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1167 (6.8%)
1966
277 (7.7%) 57 (2.7%) 804 (7.5%)
29 (3.4%)
Tankers hoik Carriers freighters Passenger/ Cargo
Totals
The nation’s active flag fleet has thus defined both absolutely and relatively. Whether V cause or consequence, on 31 December ^6, only 9.4 per cent of U. S. exports and 7.3 Per cent of total U. S. trade traveled in AmeriCan bottoms.
The statistics on world shipping justify concern over the prospects of the U. S. Merchant Marine. The U. S. active flag fleet ^"Privately owned vessels and government- owned vessels not in the National Defense Reserve Fleet—has declined from 1,617 ships 'n 1950 to 1,167 in 1966 or from 14.1 percent the world fleet to 6.8 per cent. Table I, Vvhich depicts the number of U. S. ships and ^eir percentage relationship to the world fRet, shows that all components of the fleet shared in the downward trend.
Table I 1950
457 (21.5%) 54 (9.6%) 1049 (13.6%)
57 (5.2%) 1617 (14.1%)
Three considerations add perspective to ls rather bleak presentation, firstly, some decline in the U. S. flag posi- l0n was inevitable as the major maritime- states—with one noteworthy exception—re- the losses of World War II. fable II depicts the revival of five of the Prewar powers:
| Table II |
|
| |
Japan It q o | 387 | 1950 (3.4%) | 1966 1,405 (8.1%) | |
“•S-S.R. Nrw | 432 | (3.8%) | 1,343 | (7.8%) |
;N°r\vav | 959 | (8.3%) | 1,356 | (7.8%) |
est Germany | 174 | (1.5%) | 860 | (5.0%) |
Greece | 218 | (1.9%) | 952 | (5.5%) |
^ he United Kingdom registry, like the lllted States, suffered from the postwar rein ?Cnce colrlpetition. The number of ships he British merchant service, still the largest
in number of ships, declined from 2,605 in 1950 to 1,985 in 1966 and relatively from 22.6 per cent to 11.5 per cent of the world figure. Both France and Italy expanded absolutely, yet got a smaller percentage share of the postwar market. The Netherlands and Sweden declined absolutely and relatively.
Secondly, the United States possesses a large government-owned reserve fleet, counting some 1,300 ships. Conceding that these vessels retain small commercial value, nonetheless, they constitute a significant military asset as recent Vietnam experience attests. Adding the reserve fleet to the active fleet, the U. S. Merchant Marine ranks first in number of ships and first in deadweight tonnage among the world’s fleet, with 2,278 ships of
27,225,0 tons as of 31 December 1966.
Thirdly, the relative maritime position of the United States also alters dramatically if we combine those ships under “effective U. S. control” with the active fleet. Indeed, some observers contend that maritime policy should comprehend the concept of a controlled fleet, comprising active flag ships plus those units under PanLibHon—Panama, Liberia, and, to a lesser extent, Honduras—registries having special agreements with the Department of Defense. On this assumption, the U. S. controlled fleet, as of 31 December 1966 numbered 1,641 ships (474 PanLibHon vessels)— 9.5 per cent of the total world fleet—second only to the United Kingdom in the total number of ships.
Is it valid to include ships under foreign flags (popularly referred to as Flags of “Convenience” or “Necessity”) in the U. S. totals? If this phantom fleet materially reflects U. S. defense calculations, should not its ships fly the American flag? Stated differently, how efficacious is the “doctrine of effective United States control” and what position should it hold in U. S. maritime policy?
Those ships that fly flags of “Convenience” or “Necessity” are participating in a form of international shipping competition whereby some states (Liberia and Panama, especially)
of
L. Davies noted in the January 11 issue
“ef"
Liberia
Panama
Honduras
allow the use of their flags on the fulfillment of simple formalities. Apart from the grant of a certificate of registry, there exists no genuine link between the state and the ship. The state exercises a minimum control in administrative, technical, and social matters over the ships flying its flag. This contrasts with the rather more extensive requirements of established maritime states. The fleets involved bear little relationship to the international trade position of the conferring state, infrequently visit home ports, and most often are owned and manned by the nationals of other countries.
