 7960 Annual f?epoti (Washington, D. C.: Maritime Administration, U.S. Department of Commerce, July 1961), p. 61.

Ch. 6—U.S. Maritime Policies ● 155

would be signed, and that the fiscal year 1982-83moratorium on new CDS contracts would be con-tinued.

Maritime subsidy policy clearly has been changeddrastically through budgetary reductions and tem-porary legislative authority over the past 2 years.Strong industry opposition, especially by the ship-builders, has occurred while U.S. liner operators,who could benefit from build-foreign provisions,have applauded the changes. Legislation has beenintroduced to restore construction subsidy funds forsupport of the U.S. shipbuilding industry, and thedebate undoubtedly will continue.

In 1982, one subsidized operator, U.S. Lines,and the U.S. Government negotiated the termina-tion of an ODS contract on some ships in returnfor a short-term ODS contract on other ships. Sincethen, other ODS operators have expressed interestin so-called ‘‘subsidy buy-outs’ or the termination

of their ODS contracts in return for a lump sumpayment. One application was filed but later re-jected by MarAd in early 1983. While the presentadministration has considered such a buy-out pro-gram as one method to use to phase out operationalsubsidies, and DOT has considered the develop-ment of guidelines, no policy on this subject hadbeen announced as of September 1983.

It appears that after 45 years, the U.S. maritimesubsidy program will soon end. Many argue thatnew policies are needed to take its place, but nonethat has been proposed has broad support. Pros-pects for shipbuilders and ship operators who havedepended on the subsidy program are unclear,Most industry spokesmen would like to see futuremaritime policies include some new forms of in-dustry support, such as indirect incentives designedto promote U.S.-flag shipping and U.S. shipbuild-ing. Unsubsidized U.S. competition with the restof the world in a free and open market system isa worthy goal but does not appear feasible for ourmaritime industries under any likely future scenar-io, particularly in light of both direct and indirectsubsidies provided foreign builders and operatorsby their governments.

Ship Financing Guarantees

The Federal Ship Financing Guarantee programwas established in 1938 pursuant to title XI of the

Merchant Marine Act of 1936. It provides for afull faith and credit loan guarantee by the U.S.Government. Prior to the 1970’s, the program grewonly moderately, and at the end of fiscal year 1970there were only $1 billion in contracts in force.

The program was overhauled in 1972 and is nowa financing guarantee program (rather than a mort-gage insurance program) under which the Govern-ment guarantees shipbuilding obligations sold toinvestors. Such guarantees may be provided by theFederal Government covering up to 75 percent ofthe construction cost of vessels built with CDSassistance, and 87.5 percent of the construction costof nonsubsidized vessels. Vessels to be used in boththe foreign and domestic trades are eligible for titleXI aid. They must be U.S.-flag and built in U.S.shipyards. Cargo, passenger, and cornbkationships, tankers, tugs, towboats, barges, dredges, fish-ing vessels, floating drydocks, and oceanographicresearch and pollution-abatement vessels are alleligible. In addition, mobile offshore drilling rigshave been interpreted by MarAd as eligible, al-though recently the administration has sought tocurb use of the authority for rigs.

The importance of the program can be seen bythe amount of commercial shipbuilding using theprogram (see table 41). The percentage of commer-cial shipbuilding and conversion work financedthrough title XI increased from 16 percent in 1970to 63 percent in 1981.

Table 41 .—U.S. Shipyard Orders, 1970-81, FinancedUnder Title Xl Program

Title Xl orders

Year Amount ($ millions) Percent of total private

1970 . . . . . . $ 193 16.11971 . . . . . . 358 29.51972 . . . . . . 849 55.11973 . . . . . . 1,241 35.71974 . . . . . . 1,539 34.31975 . . . . . . 971 19.31976 . . . . . . 1,045 25.41977 . . . . . . 1,198 31.91978 . . . . . . 552 18.81979 . . . . . . 1,087 37.01980 a . . . . . 1,338 42.91981a . . . . . 1,350 62.8

Totals . . $11,721 32.6

aEstimated.

SOURCE Compiled by the U S. Maritime Administration, Office of Policy andPlans, from MarAd Title Xl data and the Shipbuilders Council ofAmerica, Artnua/ ffeporl, 1981

156 An Assessment of Maritime Trade and Technology

Substantial growth in the program has occurredduring the past decade. From 1938 to 1970, $1billion in guarantees was issued, while between1970 and 1982, $10 billion was issued. Among thefactors that influenced this expansion were the Mer-chant Marine Act of 1970, which stimulated tankerand liquefied natural gas (LNG) tanker construc-tion; Alaskan oil trade, which also stimulated tankerconstruction; and 1972 amendments to title XI,which stimulated inland tug-barge construction.

As of July 1983 the following guarantees wereoutstanding:

Oceangoing merchant ships . . . . . . . . . . . . . . . . $4.8 billionOffshore oil rigs . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 billionInland river vessels . . . . . . . . . . . . . . . . . . . . . . . 1.6 billionMiscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 billion

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.0 billion

For most of its history, title XI has been non-controversial. It has been self-supporting throughfees paid by participants. These fees are placed inthe Federal Ship Financing Fund, from which allMarAd operating costs associated with the admin-istration of the. program and guarantees, in theevent of default, are honored. The program has ex-perienced only 17 defaults since its inception, re-sulting in a combined pay-out from the fund of$248.2 million. Of this amount, $50 million wasassociated with the 1978 bankruptcy of a subsidizedliner operator. Of the $248.2 million, it is antici-pated that $155 million ultimately will be recoveredby the Government.

Recently, the pace of defaults has increased.Thus far, five companies have defaulted in fiscalyear 1983, resulting in Fund losses of $55.7 million.Advances of $31 million also have been made to17 companies. As of July 1983, the Ship Financ-ing Fund had assets of $190 million. It is anticipatedthat there could be another $60 million in defaultsthis year (before any recovery by the Government,which would reduce the exposure substantially).Overall, the risk to the Government could total$500 million to $600 million ultimately if all com-panies currently in shaky financial position wereto default.

These facts have caused concern within the ad-ministration, and all advances from the Fund mustbe approved by the Office of Management andBudget.

One current legislative initiative that would re-form the title XI program is H.R. 3399 recentlyintroduced by Congressman Biaggi. Under the bill,an Industrial Redevelopment Bank would be es-tablished. The Bank would handle financing, co-financing, or refinancing of vessel construction orreconstruction. It would subsume the title XI loanguarantee program but would have considerablybroader authority than now exists. The Bank couldeither invest directly in the form of equity participa-tion or guaranteed loans, or indirectly through long-term guarantees of obligations secured by shipmortgages, leases, or stock pledges.

