The erosive effects of years of empty words and unacceptable performance may yet force the federal government to make the choice it obviously wishes to avoid. To many, the choice clearly seems to be between a seemingly insatiable “private industry” and the public interest.
Since early 1968, there has been turmoil in the American merchant marine industry over the practice of subsidized carriers transporting government-sponsored, and particularly military, cargo at freight rates intended to pay the full cost of operating ships under American registry.
Much of the controversy stems from the fact that, since 1904, cargo belonging to the military services has been reserved for American-flag ships and, since 1954, at least half of the cargoes sent abroad under the U. S. program of economic and agricultural aid to foreign nations has been restricted to American-flag ships, when they are able to provide the service. Since 1936, the federal government has paid a portion of the shipbuilding and operating expenses of a number of companies engaged in the foreign trade and providing regular common-carrier service. To the extent that these federally-aided companies participate in the carriage of cargo reserved for American ships (hereafter to be called “preference cargo”), they are both obtaining a double subsidy and are not living up to the purposes of the Merchant Marine Acts of 1936 and 1970.
A look at the intent of the various laws designed to assist American ships is in order.
In the 1904 law, which restricted the carriage of military cargo to ships belonging to the U. S. government or of U. S. registry, it was the intent of the Congress that the benefits of this business be directed toward the U. S. merchant marine. The problem of the higher costs of owning and operating American ships was acknowledged by the provision that freight rates payable for the transportation of these goods were to be fair and reasonable. The implication, supported by numerous administrative decisions, was that these freight rates were to compensate the owner for the expense of running ships under American registry. It is quite clear that the purpose of the Congress was to assist the U. S. merchant marine by providing some cargo for the ships.
When, a half-century later, the Cargo Preference Act of 1954 was signed into law, the will of the Congress was that at least one-half of those cargoes under the control of the government would be transported in privately-owned ships of the American merchant marine, at rates which would compensate for the higher cost of operating ships under American registry as compared to foreign-flag vessels. There is no limitation, in the wording of the act, imposed upon the government agencies (Department of Defense, Department of Agriculture, Agency for International Development, and the Export-Import Bank) to use only those ships which do not hold operating-differential subsidy contracts. The efforts to have this law passed, and the pressure to obtain maximum benefits from it, came from the unsubsidized segment of the merchant marine—the tramps and the liner services most particularly. It is not reaching out too far to say that the real intent of the Congress was to provide some sort of assistance to these hard-pressed components of the merchant fleet; the subsidized operators were considered as already being assured of help by virtue of their existing contracts with the Maritime Administration.
The Merchant Marine Act, 1936, embodied what was then a new concept of government aid to U. S. shipping by which operators facing specific and measurable competition from foreign-flag carriers for the cargo and passengers moving on essential foreign-trade routes would be eligible to receive payments from the federal treasury. These payments were intended to make it possible for high-cost American operators to transport cargo and passengers at rates fixed by foreign competition, and therefore below the compensatory level for the Americans. The disparity in revenue would be offset by the subsidy, which would apply to the major items of ship operating cost: wages, marine insurance, maintenance, and repairs. It was the intent of the Congress, based on the theory that American ships were necessary to the well-being of the nation, that American operators be placed on a parity with their foreign-flag rivals, and that these operators thereby be enabled actively to seek out cargo which, but for the subsidy, would cause serious losses to handle.
It must be noted that, in 1936, the volume of military cargo shipped to overseas destinations was very small, and there were no economic or military aid programs. Likewise there was no fleet of American-flag tramps (i.e., ships trading on no fixed route, carrying predominantly full loads of a single commodity usually moving in bulk) engaged in the foreign trade of the United States. The law therefore was mute on the problems which have arisen since 1945.
The tramp fleet came into existence when surplus ships were sold, pursuant to the Ship Sales Act of 1946, at bargain prices, to American operators who saw opportunity in the almost limitless flow of cargo destined to war-ravaged countries. The lack of foreign competition lent substance to their dreams. The reality of international shipping became evident all too soon, and by 1950 it was clear that the tramps and the liner companies operating without subsidy would need some form of government help. In these circumstances, the Congress enacted a short-term assistance program, and made it permanent in the 1954 Cargo Preference Act. This was a thinly-disguised subsidy which, as already stated, was intended for, and directed to, the carriers who had not been granted operating-differential subsidy contracts. In the light of subsequent events, it was unfortunate that the wording of the 1954 Act did not stipulate clearly and incontrovertibly that this form of cargo preference was to apply only to the tramps and unsubsidized liners.