The practice of registering ships under foreign flags is an old—if not always respected ■—practice of ship operators. Many English merchants of the 16th century sailed under the Spanish flag in order to participate in the West Indies trade. Seventeenth century Newfoundland fishermen frequently hoisted the French flag to avoid deportation to England. But the exigencies of war most often encouraged the stratagem. During the Napoleonic Wars, scores of English vessels transferred to German colors to avoid the French embargo. Similarly, the War of 1812 saw American ships sailing under Portuguese registration to circumvent capture by the British. Following the collapse of the merchant marine after the Civil War, American shipping capital sought refuge abroad. By World War I, the bulk of American-owned ships were registered under various foreign flags. Attempts to escape the effects of American neutrality laws gave added impetus to transfers in the days preceding World War II, a movement unofficially sanctioned by the U. S. government.
All in all, these illustrations simply underscore an historic truth: that shipping is the most international of all industries, and the capital and enterprise invested in it tend to move fluidly around artificial impediments to seek out opportunities for trade.
Since World War II, the practice by American and European ship owners of registering under a foreign flag has been primarily associated with the PanLibHon registries. It has become a topic of discussion in international shipping circles because of the enormous dimensions it has assumed. Specifically, Liberia registers 1,429 ships and accounts for 8.3 per cent of the world fleet—larger than the U. S.
active fleet. In 1966, 571 ships—-3.3 per cent of the world’s merchant fleet—flew the flag of Panama. The spectacular growth of these fleets and the advantages they enjoy agitates ship owners and labor leaders of the traditional maritime states.
Panama and Liberia register approximately 16 per cent of the world’s bulk carrier fleet and 19 per cent of the tankers. The fleet reflects the growing dependence of the industrial nations on imports of raw materials and foodstuffs. Trade in oil, bauxite, iron ore, sugab and grain has increased in greater proportion to the growth of world trade. In U. S. foreign trade, for example, growth in irreg11' lar and bulk cargo movements carried in vessel lots by tramps, industrial carriers, and tankers has multiplied by six to eight times over prewar averages, while dry cargo liner tonnage declined by one-third. With only 3 formal allegiance to the registry state, the PanLibHon ships typify the “ideal” world trader: searching the trade routes for neW customers and outlets and willing to furnish service for currencies which the customer can pay within the regulations of his homeland’ Since most of the PanLibHon operator’s expenses are also in foreign currency, he is well' placed to participate in cross-trades, using directly the currency he receives. As Charles
The Journal of Commerce, this extends to the acquisition of new capital:
Most major oil companies are largely paying [for tankers built abroad] with their foreign funds, with 85 per cent of the financing f°r some recent construction coming from foreign currency held by the companies ordering the ships.
As noted earlier, in 1966, 474 PanLibHon owners had executed special agreements with the Department of Defense [Table III] ,l’ make their vessels available to the United
States in time of emergency as part of the fective control fleet.”
Table III | Dry |
|
| Cargo | Tankers |
354 | 169 | 185 |
110 | 17 | 93 |
10 | 10 |
|
Totals 474 196 278
It is estimated that 40-45 per cent of the PanLibI Ion tonnage represents varying degrees of American ownership. Hence, not all u.s . owners have chosen to accept the obligations of the effective control agreements.
The “effective control” fleet is owned by 222 companies. Of this total, 146 companies have a majority American ownership interest and 76 companies have a minority American ^presentation in management. Of the 222, 101 companies control the 278 tankers and 121 concerns operate 196 dry cargo Vessels. However, the American Committee I°r Flags of Necessity (ACFN), composed of 15 Companies with effective control agreements, nperates 217 vessels, or over 45 per cent of the ships under effective U. S. control. These companies are Alcoa Steamship Company, Inc.; American International Oil Company;
Atlantic Refining Company; Cities Service Oil Company; Gulf Oil Company; Marine Transport Lines, Inc.; Naess Shipping Company, Inc.; National Bulk Carriers, Paco Tankers, Inc.; Richfield Oil Corporation; Socony Mobil Oil Company, I^c.; Standard Oil Company (N. J.); Standard Oil Company of California; Texaco, lr,c.; and Tidewater Oil Company.
It should also be noted that these companies °Wn or operate 80 per cent of the tanker ton- Ilage in the “effective control” fleet and 57 Per cent of the American flag tanker fleet. ^Iso, ACFN companies frequently will operate ships through subsidiary corporations under other registries—British, Dutch, Norwegian, e%ian, French, and West German. The aher are not subject to effective control
a§reements.
Although many considerations affect the ecision to select a ship’s registry, three factors lllake the PanLibHon group especially at- lractive to American shipping interests.