In addition to financing vessel acquisition, theBank would have authority to contract directly forthe construction or reconstruction of vessels in U.S.yards. This authority is pursuant to the provisionsof Title VII of the Merchant Marine Act—the‘ ‘build and charter’ authority.

Provisions of the bill would encourage construc-tion of generic vessels in series production and in-creased shipyard efficiency. A primary element ofthe Bank’s responsibility would be to allow for thedomestic production of replacement vessels in theU.S. liner fleet that would be suitable for nationaldefense support. Some provision would be avail-able for foreign construction of subsidized vessels,but such permission would be restricted in orderto protect the shipyard mobilization base. The Bankwould have authority to set up R&D consortia withprivate sector participants who would be eligiblefor substantial tax benefits.

The Bank would be provided with a $2-billionline of credit ($1 billion in direct guaranteed loansand $1 billion in revolving authority in the formof interim construction financing); it also wouldhave $2 billion in investment guarantee authoritythrough the restructuring of existing credit pro-grams.

Eventually, the responsibilities of the Bank wouldbe turned over to the private sector. Initially, Fed-eral seed money would be provided. A sunset pro-vision in the bill would, after 10 years, eitherdissolve the Bank or sell it to financial institutions,export trading companies, or union pension funds.This proposal probably will be debated in the com-ing months as a promising alternative to direct sub-sidy programs.

Ch. 6—U.S. Maritime Policies ● 157- — . —

MARITIME REGULATORY POLICY

It may be possible to enhance competition in cer-tain segments of the industry if the”U. S. Govern-ment focuses attention on enabling the U.S. ship-ping industry to operate in a regulatory frameworksimilar to that of foreign operators. Along thoselines, a bill to amend the Shipping Act of 1916(regulating liner operations) has been passed by theSenate and was pending in the House as of Sep-tember 1983. As passed by the Senate and intro-duced in the House, this bill contains almost thesame provisions as similar proposed legislationwhich has been debated in Congress for at least 4years. 16 The bill’s passage is also supported by theadministration.

FMC is the Government agency charged withoversight of U.S. shipping regulations. The basisfor U.S. regulatory policy on shipping is the Ship-ping Act of 1916 as amended. The act imposes strictrequirements on the competitive practices of allocean common carriers in both foreign and domes-tic commerce while permitting approved antitrustimmunities to shipping conferences. Prior Govern-ment acquiescence is required for all anticompeti-tive conference agreements, such as rate-setting,pooling agreements, or interconference agreements.Conferences in U.S. trades are required to be opento any carrier that wishes to join.

A number of practices are prohibited. One con-cerns the giving of deferred rebates, a practicewhereby ship operators agree to return a portionof the total freight paid for services in an earlierperiod to a “loyal’ shipper who has shipped all ofhis cargoes with the carrier or conference in ques-tion. This practice is common in foreign confer-ences. A second prohibited practice is the use of‘‘fighting ships, whereby a carrier or conferencesets one or more ships, operating at extremely lowor predatory rates, in head-to-head competitionwith a competitor in order to drive the competitorout of the trade. Losses on the operation of fightingships are shared by all members of the conference.A third practice outlawed is discrimination againstshippers as punishment for nonpatronage. Section14 of the Shipping Act included a more general pro-

‘GSee ‘ ‘The Difficulty of Introducing Meaningful U.S. MaritimeLegislation, by Paul Richardson, October 1980.

hibition against unjust or unfair discriminationamong shippers. All common carriers must offertheir services on equal terms to all shippers.

The Shipping Act was revised substantially in1961 with the passage of Public Law 87-346. Sec-tion 14 was amended to allow approved loyaltyagreements in the form of dual-rate contracts, withthe following limitations: penalties that could be im-posed on shippers for contract violation were limitedto single damages, and the maximum exclusive pa-tronage discount was set at 15 percent.

Section 15 also was amended to restrict the con-ferences’ ability to control membership. Previous-ly, any conference agreement could be disapprovedif it was considered unjustly discriminatory or un-fair among carriers. Public Law 87-346 specifiedthat agreements could be approved only if theyallowed open access to all carriers which could andwould provide regular liner service on a given trade.

Carrier agreements also could be disapproved iffound to be “contrary to the public interest. ” Sub-sequent case law, affirmed by the courts, requiredcarriers to “bring forth such facts as would dem-onstrate’ that the agreement was required by aserious transportation need, necessary to secure im-portant public benefits, or in furtherance of a validregulatory purpose of the Shipping Act. The prin-ciple, known as the Svenska test, after the FMCcase of that name, is considered by carriers as amajor impediment to conference approval, primari-ly because it is difficult to define the concept of“public interest”- therefore, application (i. e., ap-proval of agreements by FMC) is uneven and un-predictable. Pending legislation (the Shipping Actof 1983) would eliminate this ‘‘public interest’standard in most versions, but the House JudiciaryCommittee has favored retaining the standard.

Conferences in the U.S. trades are substantial-ly weaker than their foreign counterparts. Membersmust receive FMC approval to organize pools, ra-tionalize service, and limit sailings. They cannotlimit membership, and they cannot encourage ship-per loyalty through such mechanisms as deferredrebates. Independent operators can easily enterU.S. liner trades. A conference’s inability to con-trol access to the trades, whether within or outside

158 . An Assessment of Maritime Trade and Technology. —

the conference structure, means that attempts torationalize service—even if approved by FMC—are likely to be unsuccessful. The U.S. trades suf-fer from chronic overcapacity. Rate wars have oc-curred in both the North Atlantic and Pacific tradesrecently. These are devastating to the weaker, high-cost conference members (which tend to be U.S.flag).

U.S. carriers also face a more significant prob-lem than do foreign carriers in the same tradesbecause, while theoretically all of the restrictionsapply equally to all conference members, it is easierfor FMC and the Department of Justice to monitorthe actions of U. S. carriers, whose financial state-ments and business practices are open to close scru-tiny.

The open conference system, as it exists in U.S.trades, is an anomaly in world shipping. The in-dustry is constrained by Government regulationwhich forces on it some, but not all, aspects of com-petition. Conferences set rates and schedule serv-ices. But any joint planning must be approved byFMC, and direct negotiation with shippers’ groupsdoes not have antitrust immunity. Overtonnaginghas detrimental effects, such as an increase in unitcosts resulting in higher rates.

There are two economic alternatives to the cur-rent situation. Debate on the merits of each has con-tinued for years, both inside and outside the FederalGovernment. One is price competition. Under idealconditions, price competition would reduce prices,remove excess capacity, and create a healthier bus-iness climate for firms remaining in the industry.Each firm would determine its profit-maximizinglevel of output and produce accordingly. Becausedemand would not be sufficient to support all car-riers currently operating, carriers would have toreduce prices and operate at higher capacity levelsto minimize or eliminate short-run losses. Ineffi-cient and financially weak firms would be forcedout of the industry.