Fundamental to all three of these laws was the belief of the Congress that a modern and efficient merchant marine was a necessary resource for the defense establishment. That this belief was correct can be corroborated by the facts of four wars.
Has cargo preference legislation attained its goals? There are various ways in which this broad question must be answered. First, the carrying capacity of the dry-cargo segment of the American merchant marine (excluding, because there is relatively little preference cargo moving in them, the combination passenger-cargo ships, bulk carriers, and tankers), is a yardstick of the potential of those ships. If there is abundant cargo, the fleet should grow, and conversely it should shrink when cargo is scarce. The following table tells its own story of the lack of success achieved by this legislation:
Year | Fleet Capacity, | Year | Fleet Capacity, |
1955 | 25.8 | 1963 | 19.7 |
1956 | 25.2 | 1964 | 19.1 |
1957 | 24.7 | 1965 | 17.9 |
1958 | 24.1 | 1966 | 17.4 |
1959 | 23.0 | 1967 | 16.4 |
1960 | 21.9 | 1968 | 15.8 |
1961 | 20.1 | 1969 | 15.4 |
1962 | 20.2 |
|
|
The next facet of the answer is the proportion of American waterborne commerce carried to foreign countries in ships of American registry. It is a reasonable expectation that a healthy merchant marine would continue to carry the same relative proportion of the national waterborne commerce as total quantity increases from time to time. Ideally, it should add annually a small increment to its share of the cargo lift. The statistics which follow demonstrate that these reasonable expectations have not been attained:
Cargo Tonnage Lift of U. S. Flag Ships
(In millions of long tons)
Year | Total Tons of U. S. | U. S. Flag | U. S. Flag |
1954 | 177.0 | 48.7 | 25.5 |
1955 | 266.2 | 53.1 | 23.5 |
1956 | 260.1 | 53.9 | 20.7 |
1957 | 289.3 | 50.8 | 17.6 |
1958 | 253.3 | 30.9 | 12.2 |
1959 | 267.0 | 27.1 | 10.2 |
1960 | 277.9 | 31.0 | 11.1 |
1961 | 272.4 | 26.3 | 9.7 |
1962 | 296.8 | 29.6 | 10.0 |
1963 | 311.6 | 28.5 | 9.2 |
1964 | 332.8 | 30.5 | 9.2 |
1965 | 371.3 | 27.7 | 7.5 |
1966 | 392.3 | 26.2 | 6.7 |
1967 | 387.6 | 20.5 | 5.3 |
1968 | 418.6 | 25.0 | 6.0 |
1969 | 427.9 | 20.7 | 4.8 |
Essential, and pertinent, to this analysis is the determination of how much of the tonnage carried by American-flag ships is obtained because of the requirements of the cargo preference legislation, and how much is procured by aggressive, imaginative, and customer-oriented salesmanship. Unfortunately, the data maintained by the Maritime Administration do not provide the basis for such a determination, because they do not distinguish clearly between genuinely commercial cargo and that which moves in American ships solely because of the mandate of law. Either preference cargo is lumped into the commercial lift statistics, or it is not classified by carrier to differentiate between liner and tramp. These shortcomings in the data, however, do not obscure the fact that, but for the cargo preference legislation, the American merchant marine would be in a more precarious condition than it now is.