• Economic Advantages. It costs more— b°ut double—to construct and operate ^*Ps under the U. S. flag (See Table IV).
Ur Merchant Marine, as now organized a,1<l administered, cannot compete on the y°rld market. Without the prop of direct and ’^direct subsidies, it would likely revert to its .World War I status. Moreover, it is not !j>nply the labor charges which are higher but e whole array of costs—depreciation, repairs, overhead, stores and provisions, and insurance. If these costs could be placed on a par with the foreign operator, it would reduce the annual costs of a U. S.-operated 47,000-d.w.t. bulk carrier by approximately $418,000. Resort to PanLibHon registry, in short, permits the American owner to compete without an operating subsidy on the world market. This, however, is not a unique advantage of the PanLibHon registry, but inheres generally to all foreign registration vis- d-vis the U. S. flag. If the PanLibHon opportunity did not exist, it is most unlikely that these ships would transfer to U. S. registry.
• Tax Advantage. In 1921, in order “to encourage the international adoption of uniform tax laws affecting shipping companies, for the purpose of eliminating double taxation,” the Revenue Act exempted from Federal income taxation the “earnings derived from the operation of a ship . . . documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States.” The major maritime states responded in due course with equivalent exemptions. Of course, the foreign ship operator (including the American- owned subsidiary) continues to be liable under the tax codes of the documenting country. Belgium, Denmark, France, Germany, Italy, Netherlands, Norway, Sweden and the United Kingdom—all subject shipping corporations to income taxation, albeit at varying rates. On the other hand, if the documenting country imposes no income tax, the omission under the law has the same result as an exemption. Herein lies the unique tax advantage of Liberian and Panamanian registry. Liberian law, for example, exempts Liberian-flag vessels “not exclusively engaged in the Liberian coastal trade,” and, conveniently, “In the case of a Liberian corporation the majority of whose voting power is held by citizens of a foreign country or nonresidents of Liberia, there is also no tax on income derived from business transactions in foreign commerce. . . ” Panamanian law expressly exempts from taxation any income derived from vessels registered in Panama and engaged in international maritime commerce, even if the transportation contracts are signed on Panamanian soil.
Since the income of the foreign subsidiary is not taxable until distributed to the parent corporation as dividends, the tax is deferred, not avoided. Consequently, the subsidiary has the use of tax-free earnings for fleet expansion or maintenance while less fortunate competitors must set aside or remit funds for tax purposes. The tax-free subsidiary enjoys the income from funds which would otherwise be paid out to the government; the additional income creates additional investment funds which in turn generate more tax-exempt income; and so the cycle repeats, since the tax can be deferred indefinitely. The higher earnings potential due to tax postponement also makes it easier to raise funds externally to finance fleet expansion. Lastly, while the earnings of the subsidiary are subject to the income tax when distributed to the parent corporation, the declaration, it should be noted, can be timed to take advantage of favorable adjustments in the Revenue Code or in the tax position of the parent company.
Complete analysis of the tax angle in the
^ fac,
'ttipoi tit co: 'ngne vessel make
(the 1
°r wa natur tiona Th “effe< Paris< of th< tight: (Uni
vessel
tized
tiled
Playc state Will $
tegisi
Flags of Convenience picture would necessitate a comparative review of the tax laws of the major maritime states in relation to the tax status of the particular ship operator. The income statements of 19 tanker and 21 dry cargo companies, submitted to the U. S. Maritime Administration, indicate a U. S. income tax liability of 44 to 47 per cent of net profit. The PanLibHon operator at a compoT' able income level thus postpones a substantial tax liability. After the declaration of a dividend to the parent corporation, the normal U. S. tax rates, dependent upon the total income of the parent corporation from all sources, apply to the dividends received. Considering the tax position of ACFN members this could approximate 48 per cent. The remaining income of the subsidiary continues free of taxation until paid out as a dividend' In summary, although the tax laws of the major maritime states frequently confer pref' erences upon domestic shipping, the tax status of the PanLibHon registries has some companies a superior inducement ano