A study by the Department of Justice in 197717

concluded that the Nation would benefit from amore competitive environment in ocean-liner ship-ping markets and recommended repeal of, or

‘7’ ‘The Regulated Ocean Shipping Industry, ” a report of the U.S.Department of Justice, January 1977.

amendment to, the 1916 Shipping Act to increasecompetition. This philosophy also has been es-poused by some opponents to the present proposedlegislation who claim that the 1983 Shipping ActAmendments are inconsistent with the trend towardderegulation.

It is not clear that shipping competition couldbe achieved easily. Significant barriers do exist andwould continue. These include the major capitalrequirement to enter shipping, high fixed costs,worldwide cargo-reservation schemes, and productdifferentiation. On a practical level, achievementof such competition could result in decimation ofthe U.S.-flag fleet because many foreign carrierscontinue to receive direct and indirect subsidies aswell as antitrust immunities which could carry overinto their U.S. operations.

At the other regulatory policy extreme is theclosed conference system combined with the elim-ination of independent carriers, thus effectively clos-ing the trades. The economic argument for permit-ting closed conferences is that they could rationalizetrade, reducing the misallocation of resources andending costly service competition. Excess tonnagewould be reduced. The result, however, likelywould be higher freight rates. The degree to whicha conference would face outside competition woulddetermine how much control it would have overrates. Given a choice between reducing costs to in-crease profits and raising rates to accomplish thesame goal, there might not be sufficient incentiveto do the former. Shippers, and ultimately consum-ers, would be the probable victims under such asystem. A survey of shippers taken by the GeneralAccounting Office (GAO) indicated that shippersbelieve the highest liner rates and greatest declinein service quality would result under a closed con-ference system (the other choices were open com-petition, restricted conference, and “other’ ’).

Changes in U.S. regulation of ocean-liner opera-tions in the U.S. foreign trades are being consideredin the proposed Shipping Act of 1983, which would

laTestimony on S. 47 by Allen Ferguson, Chairman of the NationalInstitute of Economics and Law, before the Senate Commerce Com-mittee, 1983.

lgchages jn Feder~ Maritime Regulation &n Increase Eficien -cy and Reduce Costs in the Ocean Liner Shipping Industry, Report—GAO/PAD-82-l 1 (Washington, D. C.: U.S. Government AccountingOfXce, July 1982), pp. 20-21.

Ch. 6—U.S. Maritime Policies 159

replace the existing regulatory framework under theShipping Act of 1916. The proposed legislation re-tains the open conference system for U.S. tradesbut clarifies and strengthens the carriers’ immunityfrom U.S. domestic antitrust laws.

U.S. liner operators in international trades con-tend they have been at a disadvantage relative totheir foreign competitors due to U.S. regulation ofthe industry. While in theory all operators in theU.S. foreign trades are subject to regulation underthe Shipping Act 1916, foreign operators in manyinstances are, in effect, beyond the reach of U.S.regulatory and judicial control. The intent of theproposed Shipping Act of 1983 is to provide a moreequitable regulatory environment for the U.S. oper-ators by limiting their exposure to U.S. antitrustlaws.

The legislation now being considered in Congressis based on a compromise achieved during the 97thCongress between the interests of ocean carriers andshippers. Under the compromise, carriers wouldbe assured that agreements to form conferences,set rates, and rationalize service within the confer-ence framework, which were effective under thenew act, would be immune from U.S. domesticantitrust laws. To balance the strengthened con-ferences that would result, provisions were includedto stimulate competition, such as the mandatoryright of conference members to set rates independ-ently under certain conditions and the authoriza-tion of loyalty and service contracts which couldprovide lower rates and improved service for cer-tain shippers. While the proposed legislation ex-plicitly expands the scope of agreements that maybe formed only by including intermodal activities,the removal of the threat of penalty under antitrustlaws would, in effect, give the carriers freedom toform stronger agreements,

In the compromise package, the greater certaintyof antitrust immunity was to be provided primari-ly through two major regulatory changes. The firstwould be the removal of general competitive stand-ards of review historically used by FMC in approv-ing liner conference agreements. Instead, prohib-ited acts would be clearly specified. Potential viola-tions of the act would be limited to those listed pro-

hibitions, and agreements would not be exposedto subjective interpretations of broad ‘ ‘public in-terest criteria.

As of September 1983, amendments to the pro-posed legislation by the House Judiciary Commit-tee would weaken the antitrust immunity envi-sioned in the original compromise proposal by re-taining a general standard of review to be used byFMC in addition to the specified prohibited actions.

The second element of certainty would be theconsolidation of jurisdiction over ocean-liner ship-ping activities in FMC, subject solely to the Ship-ping Act. Agreements that become effective underthe act would not be subject to review or penaltiesby other Government agencies, notably the Depart-ment of Justice, Similarly, agreements or conductwhich were found to be in violation of the act wouldbe subject to suspension, modification, or penaltiesonly by order of FMC.

Additional substantive changes made by theHouse Judiciary Committee include the expirationof the antitrust immunity conferred by the bill 2years after the study commission (on Deregulationof International Ocean Shipping, to be establishedby the bill) files its report, or December 31, 1988,whichever is earlier, and the elimination of filingand FMC enforcement of tariffs. Most carriers,shippers, and FMC have supported the existingtariff filing requirements, claiming that they en-hanced stability and facilitated enforcement of anti-rebating laws. However, others, including the pres-ent administration, some large shippers, and theFederal Trade Commission (FTC) oppose tariff fil-ing and enforcement on the grounds that it is un-necessary Government intervention in the market-place and hampers competitive flexibility in settingrates. Under the Judiciary Committee amendment,carriers still would be required to publish theirtariffs in a manner easily accessible to shippers andother interested persons.

The final passage of the Shipping Act of 1983,with or without recent House Judiciary amend-ments, is not certain. It appears, however, that anacceptable compromise is close.

