Certainly the most controversial of our many maritime problems is the situation regarding “Flags of Convenience.” The matter is of vital interest in defense planning and has a number of conflicting implications in international affairs. It is the subject of a perennial labor-management legal battle in the courts and before the National Labor Relations Board, and was the central issue in a recent Maritime strike.
The bitterness of the argument is pointed up by the various names given to the concept. Depending on viewpoint, these range from “Flags of Necessity” to “Runaway Flags.” Most of the more neutral observers speak of “Flags of Convenience.”
Whatever the title, the situation referred to is the ownership and control by U. S. citizens or corporations of merchant ships under the flags of Panama, Liberia, and Honduras, collectively called the “PanLibHon Flags.” It is difficult to make an exact definition of “Flags of Convenience.” There are a number of features, however, which are common to the current “Flags of Convenience” and which are probably necessary attributes of any convenience registry:
(1) The country of registry allows ownership and/or control of its merchant vessels by non-citizens.
(2) Access to the registry is easy. A ship may be usually registered at a consul’s office abroad. Equally important, transfer from the registry at the owner’s option is not restricted.
(3) Taxes on the income from the ship are not levied or are low. A registry fee and an annual fee based on tonnage are normally the only charges made.
(4) The country of registry is a small power with no national requirement under any foreseeable circumstances for all the shipping registered.
For the American shipowner, convenience registries have in the past held three attractive features: lower operating costs, principally wages, freedom from internal labor troubles, lower local taxes, and deferment of taxation by the United States on the profit of the operation until such profits are returned to the United States. Less important, most of the expenses of operation are in foreign currency, better enabling the owner to operate in the foreign cross-trades, as he can use directly the foreign currency he receives.
American flag-of-convenience operations ii started in the late thirties, when one of the major oil companies moved a group of tankers from a German-controlled registry to Panama due to the Nazi threat. Oil imports from Central America had begun to be a factor, and soon a number of oil companies began to develop Panamanian tanker fleets.
After the outbreak of war in 1939, American-owned Panamanian-flag ships were found to be an effective means whereby we could circumvent our own Neutrality Act (which prohibited the use of U. S.-flag ships in the war zone) for the purpose of supplying our future allies. Prior to our entry into the war, the U. S. government encouraged the transfer of numbers of ships from the U. S. to the Panamanian flag for this purpose.
After December 1941, American-owned ships under the Panamanian flag were directly integrated into our war effort, under either the U. S. or the Panamanian flag.
Thus, during World War II, the ground work was laid and precedents established for the effective control of flag-of-convenience shipping, with the tacit consent and concurrence of the nation of the flag.
After the war, the advantages of this method of operation were more widely recognized and a growing number of ship operators, both American and European, entered the field. From the point of view of the registering nation, the advantages in terms of fees, prestige, etc. were attractive, and a number of countries followed Panama’s example in providing the proper climate for operations. Costa Rica, Honduras, Liberia, and Venezuela developed convenience fleets. Over the years, however, all of these except Liberia and Panama have removed themselves from consideration as convenience registries for general usage. Honduras still has a few convenience registries.
The development of these fleets in the postwar years was fostered by U. S. maritime policies and by American financing institutions. One major effect of our Ship Sales Act of 1946 was to expand the convenience registries with U. S. war-built tonnage.
Although many observers speak only of the American-owned portion of the convenience registries, two-thirds of them are controlled outside the United States, principally in Western Europe. As the shipyards of Western Europe and Japan began to recover from World War II, new vessels for the flags of convenience were constructed in them, financed in the main by American banks and insurance companies. These new vessels, usually tankers and ore carriers of ever-increasing size, were registered initially in Liberia or Panama and never came under the U. S. flag.
After the start of the Korean War, ships sold or transferred from U. S. registry to foreign flags had to contract to be available to the United States upon request in the same manner as U. S.-flag vessels. They were also prohibited further change of registry or ownership without the consent of the Maritime Administration. Later policy changes allowed U. S.-flag war-built tonnage to be transferred in consideration for building new tonnage for the U. S. flag. From 1953 on, the policy allowed transfers only to the PanLib- Hon registries, and contracts guaranteed the availability of the ships as well as prohibiting further transfer.