COMPARATIVE COSTS & PERCENT (%) OF TOTAL COST OF OPERATING 47,0°° DEADWEIGHT TON BULK CARRIER UNDER SELECTED REGISTRIES
Annual Cost
Annual Cost
Annual Cost
Flag:
UNITED STATES
FOREIGN
FOREIGN Brit. Off./
Crew: |
| American | Japanese | Ind. Unlic. |
Crew Complement2 |
| 42 | 45 | 63 |
Repair Days |
| 20 | 20 | 30 |
Operating Days |
| 345 | 345 | 345 |
|
| % | % | % |
Payroll Costs | $ | 612,000 (39.89) | $184,000 (28.66) | $153,000 (23.18) : |
Depreciation3 |
| 510,000 (33.26) | 250,000 (38.94) | 250,000 (37.87) |
Repairs |
| 154,000 (10.04) | 88,000 (13.70) | 88,000 (13.33) |
Overhead |
| 50,000 ( 3.26) | 30,000 ( 4.67) | 30,000 ( 4.55) |
Stores & Provisions |
| 84,000 ( 5.47) | 24,000 ( 3.74) | 73,000 (11.06) |
Insurance |
| 105,000 ( 6.84) | 47,000 ( 7.32) | 47,000 ( 7.12) |
Other |
| 19,000 ( 1.24) | 19,000 ( 2.96) | 19,000 ( 2.88) |
TOTAL ANNUAL COST | $1 | ,534,000 | $642,000 | $660,000 |
Cost per Operating Day | $ | 4,446 | $ 1,861 | $ 1,913 ! |
1 For a comparably manned Norwegian flag bulk carrier, costs (excluding payroll costs which are about $29,000 lower) are approximately the same as for British operation.
2 Figures reflect typical manning of modern but unautomated bulk carriers.
3 Calculated on a straight-line basis over a 20-year period for all vessels shown.
000 fo’
$218,
250,000
08,000
30.000
60.0 47,°° 19,00°1
$712,0°° c 7.06*
$ lQN
Vk
Source: American Committee for Flags of Necessity
ressi-
iWS of
0 the ■. The
1 dry U. s. S. in-
of net nnpof' antial divi-
orinal
tal in- m
Con- inbers he retinues idend- of the - pref- e tax as f°r it and
British1
Annual Cost FOREIGN
$692,000 $ 2,006
38
20
345
%
$201,000 (29.05) 250,000 (36.13)
88.0 (12.72)
30.0 ( 4.34)
57.0 ( 8.24)
47.0 ( 6.79)
19.0 (2.75)
de facto constitutes a form of indirect subsidy.
• Legal Foundation of “Effective ControlAn Important feature of the Panlibhon registries, m contrast to other foreign flags, is the will- mgness of these states to permit the owners of > vessels to enter upon special agreements to make their ships available to another country (the United States) in the event of emergency 0r War. Questions have arisen as to the binding future of these agreements under interna- honal law and their effective implementation. The legal issues surrounding the doctrine of effective U. S. control” emerge in the comparison of sovereign prerogatives: the rights the flag state (Panama or Liberia) vs. the rights of the state of beneficial ownership (United States). Apropos the former, each Veffel must have a connection with a recognized maritime state (flag state) evidenced by (he documents of registration and the flag displayed. It follows, then, that (a) each flag state establishes the criteria under which it Vvdl grant nationality, and the validity of the registration remains to the determination of
TABLE IV
Annual Cost
FOREIGN I tal. Off/ Pan. Unlic.
44
20
345
%
$232,000 (30.77)
250,0 (33.16)
88.0 (11.67)
30.0 ( 3.98)
88.0 (11.67)
47.0 ( 6.23)
19.0 ( 2.52)
$754,000 $ 2,186
its municipal courts; (b) under international law, the grant of nationality must be respected by other powers; (c) each vessel is a distinct unit subject to the jurisdiction of the flag state; (d) the flag state has the right to control movements of its ships in times of emergency and, with adequate compensation, to expropriate the property irrespective of the beneficial ownership. The citizenship of the owner, the composition of crew, and the country in which she was constructed are not determinants of nationality. Nationality is conferred only on the vessel and takes precedence over the nationality of the owner (whether corporation or a natural person) or crew. Finally, a flag state’s right to confer nationality can be limited only by (a) express treaty provisions; (b) the prior rights of other states; (c) where a reasonable ground for suspicion exists that the ship be used for purposes violative of international law.