160. An Assessment of Maritime Trade and Technology

U.S. SHIPPING TAXATION POLICIES

An important aspect of U.S. shipping competi-tiveness versus foreign-flag fleets is this Nation’staxation policies. The following discussion will ad-dress the tax rules that apply to the taxation of theshipping income of U.S. domestic and U.S.-ownedforeign corporations. The United States generallysubjects to tax the worldwide income of a U.S. do-mestic shipping company even if the income is sub-stantially foreign source income (determined undercomplex sourcing rules based on property and timespent inside and outside the United States). In mostcases, the United States will allow a credit againstU.S. tax liability for foreign taxes paid on foreignsource shipping income. In general, shipping istreated similarly to other industries, although a fewtax benefits are unique to the shipping industry.These tax benefits allow U.S. citizens owning orleasing eligible vessels that are U.S. built to obtaintax benefits through the maintenance of CCF andConstruction Reserve Funds (CRF) to be used toconstruct qualified vessels. These tax-deferral pro-visions, authorized by the Merchant Marine Actof 1936 as amended are considered by many to bethe most important provisions of the act.20

If the goal of the U.S. maritime policy is to pro-mote U.S.-flag shipping and to assure fairness forthe Nation’s shipping industry, then tax policiesmust be designed to ensure tax parity with othernations. If direct Government subsidies to U. S.-flag ship operators are discontinued, as the presentadministration proposes, then tax parity with for-eign operators takes on added significance. A ma-jor reason for the existence of huge fleets ownedby U.S. interests and registered in countries suchas Liberia and Panama is that those countries of-fer an exemption of shipping income from taxa-tion.21 Similarly, other major maritime countriessuch as Greece and Japan, which are not consideredflags of convenience, offer significant tax advan-tages to shipping when compared to their domesticindustries. In fact, many nations consider their in-

*“James Gallagher, “Maritime Tax: The Capital Construction Fundof the Merchant Marine Act of 1970, Journal of Maritime Lawsand Commerce, p. 105.

*lThe council of American-Flag Ship Operators, ‘‘Analysis of pro-

posal to Impose Tax on CCF, ” March 1982.

ternational shipping as offshore enterprises and pro-vide special tax concessions.

In 1962, Congress specifically exempted U. S.-controlled shipping income when it enacted the so-called ‘‘subpart F’ provisions amending the In-ternal Revenue Code. These provisions requiredthat certain types of tax-haven income of foreignsubsidiaries of U.S. companies be taxed current-ly, rather than when the income is distributed tothe U.S. parent. The shipping income exclusionfrom ‘‘subpart F’ was primarily for nationaldefense reasons. It was believed by Congress thatthe shipping exclusion would encourage a U. S.-owned (controlled) maritime fleet.

In 1975, to achieve some parity in the taxationof shipping income of U.S. domestic and U. S.-owned foreign corporations, Congress generallyended the ‘‘subpart F’ exclusion for shipping in-come except to the extent the shipping income ofthe foreign subsidiary was timely reinvested intothe shipping business. Congress believed that thereinvestment rule was appropriate because of thecompetitive nature of foreign-flag shipping opera-tions and in order to continue to encourage a signifi-cant U.S.-owned (controlled) maritime fleet.

In May 1983, the Internal Revenue Service(IRS) issued final regulations for Americanstockholders of foreign-based companies that gen-erate shipping income. These regulations amendthe Income Tax Regulations and implement the1975 Tax Reduction Act and 1976 Tax ReformAct. These regulations were first proposed in Au-gust 1976. The new regulations state that if less than90 percent of the earned income is classified as‘‘subpart F’ income, all of it is subject to taxation .22The previous regulation stated that if more than70 percent of the income was ‘‘subpart F, all ofit was considered exempt.

Thus, today, U.S.-owned foreign shipping cor-porations, such as those “U.S. effective-controlled”fleets under Liberian or Panamanian flag, haveavailable to them a vehicle for deferring taxeson income but only if it is reinvested in shipping

**See Feder~ Register, May 19, 1983, P. 22512.

and only if at least 90 percent of the corporation’sincome is from shipping. Some bulk operators ofsuch foreign-flag fleets have claimed that the in-tent of the 1975 Act—to encourage investment inU.S.-owned ships—has not been realized becauseinvestment decisions are based not on deferred taxesbut on much more significant market and price fac-tors. Other operators—particularly in the linertrades—believe that such tax benefits are impor-tant to the future viability of the industry. Thesearguments require careful analysis if the overall sub-jects of tax parity and tax incentives for the ship-operating industry are addressed by Congress.

Certain forms of tax deferrals also have been putinto effect as a means of encouraging investmentin the U.S.-owned, U.S.-flag fleet. In 1970, Con-gress adopted a tax measure for the U.S.-flag fleetwhich instituted the CCF program. This programgenerally allows U.S. shipping companies to enter

into agreements with MarAd to establish CCFS forthe replacement or addition of vessels for use in theU.S.-flag merchant marine. U.S. owners or char-terers of U.S.-constructed U.S.-flag vessels oper-ated in the U.S. foreign or domestic commerce candefer taxation of the net earnings derived from suchvessels by depositing the earnings into the CCF toprovide for replacement or additional vessels to beoperated in the U.S. foreign, Great Lakes, or non-contiguous domestic trade. Vessels operated incoastwise or intercostal trade are not qualified.Federal income tax on such earnings (as well as in-vestment income of the CCF) is deferred until thefunds are withdrawn from the CCF for a purposenot permitted under the agreement with MarAd.Deposits of tax depreciation of vessels and net pro-ceeds from the sale of vessels also may be made.Theoretically, the tax deferral can continue on in-come deposited in the CCF as long as the fund-holder continues to acquire, construct, or recon-

162 ● An Assessment of Maritime Trade and Technology— . — . —

struct qualified vessels. The tax basis (cost) of avessel generally is reduced to the extent the vesselis purchased by a qualified withdrawal from a CCF.

The CCF program is authorized by section 607of the Merchant Marine Act, as amended in 1970.Prior to the 1970 amendment, only subsidized shipoperators were eligible for tax-deferred funds, re-ferred to as Capital Reserve Funds and Special Re-serve Funds. Today, both subsidized and nonsub-sidized operators are eligible for the CCF program,and the old Capital Reserve Fund has been phasedout. The CCF program is believed by U.S.-flagoperators to be the key element that could placeU.S.-flag ships on a tax parity with that of U. S.-owned, foreign-flag ships under ‘‘subpart F’ of theInternal Revenue Code and foreign-flag, foreign-owned competitors. 23 presently, however, U.S.-flag, foreign-built ships are neither “qualified” forCCF withdrawals nor “eligible” to make CCF de-posits.

The CRF is another tax benefit to U.S. ship-owners. The CRF is authorized under section 511of the Merchant Marine Act as amended and allowsU.S. shipowners operating vessels in foreign ordomestic commerce of the United States to deferthe gain attributable to the sale or insurance pro-ceeds from the loss of a vessel. The moneys depos-ited in the fund must be used to construct, recon-struct, or acquire vessels of U.S. registry built inthe United States. Although any gains on thesetransactions are not recognized for income tax pur-poses if the deposits are properly expended for avessel, the basis for determining depreciation of thevessel is reduced by the amount of any such gains.The ability to defer gain on certain transactionsthrough deposits to the CRF applies only to vesselowners.