Figure 1 records the tonnage lifted by American-flag ships since 1954:
Figure 1
Categories of Cargo Lifted by U. S. Flag Ships (in millions of long tons)
(1) | (2)* | (3)* | (4)* | (5 )* | (6)* | (7) | (8) |
Year | Total | Dry-Cargo | Total | Total | Total Tons | DoD Cargo | Total Cargo |
1954 | 48.7 | N.A. | N.A. | N.A. | N.A. | N.A. | N.A. |
1955 | 53.1 | N.A. | N.A. | 12.754 | 10.022 | .738 | N.A. |
1956 | 53.9 | 33.8 | 26.788 | 13.972 | 7.012 | .859 | 19.828 |
1957 | 50.8 | 34.0 | 25.884 | 13.991 | 8.116 | .879 | 20.009 |
1958 | 30.9 | 22.8 | 22.413 | 11.176 | 8.487 | 1.049 | 11.624 |
1959 | 27.1 | 21.7 | 14.355 | 10.630 | 7.345 | .971 | 11.070 |
1960 | 31.0 | 22.9 | 12.645 | 11.220 | 10.255 | .872 | 12.645 |
1961 | 26.3 | 20.4 | 9.480 | 9.773 | 10.420 | .981 | 10.627 |
1962 | 29.6 | 21.0 | 8.008 | 10.050 | 12.992 | 1.133 | 10.950 |
1963 | 28.5 | 21.7 | 7.581 | 10.728 | 14.119 | 1.301 | 10.972 |
1964 | 30.5 | 23.0 | 10.977 | 11.288 | 12.023 | 1.142 | 11.712 |
1965 | 27.7 | 19.4 | 8.922 | 8.913 | 10.478 | 1.157 | 10.487 |
1966 | 26.2 | 18.3 | 9.649 | 10.070 | 8.651 | 1.346 | 8.230 |
1967 | 20.5 | 16.0 | 9.520 | 9.867 | 6.480 | 1.420 | 6.133 |
1968 | 25.0 | 17.5 | 9.934 | 10.300 | 7.566 | 1.399 | 7.200 |
1969 | 20.7 | 14.4 | 6.835 | 5.974 | 7.565 | 1.082 | 8.426 |
Notes: *— Includes preference cargo, but excludes DoD tonnage.
N.A.— Not Available
Col. 2— U. S. Oceanborne Foreign Trade (MarAd Chart 233.01)
Col. 3— U. S. Oceanborne Foreign Trade (MarAd Chart 233 01)
Col. 4— Col. 3 minus Column 6
Col. 5— Foreign Trade Cargo Carried (MarAd Chart 233.03)
Col. 6— Cargo Preference: P.L. 664 (MarAd Chart 322.22)
Col. 7— Foreign Trade Cargo Carried (MarAd Chart 233 03)
Col. 8— Col. 5 minus Col. 3 (Tonnage shown in Col. 8 is part of the total shown in Col. 3)
Even statistics as fragmentary as Figure 1 suffice to demonstrate the crucial importance of preference cargo to American steamship operators, both subsidized and otherwise.
Examination of these statistics reveals that the subsidized carriers have a substantial interest in the movement of preference cargo, particularly because of the current practice of the government which permits them to collect subsidy while also charging freight rates calculated to defray total costs of operating ships under the American flag without subsidy.
Herein lie the seeds of bitter controversy. To understand the reasons for the bitterness it should be necessary only to recall that the real purpose of the construction and operating differential subsidies, which have been paid since 1937, is to make it possible for American operators really to compete with foreign carriers for a share of the commercial cargo moving in the foreign trade of the United States. If the system as administered has not accomplished this purpose, then the affected shipowners and the Maritime Administration should cooperate to find a way to achieve the goal depicted in the law. To this observer, it seems very clear that to permit subsidized carriers to accept preference cargo in any substantial quantities is contrary to the intent of the Congress as set forth in all the laws since 1904.
The diminishing size and capability of the entire American dry-cargo fleet, and the substantial losses reported by some of the major subsidized steamship companies prove that the systems now in effect are not perpetuating the merchant marine nor providing the United States with the resources it requires for military auxiliaries.
Several remedial steps already have been taken. The Merchant Marine Act of 1970 has established the concept of a ten-year procurement program, ultimately to produce 300 new ships. The operating subsidy is to be extended to bulk carriers. Construction assistance will be available to shipowners previously excluded from this type of government aid. There is, however, no indication so far that the subsidy will be paid only to support true competition, meaning to take cargo away from foreign carriers by providing superior American-flag service at no higher cost to the shipper. Until this is done, it is to be expected that subsidized carriers will seek that cargo which pays the highest revenue. Obviously preference cargo, on which freight rates are computed to compensate fully for American costs without subsidy, is much more lucrative than true commercial cargo accepted at rates fixed by lower-cost foreigners on which subsidy is required if the carrier is to earn any profit at all.