Against the position of the flag state, what rights under international law can the United States assert in order to exercise effective control over the subject vessels in case of national emergency? Manifestly a state possesses inherent power to command its own citizens and requisition their property in times of crises. In the maritime area, however, this can be accomplished legally only with the acquiesence of the flag state whose rights are superior, since nationality attaches to the vessel and not the owner. Under the pressure of war, of course, the United States—indeed, any state—may seize foreign registered vessels in its territorial waters and conceivably may be justified in doing so on the high seas where necessary to offer protection which the flag state cannot provide. Author Boleslaw. A. Boczek excepted these special circumstances when he observed:
. . . the documentation of a ship is the exclusive basis upon which the rights of requisition are founded, and ... no case has come to the attention of the author in which a state has succeeded in requisitioning a vessel on the grounds of ownership by its nationals over the protests of another state having other more highly regarded connections with the vessel.
The specific content of “effective U. S. control” amalgamates distinct statutory and contractual arrangements: (a) The Secretary of Commerce has statutory authority to requisition any vessel owned by a U. S. citizen in time of emergency; (b) contractual agreements with beneficial owners of vessels transferred to foreign flags guaranteeing, under penalties, ultimate American ownership and the vessels’ availability in time of war; (c) voluntary written pledges by the beneficial owners to undertake the obligations described in b\ (d) a similar quid pro quo arrangement with PanLibHon beneficial owners who accept U. S. war risk insurance; (e) PanLibHon countries have municipal legislation which permits U. S. owners to commit their vessels to the United States; (f) a non-treaty status agreement between the United States and two major Flag of Convenience countries (Panama and Liberia) under which the latter would make their ships available to the United States when circumstances require.
Adherents of “effective U. S. control” also cite several pragmatic factors that buttress its legal support. These include: the responsiveness of the crews to U. S. orders (the 15 member companies of the ACFN have implemented a program to screen out security risks from job applicants and crews perforce realize that to draw pay depends upon obedience to directives); the PanLibHon states do not have the naval power to enforce on the high seas decrees contrary to the United States; the PanLibHon states have no need for the quantities of shipping represented on their registry to support domestic, economic or military needs;
the PanLibHon states lack the shore facilhieS to support large fleets; in the event of eX' propriation with compensation, the sums p&T able would not go to PanLibHon national but to U. S. citizens. (
The doctrine of “effective U. S. control thus presumes that it would not be in the efl' lightened self-interest of these countries 10 disrupt present arrangements, and they have only a limited power in the event to do so.
For the companies involved, the doctrine represents a felicitous confluence of economic advantages and national sentiment, but 011 sober reflection the concept does not warraU the optimistic appraisals accorded by lts sponsors in the government and ACFN circles- PanLibHon states, we have seen, enjoy PrC\ eminent rights to control the movement 0 these vessels, individual contractual agree' ments to the contrary notwithstanding, an such prerogatives have not been limited by treaty provisions. ,
s
It
Other uncertainties emanate from the eh' mate of international relations. There is a° explosive nationalism, charged with ero°' tional overtones, loose among the ernergmS nations. In the excitement of the moment* they frequently act in a manner contrary bot to our judgment of their enlightened set ' interest and the niceties of international la"^j The actions of Egypt on the Suez question a° the Gulf of Aqaba do not evoke the admira
tion of international jurists. Equally, the fact lhat expropriation under international law toust be accompanied by reasonable compensation has not deterred revolutionary governments. Reasonable compensation is a Prudential judgment subject to negotiation, While in due course the expropriator enjoys 'he fruits of possession. Moreover, is it not Possible in the politics of the underdeveloped eountries that PanLibHon or other flag states rrright ally themselves with nations antagonis- hc to U. S. interests and in the maritime area vhiate American policy? Could the United States direct Flags of Convenience vessels to avoid specified waters without the consent of Liberia, for instance? Precedent would indicate otherwise. Lastly, the states in question have interests which will on occasion lead 'hem into conflict with other nations. Is the Llag of Convenience ship not legitimately the Pfey of the enemy? Actually, myriad possibilities can be envisioned. The fact that they h^ve not occurred is no guarantee they will n°t occur in the future.
There are sufficient legal and practical Questions surrounding implementation of effective control” agreements to encourage exploration of alternative approaches. It is doubtful, under the most optimistic assump- ll°ns, that PanLibHon units can be regarded as being available, fully manned, to America 'i? t*me °f war. This being so, S. G. Sturmey, Wish Shipping and World Competition, contends that:
• • • given the rate at which untrained seamen can be substituted for trained seamen, the active part of the American-owned fleet must he larger, and the inactive part correspond- lngly smaller, if some of the active ships are Under Panholib registry than if all the active ships were under American registry and were subsidized. Given, therefore, the American 'ntention to be in a position to have a given tonnage of shipping available for defense purposes, it would be better for other maritime countries if the active part of the fleet was subsidized under the American flag than that part of it should be un-subsidized under the Panholib flags.