A comparison of other nations’ shipping tax pol-icies is also relevant to gaining an understandingof U.S. shipping tax parity. In Greece, for instance,no tax is levied on shipping income, only a ton-nage tax similar to those imposed by Liberia andPanama. In Britain, shipowners are able to sheltercurrent income from taxes by the use of free de-preciation (1 year), or by registering in a Britishcolony such as Bermuda or Hong Kong. In Nor-

way, the tax on current income is reduced substan-tially by a combination of accelerated depreciationand the use of tax-deferred replacement and repairfunds. In France, tax deferral results from a com-bination of accelerated depreciation and the absenceof any tax on operations carried on outside thecountry. Worldwide, most countries impose verylittle tax, if any, on shipping income.24

Recently, DOT outlined proposed changes to theMerchant Marine Act of 1936, necessary to imple-ment a number of the administration’s maritimepolicy initiatives. One major change proposes thatexisting and newly deposited tax-deferred moneysin the CCF program could be used to acquire, con-struct, or reconstruct U.S.-flag, foreign-built ves-sels. This proposal was also proposed and rejectedby the 97th Congress in the conference report onthe Maritime Administration authorization bill of1982. This recent proposal will now be consideredby Congress in the form of a legislative package.

Another recent proposal also supported by DOTand a similar proposal submitted as H.R. 2381 byCongressman Gene Snyder calls for a repeal of the50-percent ad valorem duty on foreign parts andrepairs made to U.S.-flag vessels abroad. H.R.2381 differs from the DOT proposal by requiringthe 50-percent duty be deleted only for ships thatremain away from U.S. ports for 2 or more years.This proposal, as well as the use of CCF moneysto construct or acquire foreign vessels is, as ex-pected, being opposed by U.S. shipbuilders. In astatement on behalf of the Shipbuilders Council ofAmerica, President Lee Rice explained, “the ef-ficacy of maritime programs to provide militarycapability required by this Nation is being erodedby the programs put forth by the administrationto allow tax-deferred CCF moneys to be used forforeign building and by the elimination of the AdValorem Tariff on foreign repairs. ” However, forthe U.S.-flag vessel operator, these proposals arewarmly welcomed, especially in light of the absenceof future CDS funds.

Other tax issues affecting the U.S. merchantmarine are taxation of vessel lease and lease/pur-chase and purchase/lease-back agreements. Theseagreements have become more common as the cap-

ZgMarjtjme subsidies (Washington, D. C.: U.S. Department ofTransportation, Maritime Administration, February 1983), p, 158. Z4The Journ~ of Commerce, Aug. 10, 1979, p. 1.

Ch. 6—U.S. Maritime Policies ● 163— — — — —— . .

ital requirements involved in ship purchasing havesoared. Essentially, a financial institution or otherorganization with ample capital reserves and signifi-cant income needing tax shelter becomes the ownerof record for a new ship. The vessel is then bare-boat chartered to the company or person who ac-tually wants the ship. The operator makes leasepayments to the financial institution, which takesadvantage of all the tax benefits available, such asinterest deductions, and depreciation.

Recently, the U.S. Navy, through MSC, has in-augurated a program to acquire merchant vesselsthrough leasing. These ships, 13 special-purposeRO/ROs under the T-AKX program and 5 prod-uct carriers under the T-5 program, will be time-chartered to MSC for a 5-year period with an op-tion for renewal, to a total of 20 to 25 years. Thevessel owner of record receives tax benefits throughthe accelerated cost recovery (ACRS) and invest-ment tax credits (ITC) provisions, while the U.S.Navy receives a favorable long-term lease of thevessels. The issue of whether the Government,through leasing programs such as the U.S. Navy’s,is actually losing revenue through less taxes has notbeen resolved.

More recently, a bill, H.R. 3110, was introducedto revise these tax benefits. The bill, titled the“Governmental Leasing Tax of 1983, ” would denycertain tax benefits for property used by govern-ments and other tax-exempt entities. Under the bill,the ITC would be denied (as is generally the ruleunder present law) and ACRS depreciation alsowould be denied for property used by tax-exemptentities. Therefore, the legislation extends toagreements by foreign governments and corpora-tions to lease American capital goods. This aspectis of concern to the U.S.-flag operators who haveoften built and charted vessels to foreign govern-ments and corporations, utilizing these tax benefits.In the past, these tax benefits have been of great

importance to the U.S. bulk fleet, and certain in-dustry spokesmen have urged that the tax conceptsin the bill be analyzed further.

Another issue is taxation of offshore wages ofcrew and staff. In many countries (e. g., Norway),these are treated as personal income derived undera foreign jurisdiction and are not taxed. The re-sulting savings in crew and staff wage costs (as wellas fringe benefits, which are usually a proportionof gross wages) can be as much as 50 percent.

Accelerated depreciation of ships and equipment,and particularly containers, is also an importanttax concession granted by many countries. U.S.tax policies for depreciation of ships are based ona 14,5- to 21.5-year depreciation rate for U.S.-flagships that entered service prior to 1981, and a 5-yeardepreciation rate for U.S.-flag ships entering serv-ice in 1981 and after. Also, the 10-percent ITC isgenerally permitted with respect to the cost basisof a new investment in a U.S.-flag vessel operatedin the U.S. domestic or foreign commerce. In thecase of a vessel purchased with CCF funds, Con-gress has specifically authorized that one-half of theITC be allowed (notwithstanding the CCF cost-basis reduction rule mentioned earlier). Availabilityof the other half is subject to dispute by the IRS,which has won and, more often, lost court caseson the issue.

In summary, the major tax provision that pro-vides tax parity to U.S.-flag ship operators is theuse of the CCF. Due to the absence of a shipyardCDS program in the United States, it is unlikelythat the CCF will be useful in the future unlessamended to permit construction of U.S.-flag shipsin shipyards abroad. Further study in innovativetax policies is clearly needed to ensure that theexisting tax parity of U.S.-flag ship operators withother competitive shipping nations is not eroded.

CABOTAGE POLICIES

The Merchant Marine Act of 1920, and more ferred to as the “Jones Act. ” Basically, section 27specifically section 27 of the Act, is commonly re- requires that all U.S. domestic trade be carried on

164 ● An Assessment of Maritime Trade and Technology

vessels that are under U.S. registry, built in theUnited States, and manned by U.S. citizens. Spe-cifically, section 27 states:

No merchandise shall be transported by water,or by land and water, . . . between points in theUs. . . . in any other vessel than a vessel built inand documented under the laws of the U.S. andowned by . , . citizens of the U.S. . . .