The judgment of history appears to be that the administrators of the Merchant Marine Act, 1936, failed to appreciate the intent of subsidy. They imposed no penalties on the subsidized operators for carrying preference cargo, and they gave comparatively little attention to finding solutions to the problem of making American shipping industry more competitive in world trade. Certainly these administrators did not publicize (if they ever established) the real reasons for the steady decrease in the participation of the U. S.-flag Merchant fleet in our international commerce.
Not all the blame for the failure of the subsidy concept, however, can be laid on the government. The industry itself must accept its share of responsibility, because it has given the general public the impression that it is interested only in obtaining maximum federal contributions as well as guaranteed cargoes at lucrative freight rates.
As these lines are written, a bitter argument is in process between U. S. ship operators on the issue of the transportation of military cargo by the subsidized carriers. That the point of contention has been magnified out of all proportion seems clear, but that its importance in clarifying the need for federal assistance has not been appreciated is equally apparent.
In the year ending 30 September 1969 (latest figures available), the Maritime Administration reported that subsidized ships carried 1,082,000 long tons, equivalent to 2,703,000 measurement tons, of military cargo to world-wide destinations. Had this been moved in Mariner-class cargo ships (each with a nominal capacity of 19,250 measurement tons, which, after allowing for the inevitable loss resulting from fitting rectangular objects into curved hull compartments, could stow about 14,500 measurement tons of cargo), there would have been just over 186 full loads.* Assuming that these ships completed a round voyage in one month, there would have been full employment for just 16 “Mariners” during the year.
* In the general-cargo trades, revenue normally is computed on the basis measurement rather than weight. Forty cubic feet equals one measurement ton. Military cargo is bulky, rather than heavy, and a conversion factor of 2.5 has been established for changing long tons to measurement tons.
The assumptions above are based on an ideal, not a real, situation; they serve, however, to indicate dramatically that the volume of military cargo is limited, and cannot in itself support the entire merchant marine. A more realistic analysis of the contribution of military cargo to the revenues earned by ships would be to assume that about four thousand measurement tons were sent in each ship, and that voyages averaged two months in length. In these circumstances, there would have been business for each of 113 ships during the period under scrutiny.
It is pertinent to the discussion between the carriers to note that, on 28 February 1971, there were 840 ships of all types in the American merchant marine; of these, 454 were dry-cargo liners and tramps. There were 209 dry-cargo liners under operating differential subsidy contracts, but only about 160 were plying routes on which military cargo was moved in any quantity. Had the movement of military cargo during the year ending September 1969 been restricted to the 454 dry-cargo carriers, there would have been some military cargo (at 4,000 tons per sailing, six sailings per ship per year) for about 25% of the vessels. If it had been assigned, on the same basis, exclusively to the subsidized ships operating on the routes touching military destinations, only 70% of this fleet would have obtained a share of the business.
At least, since the establishment of the Military Sea Transportation Service (now the Military Sealift Command) in 1949, it has been customary for Department of Defense cargo to be transported at freight rates which do not include the cost of stevedoring. These so-called “free in and out”—or FIO—rates are intended to compensate for the actual cost of sea carriage plus the time needed to load and unload the cargo. An FIO rate of $20 per ton would be net to the ship, and therefore more likely to be profitable than a $30 rate out of which the expense of stevedoring would have to be defrayed.
During 1969, the Maritime Administration paid a total of $205,020,673 in operating differential subsidy to 13 steamship companies which lifted 5,974,000 long tons of cargo (including preference cargo, but excluding Department of Defense offerings). The subsidy therefore was equivalent to a payment of $34.32 per long ton, or $13.73 per measurement ton, over and above the freight rate, whatever it might have been. If the military cargo were freighted at $20 per measurement ton, FIO, and were further compensated by the subsidy, then the net revenue to the ship would be $33.73 per measurement ton. On the other hand, the unsubsidized operators solely by reason of not receiving subsidy, would collect a total of only $20 per ton of military cargo carried.