Effective control” agreements may repre- the best arrangement we can secure in e present circumstances, but it would be
preferable to have these ships under American registry. The Administration and Congress are committed to a re-examination of U. S. maritime policy. That survey should include the question: What programs will offer inducement for PanLibHon owners to shift to American registry?
A hasty response might advocate enlargement of present operating and construction subsidies to cover the entire controlled fleet. Yet, the extant system of operating and construction subsidies, however limited in application, shows no promise of resolving the underlying problems of the U. S. merchant service. On the contrary, some authorities argue that the method of subsidy payment has actually encouraged an inflation of operating costs, thereby making the industry even less competitive. Therefore, whatever policy may evolve from the present discussion, it must move in the direction of a more economically competitive merchant marine. This demands that those PanLibHon ships which transfer to U. S. registry retain their share of world trade, for otherwise they will simply dilute the earnings of the active flag fleet. Within the parameters set by this objective, there are three essential ingredients in the revision of U. S. maritime policy:
• Closing the Tax Loophole. No policy to encourage repatriation of PanLibHon ships can succeed as long as their present tax advantage persists. Since the other major maritime states impose tax obligations on registered shipping, the deferral of income tax payments by American owned subsidiaries works primarily to the disadvantage of U. S. registry. Of course, if the tax benefit were negated, this would not automatically assure the repatriation of PanLibHon shipping (the economics of the case would dictate a shift to another foreign registry or the payment of the U. S. tax without repatriation), but it is a vital element in conjunction with other policies seeking to bring these ships under the U. S. flag. This proposal, of course, will have a significant impact on the revenues of, for example, Liberia, and complicated tax questions will arise for individual companies.
• Permit foreign construction and repair of U. S. ships. Apart from higher labor charges, U. S. owners endure heavier costs of depreciation, repairs, and insurance. These result from the obligation of U. S. vessels to be built and repaired in American yards. Secretary of Transportation Alan S. Boyd has offered the suggestion that:
ships built abroad ... be documented under the United States Flag for operation in our foreign and domestic trade with United States citizen crews on the same basis as vessels built in the United States. Shipping is the only mode of transportation that is required by law to acquire its capital equipment in the United States. This requirement is a great competitive disadvantage to the domestic water carriers . . .
In view of the stringency of the Administration’s new budget, there is little prospect of construction subsidies on the magnitude required to meet the problem. On the contrary, the budget definitely places the item in the deferred category. Moreover, no American shipyard is presently equipped to build a 200,000-deadweight-ton vessel, much less one up to 400,000 tons—both representing the trend of tanker construction.
Too, the proposal segregates the interests of the ship operator from the ship builder. The latter is a manufacturer with production, capitalization, and cost control problems that differ materially from those involved in a service industry, e.g., shipping. We do not similarly link the fortunes of companies manufacturing heavy generating equipment with those providing electrical utility services, although the latter are vested with a public interest and regulated by government. Policies appropriate for one may be inappropriate for the other.
Finally, the balance of payments argument against foreign building is specious. The Interagency Maritime Task Force Report (October 1965) comments:
Considered from the standpoint of balance of payments affects, construction for the American merchant marine in U. S. shipyards . . . requires the expenditure of one dollar ... to conserve about $0.47 of foreign exchange.
Put another way under current construction—- differential subsidy contracts the Government is spending $0.53 above world costs in the U. S. to conserve $0.47 in foreign exchange, a high price for this conservation.
To grant a construction subsidy of the sum required to sustain the controlled fleet would simply add to the Federal deficit which is a major cause of the payments problem. Conversely, by permitting foreign construction, the net earnings of these ships ultimately bolster U. S. foreign exchange holdings. If the vessels were not available, the cargoes they carry would be moved by foreign owned tonnage and their earnings lost permanently to the United States. Finally, enabling the U. S. flag operator to build and repair abroad places him on a cost parity with foreign owners and isolates the problem to one of manning expense.