Cargo reservation for American domestic ship-ping was first outlined in 1817 by the First Con-tinental Congress. The First Continental Congressapproved the Cabotage Law of 1817 to prevent for-eign-flag carriers from entering the American do-mestic market. This policy has continued unbrokento the present. Over the years, many suggestionsto change this policy have been proposed, but theyhave been largely unsuccessful .25

The preamble of the Merchant Marine Act of1920 states the intent of Congress at that time:

It is necessary for the national defense and forthe proper growth of its foreign and domestic com-merce that the United States shall have a merchantmarine of the best equipped and most suitable typesof vessels sufficient to carry the greater portion ofits commerce and serve as a naval or military aux-iliary in time of war or national emergency, ulti-mately to be owned and operated privately by citi-zens of the United States; and it is to be the policyof the United States to do whatever may be neces-sary to develop and encourage the maintenance ofsuch a merchant marine . . . .

The Jones Act “Fleet”

The Jones Act “fleet,” as it has come to beknown, consists of those vessels eligible to engagein domestic trade, whether it be inland waters,coastwise, noncontiguous, or intercostal. Eligiblevessels are those built in the United States underAmerican ownership, registered in the UnitedStates, and receiving no CDS or ODS fromMarAd.

Currently, Jones Act vessels account for slight-ly under 50 percent of the total number of vesselsin the U.S.-flag fleet and approximately 60 percentof the total U.S. deadweight tonnage. As detailedin chapter 3, 94 percent of the tonnage in the ac-

ZSNACOA, op. cit., p. 35.

tive Jones Act fleet is in tankers. Tankers used inthe transport of Alaskan oil alone constitute almost30 percent of the active domestic fleet and nearlyone-half of the total domestic fleet’s deadweighttonnage.

There is no conference system operating in thedomestic trade; operations are either independentor on ships owned by corporations for their ownbusiness use. The domestic fleet provides liner aswell as tramp service and includes bulktankers, conventional and containerships,barge systems.2G

Advent of Alaskan Oil

Shifting trade patterns and a new area

carriers,and tug-

for ship-ping investments followed the production of largeoilfields on the North Slope of Alaska in themid-1970’s. As detailed in chapter 3, by 1978 pro-duction from the North Slope reached 1.1 millionbarrels of oil per day and exceeded the west coast’sdemand for it. Substantial new tanker tonnage wasneeded to move the oil to the gulf and east coastmarkets. During the 1970’s, 19 newJones Act tank-ers with deadweights in excess of 100,000 tons werebuilt to serve the Alaskan trade. Today, Alaskanoil production has reached 1.6 million barrels perday with projections that production will peak by1988 and decline through 2000.

It is generally accepted that without future U.S.oil and gas discoveries, a substantial surplus oftankers will exist by 1995. Lease sales followed byexploration drilling in promising Alaska and Cali-fornia areas are scheduled for the next few yearsand should determine potential production levels.If new oil discoveries in these areas are made, thelarge market for domestic tankers would improve.

Exceptions, Waivers, and SuspensionsAllowed Under the Jones Act

Over the years, circumstances have resulted inexceptions and waivers to the Jones Act. Trade withthe U.S. island possessions of Guam, Tutuila,Wake, Midway, and Kingman Reef may be car-ried on foreign-built, U.S.-flag vessels. The U.S.Virgin Islands are exempt from all Jones Act re-quirements as amended in the Merchant Marine

zbIbid.

Ch. 6—U.S. Maritime Policies ● 165

Act of 1936. This has been an especially importantexemption for the Virgin Islands since the discoveryof Alaskan oil. Alaskan crude oil is now shippedto refineries in the Virgin Islands on foreign-flagships and then to the U.S. mainland, again most-ly on foreign-flag vessels, even though U.S.-flagtug-barge units are also employed moving refinedproducts to the U.S. mainland.

Other important exceptions to the act specificallyapply to Alaska. These exceptions, currently receiv-ing wide attention, are the third and fourth provi-sos to section 27. They are discussed in greaterdetail later in this chapter.

Individual waivers to the Jones Act also havebeen provided through private bills passed by Con-gress. In 1978 and 1981, Congress passed bills thatpermitted two passenger ships built in the UnitedStates, the Independence and the Constitution, toreflag as American ships and reenter the domesticmarket after having served for awhile under foreignflag.

Suspensions allowed under the Jones Act, al-though not common, do exist. One suspension, sec-tion 506 of the 1936 Act, gives the Secretary ofTransportation the power to suspend the Jones Actto allow subsidized U.S.-flag ships, intended forforeign trade, to enter the domestic market for upto 6 months in any 12-month period. In 1980, sevensubsidized U.S.-flag tankers received waivers toenter the Alaskan oil trade for up to 6 months. Theoperators were required to pay back a proratedshare of their CDS based on the amount of timespent in the Alaskan trade. Another suspensionallows the Secretary of the Treasury to grant astatutory or discretionary waiver for foreign-flagvessels on the basis of national defense needs. The1936 Act also permits liner vessels receiving ODSto carry domestic cargoes in the Hawaii, Guam,and Puerto Rico trades with very modest paybackof the subsidy.

Construction Differential Subsidy Payback

A very controversial provision of the MerchantMarine Act of 1936 allows MarAd to permit sub-sidized vessels built for foreign trades to enterdomestic trades permanently, in exchange for therepayment of a vessel’s CDS plus accumulated in-terest. A 1977 MarAd decision permitted the Sea-

train Shipbuilding Corp. to repay the CDS on anew tanker, the Stuyvesant, and to enter thedomestic oil trade permanently. At the time, theworldwide tanker market had collapsed and therewas a need for domestic tankers to transportAlaskan oil. Faced with a possible default by Sea-train on loans with title XI guarantees (amountingto about $120 million)27 on two new supertankers,and no likely foreign market for the vessels, MarAdagreed to allow the CDS repayment on one of them,the Stuyvesant.

The tanker operators already in service in Alaskasued to prevent this transfer. Under a 1980 Su-preme Court ruling (Seatrain Shipbuilding Corp.,et al. v. Shell Oil Co., et al.), MarAd’s decisionwas upheld. The Court held that the broad authori-ty of the act gave the Secretary the power to fur-ther the general goals of the act, making such trans-fers legal.

The Justice Department’s antitrust division, ina review of the case, recently urged Transporta-tion Secretary Dole to adopt changes in maritimesubsidy rules and allow the total payback of con-struction subsidies so that a large group of thesevessels could enter domestic trades.

