U.S. Maritime Industry Is Out of Step

By Andrew E. Gibson

This all changed in 1849, when the British—who were our main trading rivals—repealed their Navigation Acts. For centuries this legislation had provided for British shipping and shipbuilding, but a new economic philosophy was sweeping the body politic in Great Britain, and there was a growing realization that the cost of this protection greatly outweighed its value. It had been expected that the United States would follow suit and remove its existing restrictions, but for the first time it did not. Open competition gave way to protective practices that subsequently were relied on to promote U.S. shipping and shipbuilding.

By the beginning of this century, the results of this decision were plain to see. Absent competition, change came slowly. Half of the ships built in the United States still were wooden, and most of these were powered by sail. This was in marked contrast to the rest of the world, where steel ships powered by steam were dominating the ocean trade routes. Of all ships engaged in international trade in 1900, only 2% flew the American flag.

When war broke out with Spain in 1898, British colliers had to be chartered to supply Admiral George Dewey's fleet in Manila, and it was several months after his victory before sufficient foreign tonnage could be acquired to transport the troops to occupy the Philippines. One result of this logistic gap was the passage of an act in 1904 that required that all military supplies and equipment be transported in U.S.-flag vessels, although they did not have to be U.S.-built.

The Government Becomes a Player

When World War I engulfed Europe in 1914, cargo piled up and domestic freight rates skyrocketed, as Europe's ships, on whom America had come to depend, were withdrawn for their own countries' wartime use. President Woodrow Wilson's initial attempts to provide government-sponsored shipping were defeated by the efforts of ship owners—who wanted no government competition under any circumstance—but he eventually was able to draw political support from the growing public concern over German submarine attacks on Allied and neutral shipping. The resulting legislation included regulatory reforms as well as a provision for a five-man Shipping Board with the authority to acquire and operate a government fleet. In time, the program would produce the most colossal shipbuilding effort that the world had ever seen.

The Advent of Direct Subsidies

With the war's end, pressure grew on Congress to get the government out of the shipping business. In 1920, the new Merchant Marine Act set out the terms and conditions that were to be followed in transferring the government fleet to private ownership and defined, for the first time, the maritime policy of the United States:

. . . to do whatever may be necessary to develop and encourage the maintenance of a merchant marine . . . sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency, ultimately to be owned and operated privately by citizens of the United States. 1

With only minor changes, this has continued to be the declared U.S. maritime policy. Known as the Jones Act, after its congressional sponsor, it restated the prohibition against foreign vessels entering U.S. coastal trade.

With new ships coming out of the yards worldwide, the wartime shortage turned into a surplus. Competition rose, prices fell, and American ship operators, faced with higher costs than their foreign counterparts, were losing their ability to compete. Desperate to provide relief, the Shipping Board fell back on mail subsidies to aid the ship owners. It reasoned correctly that the country could be persuaded that it was receiving a necessary service instead of once again being asked to prop up a tottering industry.

In time, the Shipping Board was successful in making a commitment to future ship construction a condition for subsidy contract awards, and a number of outstanding ships eventually were built. That was the good news. The bad news was that the mail subsidy program was grossly mismanaged. By 1935, it would be characterized by Senator Hugo Black, chairman of the Senate Investigating Committee, as a "Saturnalia of waste, inefficiency . . . [and] exploitation of the public." 2 Senator Black was openly contemptuous of the U.S. shipping industry and favored government ownership of the merchant marine. His committee's recommendations for reform reflected this.

The failure of the mail subsidy system notwithstanding, President Franklin Roosevelt continued to promote a U.S. merchant marine and created an interdepartmental committee to develop a program to accomplish this. Its recommendation—that future subsidies for ship operation and shipbuilding be direct payments based on foreign cost differentials—and those prepared by the Black committee were sent to Congress with the president's endorsement.

A combination of two conflicting programs, the resulting law—the Merchant Marine Act of 1936—inevitably was flawed. But in 1939, as the new program was developing, war broke out in Europe once again. Because of the unlimited wartime funding, none of the more obvious problems in the legislation were apparent, and any shortcomings were swept aside.

By the end of the war in 1945, the United States had built a Navy and merchant marine of a size and strength never before seen or even imagined. At the time of the attack on Pearl Harbor, the United States was only beginning to expand its merchant marine; four years later, it possessed 60% of the world's tonnage.

The United States once again had a strong merchant marine, but there was little cargo available other than that provided by the U.S. government in the form of foreign aid to the war-torn world—and U.S. merchant shipping quickly came to depend on it. As foreign competition increased, laws were enacted to guarantee that significant portions of U.S. government-financed cargoes would be reserved exclusively for Americans.

In 1954, the new Republican administration led by President Dwight Eisenhower concluded that the requirement to carry these exports in U.S. ships, regardless of cost, should be eliminated. They believed that if subsidies were needed for the merchant marine, they should be provided directly. Congress, at the urging of the shipping industry, disagreed. A compromise was reached—50% of all government-financed cargoes would be reserved for U.S. ships—and the resulting law, Public Law 664, took its place alongside the Jones Act and the Merchant Marine Act as one of the principal supports of the U.S. merchant marine.