• OJfset Operating Labor Costs. High labor costs are not peculiar to the U. S. maritime industry, but typify a long-term trend of American economic development dating from the Colonial era. They do weigh most heavily on shipping services, however, because the primary market is international rather than domestic. On the other hand, U. S. industries (some with cost characteristics similar to the maritime business) have generally adapted to higher American wage rates and sell successfully against foreign competition—the country’s foreign trade surplus in 1967 climbed to $4.3 billion, some $500 million above the 1966 level. Their experience attests not to a single solution but to a kind of chipping away at the problem from many directions. This does not imply reduction in wage rates but refers to ways and means of synthesizing manager^ effectiveness and technological innovation t0 enhance productivity.
r
The nature and urgency of the “Flag 0 Convenience” issue counsels a dual approach-
• Short Term Labor Subsidy. As an expedient to ease the transition to American registry’ and pending the fruition of longer term pr°' grams, any policy to encourage the transfer of American-owned PanLibHon tonnage t0 U. S. registry will necessarily embody the payment of a labor cost subsidy for non-lmer services. Secretary Boyd has already advo' cated a subsidy for bulk carriers. Under the present program, the Interagency Maritime Task Force forecasts operating differenti3 subsidies of $212 million by 1975. Would the extension of a subsidy to repatriated tonnage> and thus perforce to all similar ships in the flag fleet, open a financial Pandora’s box? [1] might seem so, but there are countervail!0®
Doctor Clark is Dean of the College of Business Administration, St. John’s University, New York, N. Y. A graduate of St. John’s (Magna Cum Laude), he received his M.B.A. from City College of New York and his Ph.D. from New York University. From 1954 to 1958, he was a Lecturer in Economics at Polytechnic Institute of Brooklyn. He joined the St. John’s faculty in 1959 as Chairman of the Department Economics. He has written extensively on the subjects of economics and the U. S. Merchant Marine. [2] •
the future, but the formal support of public policy is required to sustain the momentum. To this end, revision of the tax codes to permit accelerated depreciation and/or depreciation in excess of historical cost would encourage the maintenance of a modern fleet and create a positive tax advantage for U. S. registry. The extension of the tax benefits, currently enjoyed by the subsidized lines, to non-liner operators, could also be a matter for additional consideration. Along these same lines, successful international competition in the postwar years has correlated with industry expenditures on research and development. This suggests that government and industry join in supporting the investigation of new Marine transportation technologies which give promise of greater operating efficiency.
Long-term U. S. maritime policy, then, should look not to subsidies but to technology as the key to offset labor costs.
Candor compels the admission that this third component of a policy to repatriate Flags of Convenience shipping will likely prove the most difficult to achieve. New technology has behavioral implications for management and labor and will ineluctably impose changes on the structure of industry and the pattern of industrial relations. Space does not permit a review of these aspects of the problem. Suffice to say, this is not an industry marked by a flexible response to change and a spirit of compromise—as Secretary Boyd has come to realize.
Yet, the cure to the ills that plague the U. S. maritime industry is not to be found in the patient’s medicine cabinet, but, rather, in a positive program of self-therapy. The wonder-drug tablet, “Technology,” has thus far saved the patient’s life. But, he must get out of bed, look in the mirror, and, therein, see his problems as they really are. Like his forebears, he must show the will to stand on his own feet and move forward under his own power—and under his own flag.
★
[1] Long Term Competitiveness. It is a truism u<U high wage countries can compete with ) 0lher maritime states only by adopting the jOost economical means of propulsion and by /hiding larger and faster ships—in a word, . ey must remain in the vanguard of mari- ll|He progress. The spread of automated con- tr°ls and containerization augurs well for
Wes which should keep the program within Acceptable financial limits. Elimination of the Construction differential subsidy, projected
153.3 million dollars by 1975, is one such °ffset. As operating subsidies are extended to Wk ships, enabling them to compete in the "'orld market, the excuse for cargo preference Payments ceases—for a saving of 116.9 million dollars by 1975. Since the case for subsidiza- t‘on rests primarily on the national defense Posture, the subsidy could be restricted to ) Aurnbers and types of vessels requisite to that Purpose. If, for example, the existing U. S. dag tanker capability were adequate for Prosent and foreseeable emergency requirements, no subsidy would be given. Lastly, un- uke payments under the Maritime Act of 9^6, the subsidy formula should be rede- s‘gned to encourage lower costs and more effective performance. The quid pro quo for Subsidization must also comprehend agreements on lower manning scales.