Although a decision by DOT on whether to im-plement the rule to allow subsidy paybacks is notexpected until late 1983, the controversy betweenboth sides grows larger every day. The issues ofthe controversy have been debated not only amongindustry groups but within DOT itself. The issuesdebated include: projections of future Alaskan oilproduction; levels of risk to the Government frompossible title XI loan defaults; levels of direct andindirect subsidies to different sectors; levels of ac-tual shipping costs, as well as hypothetical charterrates; and effects of surplus capacity in varioustrades.

At present, according to MarAd, there is grow-ing overtonnaging in the domestic tanker fleet. Of40 Jones Act tankers presently laid up, 28 are ex-pected to be scrapped, and 26 of those employednow are likely scrap candidates because of newtanker-safety requirements. When this occurs, theremaining Jones Act fleet in the Alaskan trade will

ZTSee Fe&r~ Register, Jan. 31, 1983, ‘ ‘DOT, CDS RepaymentNotice of Proposed Rulemaking.

166 ● An Assessment of Maritime Trade and Technology. — —

consist of a smaller number of larger and newerships than is evident from today’s data.28 Therefore,allowing subsidized vessels to enter the domestictrade will have the greatest impact on the remain-ing portion of the Jones Act fleet, which is inde-pendently owned and consists of comparativelylarge, newer vessels. New tankers could be requiredin the domestic fleet beyond 1990 if substantialfuture Alaskan oil prospects are proven. On theother hand, an administration-backed proposal toallow Alaska to export oil would substantially lowereven that demand for new Jones Act tankers.

Current Jones Act tanker operators claim theyhave made huge ship investments on the basis ofJones Act guarantees which would be negated ifforeign-trade-subsidized owners were permitted toenter domestic trades. If the larger subsidizedtankers are permitted to enter the Alaskan trade,serious overtonnaging would continue at leastthrough the decade. Current Jones Act operatorshave estimated that one-quarter of the domesticindependent tanker fleet is now surplus and thatif CDS paybacks are allowed, the entire independ-ent fleet in the Alaskan trade would become surplus.

Some subsidized operators, however, claim thattheir new, more efficient, tankers would decreasethe cost of shipping Alaskan oil to U.S. refineries.They believe that by leaving their subsidized tank-ers in an idle market the Government may face sub-stantial defaults of federally guaranteed loans. 29 Itwas because of a pending default on the Stuyve-sant’s mortgage in 1977 that MarAd allowed thattanker to enter the domestic trade. Current JonesAct tanker operators claim, however, that the Gov-ernment would face even greater prospects of titleXI loan defaults if the subsidized tankers enter thetrade.

Such a suspension of the Jones Act for subsidizedtankers could bring about a short-term lowering ofshipping rates. However, overcapacity would be in-evitable and would result in a loss of business toowners who built more costly ships for the domestictrade because Federal policies required that ap-

28U. S, Mari[ime Administration comments on ‘ ‘Draft RegulatoryImpact Analysis for CDS Repayment Regulation, ” June 10, 1983.

Zgcomments submitted by Apex Marine Corp. to the Departmentof Transportation on proposed rulemaking for CDS repayment, May2, 1983.

preach. This would result in fewer U.S.-flag shipsbeing operated.

Other Proposed Changes to the Jones Act

The advent of Alaskan oil and the passage of aFederal law barring the sale of Alaskan oil in foreignmarkets are significant factors concerning the statusof the U.S. domestic fleet. Many recent proposalsto amend the act apply specifically to Alaska. TheState of Alaska has a great deal at stake if certainamendments to the act are adopted.

As mentioned earlier, two exceptions to the act,the third and fourth provisos, applying specifical-ly to Alaska, are currently receiving attention. Thethird proviso was adopted 60 years ago to facilitatethe movement of U.S. freight around the GreatLakes area. This provision permits the use of aforeign-flag vessel during a domestic movement ifsomewhere along the route a Canadian railroad isused. The proviso has been rarely used, and tworecent attempts to do so were unsuccessful.

The Alaska Navigation Co. had proposed to takeadvantage of the third proviso rule. They had hopedto operate two West German-flag ships manned byWest German crews between Vancouver, BritishColumbia, and Seward, Alaska. This applicationwas later withdrawn. The Fairbanks TruckingService also filed an application which was later re-jected by ICC because of deregulation of part of thedomestic route. A bill, H.R. 1076, repealing theprovision, passed the House in June 1983. Sucha repeal would protect U.S.-flag liner operators inthe Alaskan trade from foreign-flag competition.

The fourth proviso states that section 27 shall notbecome effective on the Yukon River until theAlaska Railroad is completed and the ShippingBoard finds that proper facilities are provided fortransportation by U.S. citizens. In 1977, the Treas-ury determined that the railroad was completed,but it is up to the Secretary of Transportation tomake the finding that would make the proviso in-operative. As of September 1983, the Secretary ofTransportation had not made that finding; there-fore, in theory, the fourth proviso still exists.

Future proposals to modify the Jones Act will de-pend on many factors and will be debated widely.In view of strong support for policies inherent in

Ch. 6—U.S. Maritime Policies 167

the act, efforts to have it rescinded in the near futuremay be difficult. In the long run, however, debatesabout costs and benefits of very restrictive provi-sions in the Jones Act could serve to clarify the na-tional interest. One change that has been discussedbut has not reached any legislative proposal is thatof reducing or rescinding ‘ ‘buy America’ require-ments. Some in the shipping industry believe thatif owners were allowed to build or purchase theirdomestic trade ships from foreign sources, enoughsavings could be realized to either reduce freightrates or permit substantial gains for U.S. operatorsin new markets. U.S. shipyards have strongly op-posed such views, but if current policies supportunrealistically high capital costs, as claimed, theyshould be carefully evaluated.

‘ ‘Buy America” provisions in several U.S. mar-itime laws and regulations are shown in table 42.It can be seen that the existing requirements fortitle XI-built vessels (where foreign-built machinery

is prohibited) are somewhat more restrictive thanfor Jones Act ships built without title XI. However,also as shown, MarAd has proposed changes tosome of the title XI prohibitions.

Alternative suggestions to modify Jones Act “buyAmerica” provisions have taken a number of ap-proaches. It would be necessary to accommodateconflicting goals of supporting a U.S. shipyard basewhile lowering ship capital costs closer to worldmarket levels. It may be possible to do this by pro-viding some level of construction subsidy in com-bination with incentives for shipyards to improveproductivity and freedom to purchase equipmentand components from lowest price suppliers world-wide without duty. Some have also proposed ap-plying CCF to Jones Act construction .30 Anotherconsideration in any proposed changes to Jones Act

gos~c c, H i]tzheimer, statement before House Merchant MarineSubcommittee, hearings on H.R. 3156, July 21, 1983.