The highly profitable tanker market created by the Suez crisis caused a great surge in tanker building all over the world. The result was much new building for the PanLibHon flags as well as considerable “trading out” from the U. S. flag, in consideration for the construction of new U. S. tonnage.
Over these postwar years, national security and defense considerations have led to the establishment of the concept of “effective U. S. control.”
In the early postwar years, the memory of our favorable wartime experience with Panamanian registry led to the conclusion that such shipping could reasonably be expected to be made available to the United States upon request. In those days we had a large, new, war-built U. S.-flag merchant fleet plus a large number of modern, war-built ships in reserve, and flag-of-convenience shipping, although a valuable adjunct, was not considered vital. This situation has gradually changed during the intervening years, as our largely war-built U. S.-flag fleet has become older, and as changing views on the shape of national emergency needs have placed a premium on active, operating ships.
Probably most important, in the years since World War II, we have become dependent upon overseas sources for about 20 per cent of our huge national petroleum requirement, about 40 per cent of our iron ore usage, and for perhaps 85 per cent of our bauxite for aluminum production. It was to serve these fast-growing bulk import trades that the flag-of-convenience fleet was developed. At the present time, over 90 per cent of these vital bulk imports is carried in foreign-flag shipping, partly in American-owned ships flying flags of convenience and partly in foreign-owned ships under various flags. Taking petroleum imports for 1959 as an example, about 60 per cent was carried in Liberian- or Panamanian-flag ships, of which somewhat over half were American-controlled. About 35 per cent travelled in Euro- pean-flag shipping. Only three per cent was carried in U. S.-flag ships.
Not all of the American-owned flag-of-convenience ships are considered as under “effective control” for emergency purposes. The determination is made on the basis of degree of American ownership and on the best judgment as to availability. Categorized by types of control, there are two broad segments of the American-owned and controlled flag-of-convenience fleet: Ships under contract to the U. S. government, and ships owned by Americans or by American-controlled foreign affiliates of U. S. corporations, but not covered by specific contracts.
The ships under contract make up about half the number, but only about 37 per cent of the tonnage. These are ships that were previously under the U. S. flag or were built in American yards for foreign account, on which there is a written contract between the owner and the U. S. Maritime Administration. This contract requires the owner to make the ship available to the United States upon request in the same manner as a U. S.-flag vessel would be made available under the requisitioning provisions of the Merchant Marine Act. It prevents the owner from selling the ship or transferring its registry without Maritime Administration permission, and each contract carries a bond of up to $250,000 to insure performance. About 174 out of the 224 ships under contract are war-built ships, principally Liberty dry-cargo ships and T-2 tankers.
The other category encompasses the bulk of the newer and more valuable flag-of-convenience tonnage. Ships in this group were built in foreign yards and initially registered directly under flags of convenience. They have never been under the U. S. flag, and the owners are under no contractual obligations to the U. S. government restricting their transfer or sale. It is this group that contains most of the modern supertankers and bulk ore carriers. A typical ship in this category might be a 35,000-ton tanker, about 700 feet long, with a draft of perhaps 39 feet. She might have been built in Japan or Western Europe and registered under the Liberian flag. She would be used principally in crude oil service on irregular runs between the oil producing areas, Western Europe, and either coast of the United States. She would be likely to have an Italian crew belonging to an Italian union, and might have Italian or British officers. Although no bonded contract would exist, the owner would probably have on file at the Maritime Administration a letter of his intent to “make the ships available on the same basis as if they were U. S.-flag vessels.” He might have a war-risk insurance agreement with the Maritime Administration assuring control if the insurance is to be valid.
Of course, it is not contracts or letters that give substance to the U. S. control of these ships, but rather the power realities of any foreseeable maritime war. An emergency of such scope as to cause wide-scale requisitioning of merchant vessels would be likely to polarize shipping to one side or the other, and certainly U. S. control, with assured payment and effective naval protection, would look better than the Communist equivalents. U. S. war-risk coverage and the possible establishment of a ship warrants system for bunkering, etc., would also be important incentives.