Add to this mixture the fact that, since 1966, the Department of Defense has solicited bids from American carriers on a competitive basis, without differentiating between subsidized and unsubsidized operators, and the abrasive nature of the “double subsidy” issue becomes apparent. It is claimed by the unsubsidized group that the rates offered to the Department' of Defense by the subsidized carriers are not sufficient to compensate for American costs, and are possible only because of the substantial operating differential subsidy received from the Maritime Administration. The unsubsidized group further contends that without the military cargo it cannot survive, and therefore it must compete with the subsidized companies by submitting freight rates from which every cent of profit has been extracted, and even some of the actual cost of performing the service has been removed.
Disregarding issues, charges, and countercharges, there remains one fact of crucial importance to the military: the steady decline of the American merchant marine continues year by year despite subsidy and cargo preference.
The existence of the U. S. merchant fleet, both subsidized and otherwise, is vital to the military. The logistical planner, willy-nilly, is dependent upon this fleet to support future operations overseas. Economically it must be so. To illustrate, in 1969, the dry-cargo fleet numbered about 585 ships. Had the military attempted to keep these ships in readiness, at an average cost of $5,000 per ship per day, the bill would have come to 1.068 billion dollars. The cost to the government, in operating subsidy and the differential in ocean freight rates paid for preference cargo (but excluding the military lift) was approximately $343 million.
To the logistical thinker, the question to be resolved is not whether there is any substance to the argument over double subsidy, or whether double subsidy has been a placebo or an opiate rather than the curative medicine for merchant marine ills, but whether in ten more years there will be a merchant marine on which the military can rely. Certainly the thinker must be concerned over the poor financial picture presented recently by U. S. shipping corporations, which are disappointing even in an industry notorious for low percentages of profit. Of course, he must be worried over the fact that of the 198 unsubsidized liners employed in all trades on 28 February 1971 only five had been built without construction differential subsidy, and only a total of 34 were less than 25 years old.
It is quite apparent that the long-range solution to the complex problems facing the U. S. merchant marine cannot be found exclusively in the equitable allocation of military and other preference cargo among all American-flag operators. It is equally true that extending the subsidy program to every shipowner will not by itself provide the efficient and responsive merchant marine the nation must have for its economic and military well-being. Nevertheless, the military planner must be assured than an adequate sealift capability will be available when and if the need arises. The critical fact for the nation is that at least 90% of the support cargoes required for any military campaign must be carried in ships.
Finding a way to provide a modern, efficient merchant fleet which can respond to military need and also play a significant (and necessarily largely self-supporting) role in the waterborne trade of the United States is, therefore, of paramount importance both to the military and the business communities. Given this compelling necessity for the fleet, the lack of success of our maritime programs up to the present, and the bleak outlook for the future, stern measures are in order.
The first proposal to achieve the goal of a modern, efficient, and responsive merchant marine is: To nationalize the U. S. merchant marine, and to operate it so that it can provide effective commercial service while assuring dependable logistical support when and if needed by the military.
This proposal will stir up animosity in certain circles; but there is compelling logical support for it. If the federal government must defray from 35% to 45% of the construction cost of the new ships and between 30% and 40% of the operating costs, and then also provide a measurable percentage of the cargo for these same ships, the validity of the steamship companies' claims to be “private industry” has to be questioned. It would seem entirely appropriate to form some sort of public corporation, similar to the new Postal Service Corporation, to buy the equities from present owners of American ships, and to proceed immediately to the business of running a nationalized enterprise in the public interest.
Traditionally, Americans have been opposed to government ownership of activities which seemed to compete with private enterprise, but given the circumstances which prevail in American dry-cargo shipping today, the merits of the proposition seem to be almost overwhelming. The nation has learned much about operating public and quasi-public corporations since the days of the U. S. Shipping Board. It does not have to be bureaucratic (in the commonly accepted and invidious sense of that word), nor wasteful, nor corrupt, nor a safe haven for political hacks. It can be efficient and effective, and it can produce that which the commercial interests of the nation require while at the same time assuring the existence of a resource vital to the military.