Following the end of World War II, a new Cold War divided the world into two hostile camps, with the United States and the countries of the North Atlantic allied against the Soviet Union, China, and the developing nations that had answered the call of the Communist Internationale. Wars in Korea and Vietnam were followed by a series of short wars in the Middle East, one of which resulted in the blocking of the Suez Canal. In this environment, the U.S. merchant marine thrived. There was such a demand for shipping that many ships that had been placed in the National Defense Reserve Fleet had to be reactivated.

Recent Policy Considerations

In 1981, the Reagan administration transferred the Maritime Administration to the Department of Transportation and eliminated the position of Assistant Secretary for Maritime Affairs. Secretary of Transportation Drew Lewis announced that there would be no further funding of construction differential subsidies and that no new operating differential subsidy contracts would be awarded. When the existing subsidy contracts expired, they would not be renewed.

Twelve years later, as part of its pledge to reduce the national deficit and improve government efficiency, the Clinton administration established a National Performance Review under the chairmanship of Vice President Al Gore. As part of its mandate, it investigated various forms of maritime subsidies and protection and eventually proposed their elimination. When this portion of the report was leaked, however, there was an outcry from maritime labor leaders, who had given President Bill Clinton considerable support during his election campaign. The administration instead came forward with an operating subsidy program called the Maritime Security and Competitive Act, to be funded by a tax on imports and exports at a time when the U.S. trade deficit was reaching all-time highs. The flawed program eventually died in committee.

Undeterred, the administration reintroduced the subsidy program as the Maritime Security Program. Foreignbuilt ships would be eligible and restrictive trade route requirements eliminated, but all other restrictions were left in place. A $100 million subsidy was provided for the first year, to support a fleet of some 47 ships by providing payments of $2.1 million per ship per year. The intention was that a similar amount would be provided for the next nine years. The ship owners, in turn, would commit such vessels for government use in time of emergency.

During the final days of the legislative session of the 104th Congress, the Senate passed the bill with overwhelming support. The program will allow American ship owners to continue to absorb unrealistically high labor costs and defray the expense of some of the government restrictions, but it contains no incentive for future U.S. flag operations. Once the present, aging fleet has been retired, the owners will continue with the program of foreign-flag replacements that already is well under way.

The New Realities

After the mid-19th century, much of America's maritime policy has been at odds with that of other developed nations. For example, no other modern maritime nation:

  • Demands that ships engaged in cabotage (coastal) trade be built domestically.
  • Requires a three-year waiting period before any foreign-built domestic-flag vessel can become eligible to carry government-sponsored cargoes.
  • Levies custom duties on foreign repairs to its ships.
  • Retains outmoded laws restricting the efficient use of shipboard personnel.
  • Taxes the earnings of ships owned by its citizens engaged in international trade as though they were a domestic operation.
  • Restricts the use of private property in the form of the sale or transfer of ships to a foreign registry when it is in the owner's interest to do so (although the recent legislation effectively eliminates this restriction for ships not covered by the new law).
  • Allows foreign ships that meet International Maritime Organization standards to enter its waters, but makes its own flag ships comply with a higher standard-in this case, the Coast Guard's unique set of rules.

No other nation so actively discourages investment in a competitive merchant marine. If any progress is to be made in retaining at least a nucleus of a American-owned merchant marine, new realities must be recognized and accepted, no matter how painful. Among these are:

  • Until recently, political support for the U.S. maritime industry was the result of war or the threat of foreign aggression. The nation no longer feels this pressure. As a result, in the competition for federal funding, the maritime industry lacks much of its previous support.
  • Nationality has become blurred. More and more, the dominant U.S. companies are members of large consortia, and their containers are readily interchanged with various members, regardless of flag. Competition, in the face of unrealistic U.S. government restrictions and union demands, will force Americans operating in international trade to continue to become owners and/or charterers of ships flying flags other than their own.
  • Increasingly skilled and sophisticated American shipping managers are aware of the costs associated with government "assistance" and are growing more determined to operate without it.
  • Containerized cargo systems are incredibly productive when linked to a sophisticated land-based infrastructure, but they break down rapidly when such facilities do not exist or are not adequate. Recognizing this, the Defense Department has chosen the RO/RO, which has no comparable shoreside dependency, for future sealift needs. It has acquired a large number of foreign-built RO/ROs, reflagged them for the Ready Reserve Force, and placed them in lay-up for future rapid activation. The Navy also has embarked on a $6 billion building program to establish its own fleet of specialized vessels. The result is that today the Defense Department places far less reliance on the U.S. commercial fleet for support in an emergency.

The old ways of carrying out national policy, particularly with respect to America's maritime industries, are no longer valid. A fresh approach is required. Any such initiative must be firmly anchored in the accepted practices of the international market. To do otherwise guarantees continued waste of scarce resources and only brief postponement of the inevitable.

1 S. A. Lawrence, United States Merchant Shipping Policies and Politics (Washington, DC: Brookings Institute, 1996), p. 284.

2 Investigation of Air Mail and Ocean Mail Contracts, 74th Cong., 1st sess., 1935, S. Rept. 898.

Dr. Gibson sailed in the merchant marine during World War II and the Navy during the Korean War, and was a senior official of the Grace Line and president of Delta Line. He served as Maritime Administrator and Assistant Secretary of Commerce for Maritime Affairs, 1969-1972. More recently, he was Admiral Emory S. Land Professor at the Naval War College, Newport, Rhode Island, where he continues as an Advanced Research Fellow.

 

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