Table 42.—” Buy America” Comparisons

Integralcomponents of the Other machinery

hull and outfit, etc. Percent of vesselsuperstructure (permitted to be cost to be Definition of

(steel, etc.) Main machinery foreign) domestic vessel cost Waiver provisionsMarAd Titie IFForeign prohibited Foreign d None

prohibited

MarAd Titie XPForeign prohibited Foreign None

prohibited

USCG (Jones Act vessels~Unimproved foreign Foreign

steel plates orshapes permitted

MarAd Titie Xi (proposed)Foreign prohibited Foreign

permitted Up to 50°/0 of thecost of foreignitems other thanintegralcomponents ofthe hull andsuperstructure

permitted Up to 50°/0 ofvessel componentmaterial cost

100 ”/0

loo ”/oe

Subject to otherlimitations

Subject to otherlimitations

Material, labor,overhead

Material, labor,overhead

Direct materialonly. No laboror overhead

Direct materialonly. No laboror overhead

Yes, except forsteel and integralcomponents ofhull andsuperstructure

Yes1) nonavailability2) unreasonable

delivery

None

None

ag 5135 of the Merchant Marine Act, 45 U.S.C. g 1155 (construction differential subsidies).bhot required by statute, but imposed by regulation (46 CFR 298.11)c~ 27 of the Merchant Marine Act, 1920, 46 US C. 863, and Vessel Documentation Act 46 CFR 67.09.dA Padial waiver has been granted for slow. speed diesels built under license in the United States which incorporate a significant number Of fOreign Componentsevessels covered by title X1 financing may incorporate foreign components and materials, However, the value of these components and materialS will nOt be included

in the determination of actual-cost title Xl financing guarantees.

SOURCE J Hotaling, Division of Engineering, Maritime Administration, personal communication, August 1963,

168 . An Assessment of Maritime Trade and Technology

provisions is that existing ship operators have madeinvestment decisions based on assurances that cur-rent policy would continue. Modification of thosepolicies could unfairly affect their ability to con-tinue a viable business. However, if changes weremade gradually over some reasonable period oftime, the industry may be able to plan and adjustwithout undue hardship. This consideration arguesfor selective changes such as allowing a limitednumber of U.S.-subsidized ships or foreign-pur-chased or foreign-built ships to enter certain tradesover set intervals-particularly where demand forshipping is rising.

One trade where Jones Act restrictions have beenclaimed to be economically detrimental is theAlaskan trade. In a 1982 study for the AlaskaStatehood Commission, effects on the Alaskan—

Slsimat, Hel]ieson, k Eichner, Inc., ‘‘The Jones Act and Its Im-pact on the State of Alaska, Vol. II: Final Report, ” prepared for theAlaska Statehood Commission, July 1982.

economy of using foreign-flag v. U.S.-flag ships inthe Alaskan trade were analyzed. The report esti-mated that differentials for U.S.-flag v. foreign-flagtotal shipping costs would range from about 10 per-cent (in the liner trade with the west coast) to 40percent (in oil product shipments from west coastrefineries). While the study did not analyze possi-ble savings from using foreign-built or purchasedU.S.-flag ships v. U.S.-built, U.S.-flag ships, thefigures indicate a much lower range of savings forthis case (roughly 2 to 10 percent). Whatever thesavings, the net effect on the national economy andthe maritime industries is much more difficult toevaluate but must be considered when Jones Actmodifications are considered.

SUMMARY

Four keyare subject

elements of U.S. maritime policy whichto current debate have been analyzed

above. These are:

. subsidy policy,● regulatory policy!● taxation policy, and● domestic trade restrictions (Jones Act).

In addition, this chapter presented an overalldiscussion of how present U.S. policies developedover the years, what changes are currently proposedand how future policies should respond to chang-ing future conditions.

Direct-subsidy policies of the past (the CDS andODS programs) have been aimed at industry pro-motion and made the assumption that different sec-tors of the industry (i. e., shipbuilding, liner oper-ators, bulk operators) could be helped by the samemedicine. This has not proved to be the case, andthe current administration appears to be directingits attention toward support of the liner operatorswithout concurrent attention to shipbuilders orother segments of the industry. Promotion of cer-

tain U.S. liner interests is possible with indirect in-centives, and this type of approach appears to beconsistent with other administration policies.

Indirect subsidies such as loan guarantees to U.S.operators (the title XI program) appear to havebeen more successful in promoting investment inmodern vessel technologies, produced at competi-tive prices and covering broad sectors of the mari-time industry. Future policies concerning industrysupport, if in the national interest, should thereforeinclude consideration of which maritime sectors canbenefit from each type of promotional effort andhow Federal support can encourage high produc-tivity and efficiency.

The resolution of the regulatory policy debateappears to be near with congressional considera-tion of the Shipping Act of 1983. Passage of someform of regulatory changes are clearly in the in-terest of the major U.S. liner operators, Proper con-sideration of U.S. shipper interests and the broadergoals of enhancing U.S. trade in the future areequally important, U.S. participation in world mar-

Ch. 6—U.S. Maritime Policies ● 169—

itime trade and shipping likely will depend on howwell our regulatory policy both protects the nationalinterests and allows for effective competition inter-nationally.

Taxation policies for U.S. shipping interests alsoare based on sometimes conflicting goals of pro-viding equivalent advantages to industries that mustcompete in the international market and of assur-ing fairness and equity among U, S. businesses. Pasttaxation policies (e. g., the CCF) have sought to en-courage investments in new ships and to strengthenthe U.S. merchant marine’s competitive position.Future taxation policies require careful analysis ofthe many approaches available and in use to en-sure that targeted industry sectors will receive thebenefits.

In the future, certain domestic shipping (JonesAct) policies undoubtedly will be challenged bythose who consider that present costs of U.S. do-mestic shipping should be reduced to the benefitof consumers. Whatever changes are proposed (i. e.,allowing foreign construction of. Jones Act ships),

certain industry sectors will be affected adversely.Policy makers will need to weigh costs and benefitscarefully over the long range, clearly including thenational interest involved with maintaining certainparts of the industrial base, such as the shipbuildingbase.

Finally, future policy formulation needs a morecomprehensive approach. Industry incentives maybe possible to devise for most maritime segmentswithout tying subsidies for one to subsidies foranother, as in the past. For example, certain taxa-tion incentives and foreign purchase allowancescould be devised to apply to shipbuilders and shipoperators without necessarily making one depend-ent on another. Also, incentives probably shouldbe tied to support for the most productive elementsof the industry and to the elimination of inefficien-cies. Also, the incentives discussed in this chaptershouid be integrated with other policies, includinginternational trade and cargo policies discussed inchapter 7.

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