The flag-of-convenience ships considered under “effective control,” with the U. S.-flag fleet included for comparison, are listed by numbers and tonnage in the tables on page 83. It will be noted from this table that the flags of convenience are strong on relatively new tankers and bulk carriers of large average size. They are lacking in the dry-cargo and passenger categories, with mostly war-built or prewar ships. The table also shows that most of the newest and largest ships are under Liberian registry.
The table points up another basic fact, often overlooked: the need for these flags-of- convenience ships is a national as well as a military need. The continued U. S. control of these new supertankers and ore carriers is highly important to the operation of the national economy, particularly during periods of emergency when the industrial tempo tends to quicken. The continued flow of vast quantities of bulk imports of oil and ores is necessary to the efficient operation of our industrial machine in peace or war.
The ships comprising these exposed arteries of vital imports should be under the U. S. flag, and the strongest possible efforts should be made to get them there. The fact is, however, that these vessels are not under our flag, and due to economic considerations, are not likely to come under it unless we decide to resort to expensive subsidies or cargo preference. It should be noted that under present conditions, the choice is probably not between operations of these ships under flags of convenience or the U. S. flag, but between American-controlled flag-of-convenience and foreign-controlled foreign-flag operations. We should retain in our hands the maximum possible control over these ships under flags of convenience, while at the same time making every effort to obtain a commercially competitive U. S.-flag capability to handle these imports.
The positions and actions of Liberia, Panama, and Honduras should be considered separately from the standpoints of commercial flag-of-convenience operations and of effective U. S. control.
First, there are no intergovernmental agreements between the United States and the PanLibHon nations on either flags of convenience or effective control. There is a treaty with Panama concerning relief from double taxation on shipping profits, and we have treaties concerning friendship, commerce, and navigation with both Liberia and Honduras.
With regard to effective control aspects, however, the U. S. government’s agreements or contracts are with U. S. citizen-corporation owners, not with the PanLibHon governments. It is true that past experience as well as informal assurances given by these governments to various of the shipowners would appear to indicate PanLibHon approval of the concept of U. S. control of convenience registered shipping in wartime. In the case of the Liberian government, a maritime regulation made effective in 1960 prohibits a Liberian shipowner from entering into any commitment or arrangements whereby a Liberian-flag vessel is to be made available for the use of or requisition by another country without the approval of the Commissioner of Maritime Affairs of Liberia. The regulation goes on to state explicitly- that “The granting of such approval shall also constitute approval for making the vessel available under the terms of said commitment, agreement or arrangement.” This regulation was apparently issued for the purpose of making explicit the commitment of U. S.-owned ships to U. S. control and preventing extraneous commitments.
A recognized forum for maritime matters is the UN’s Intergovernmental Maritime Consultative Organization. Membership on IMCO’s committees, which carry a certain prestige status, is normally based on the amount of tonnage registered under the flag of the nation. In 1958, Liberia and Panama were eligible under this criterion and were supported by the United States for membership on IMCO’s important Maritime Safety Committee. Strong opposition by the European maritime nations prevented their being placed on this committee. The matter was referred to the World Court, and in 1960, a decision was rendered which supported the right of Liberia and Panama to committee memberships. The Court stated that registered tonnage is the only practical and certain way to measure a nation’s maritime standing. Since that time, transfers away from Panamanian flag and other tonnage changes have altered the standings, depriving Panama of her hard-won committee position.
Both Panama and Liberia have also made strong efforts to establish their maritime position by internal administrative measures. Panama, in conjunction with her shipowners, is making serious steps toward training her seamen and officers, and has improved the supervision by her consuls of conditions in her ships and of administrative detail.
Liberia issued a number of changes to her maritime laws and regulations in 1960, many of them concerned with working conditions and with setting personnel proficiency standards for licensing. Other changes are reported under consideration, partly with the aim of preventing unapproved labor unions from organizing Liberian-registered ships.
Due to both nations’ lack of fully adequate enforcement means, there is in some instances a gap between regulation and compliance. This situation leads to the sub-standard conditions found particularly on some of the older PanLib ships owned by “shoestring” operators. This is not typical of the PanLib- Hon registries, however, and is certainly not applicable to the newer and more valuable of the PanLib ships considered to be under U. S. control. These ships, largely owned by major American oil, metals, and shipping companies, maintain wage, living, and working standards which are at least equivalent to European maritime practice.