The alternative to nationalization is to establish a new concept of preference cargo and the freight rates applicable thereto. In capsule form, it is proposed that preference cargo be reclassified to become a minor factor in the economics of American shipping. There would be two rate structures, one from the subsidized carriers which would reflect their net (i.e., after subsidy) costs, and one from the unsubsidized carriers which would be based on their cost experience. The selection of the actual carrier in each instance would be left to the government agency requiring transportation, and would be determined by the convenience of that agency.
A variation of this scheme, and one that is preferable, would be to grant subsidy only for commercial cargo actually carried. Subsidy payments would be made annually on examination of historic performance; convicts would be reviewed every two years. Any carrier who had transported (even without subsidy payments on that portion of his lift) more than 30% government (or preference) cargo would have to show cause why his subsidy contract should be renewed. The clear intent of this provision would be to direct the efforts of the subsidized operator to seek, and to hold on to, genuinely commercial cargo rather than to put so much dependence, as he now does, upon obtaining a share of the comparatively small quantity of preference cargo.
An essential feature of this contract would be a clause taking responsiveness to military need a basic requirement for subsidy. The military, not the subsidizing agency, would agree to a formula expressed in the contract to compensate the operator, in the event that ships were diverted to full-time military use, for the dislocation and re-establishment of ships in his regular scheduled service. Should there be no military call during the life of the contract, the only government money paid the operator would be the subsidy.
Any unsubsidized owner who would operate modern ships acceptable to the military would be encouraged to commit his fleet for national defense service. The inducement would be an annual retainer fee paid by the Department of Defense in lieu of subsidy. This retainer fee, on the order of $50,000 per ship, would be paid regularly and would be in addition to a dislocation allowance to which the owner would be entitled if his ship were called for full-time military support activity. Any preference cargo carried by these unsubsidized ships would, of course, be freighted at the compensatory rates filed by the operator.
The provision for responsiveness of the active merchant marine to the military call becomes the more imperative as the World War II ships which have served the nation through the Korean and Vietnam wars disappear from the National Defense Reserve Fleet. As of 30 June 1970, there were only 153 Victory ships still available; the other 104 ships in the fleet were largely useless for modern military cargoes. By 1978, these survivors will all be well over 30 years of age, and overdue for the shipbreakers’ yards.
By adopting one or the other of these programs, the United States will accomplish what must be done. Either one will assure a merchant fleet that participates significantly in the waterborne commerce of the nation. More important, to those who are responsible for the security of the United States and the logistical capability to meet its international obligations, there will be a dependable and highly efficient resource available and ready should the need ever arise.
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Mr. Kendall received his B.A. and M.A. degrees from Tulane University, and after further graduate study at the University of California (Berkeley) and at Princeton University, entered the steamship business in 1935. After war service in the U. S. Marine Corps from 1939 to 1946, he was appointed to the faculty of the U. S. Merchant Marine Academy, Kings Point, N.Y. In 1950, he was designated as head of the Department of Ship Management at the Academy. He accepted appointment as Commercial Shipping Advisor to the Commander, Military Sea Transportation Service (now the Military Sealift Command) in 1960, and held that post until his retirement from the federal service in 1969. He was retired from the Marine Corps Reserve in 1961 with the rank of colonel. He has been a frequent contributor to the Proceedings, and has written three articles for the Naval Review. He also has published numerous essays and monographs in the maritime press.
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Territorial Imperative
While undergoing overhaul in a shipyard, it is customary to assign a helper to each welder to make certain a fire does not get started in the compartment on the other side of the bulkhead from where welding is being done.
After one such shipboard fire had been extinguished, the officer who was first on the scene complimented the man on fire watch for sounding the alarm so promptly.
“I don’t understand, though, why you didn’t try to put the fire out with your own extinguisher,” said the officer.
“Oh, I wasn’t that man’s fire watch,” was the man’s reply. “I work with this man over here.”
—Contributed .by Commander Leonard T. Daley, U. S. Navy
(The U. S. Naval Institute will pay $10.00 for each anecdote published in the Proceedings.)