European maritime opposition to flags of convenience is based primarily on economic motives. The shipowners of the maritime nations of course dislike the competition of American shipping under convenience flags, feeling that if these ships were eliminated, the additional business would accrue to them rather than to the U. S.-flag merchant fleet. This is almost certainly true. As pointed out earlier, European participation in the American bulk import trade is significant and is apparently increasing. Continuation of this trend and elimination of American-controlled flags of convenience without a consequent U. S.-flag increase would leave the United States in an uncertain position. Well over 90 per cent of the oil and ore imports so important to our economy would be carried in ships owned by foreign citizens and corporations, particularly by citizens of nations wherein there is a close control and coordination of national policy and shipping policy. In my opinion, it would be unwise to place any group of nations in such a controlling position astride our lifelines. Furthermore, previous wartime experiences with charter rates would indicate that hiring foreign-controlled shipping during an emergency is usually expensive.
The main struggle in the flag-of-convenience controversy has been between the shipowners (both as individuals and as a group) and the domestic maritime unions (separately and in alliance, with occasional assistance from international labor). The shipowners contend that due to high operating costs under the U. S. flag, they must operate under flags of convenience in order to compete with foreign-owned and -controlled shipping in the unprotected and unsubsidized bulk trades. They maintain that U. S. domestic labor laws should not be applied to foreign-flag ships manned by aliens. The unions contend that by operating under flags of convenience, U. S. shipowners are depriving U. S. merchant mariners of job opportunities. They consider that due to U. S. ownership of the vessels and their position in our foreign commerce, domestic labor laws should apply, giving them the right to hold representational elections in the ships in order to organize the crews.
The battleground has been the federal and state courts and the National Labor Relations Board, as well as the picket lines and the docks. The advantage appears to swing from one side to the other without any clear-cut result, and some observers think that a legal battle of many years’ duration is just beginning.
As of the present date, the labor viewpoint appears to be in the ascendancy. A series of court and NLRB actions have upheld labor’s position, and the unions did achieve some success in organizing convenience shipping during the 1961 maritime strike. When a strong attempt was made, however, to have shipowners who operate both U. S.-flag and flags-of-convenience vessels accept immediate organizing of their foreign-flag operations in order to obtain a contract covering their U. S.-flag ships, the principal result was to have the problem placed under study, in some cases by a labor-industry group, and in others by a 3-member board appointed by the Secretary of Labor. A side-effect was that for the first time, wide publicity was given the flag-of-convenience issue, with the result that public reaction was largely favorable to the management position.
Of the many court decisions in the field, one stands out as a landmark in its effect on the present situation in which the tide is apparently flowing for the labor unions. Prior to early 1960, picketing or boycott actions against foreign-flag ships were countered by the shipowner’s request, most frequently granted, for a federal court injunction against the picketing on the basis that the internal administration of a foreign-flag ship was not a proper target for such harassment. In April 1960, however, the Supreme Court handed down a decision which was to have a major effect on the course of the controversy. This decision related to a case known as the “Marine Cooks and Stewards” or the “Nikolos” case. The Nikolos, ironically, was not an American-owned flag-of-convenience ship, but was a Liberian-flag ship owned by a Greek with home offices in London. She was picketed in Tacoma on the basis that being foreign-manned she was reducing job opportunities for American mariners. The owners obtained an injunction against the picketers and later sued to recover damages. The eventual upshot of the complicated legal maneuvers which followed was that the Supreme Court gave its opinion that the matter was a labor dispute, and that therefore the Federal Court should not have issued an injunction. This further carried the implication that the proper forum for such disputes was the NLRB and not the courts.
Soon after, a federal court in New York denied a plea for an injunction, citing this case. For a time, some state courts in New York and Pennsylvania appeared willing to grant injunctions, but of recent months, most state courts have refused to rule on foreign- flag cases, expressing the view that the Taft- Hartley Act pre-empts state court action by giving the NLRB exclusive jurisdiction. A California state court did enjoin a picketing case last spring, however, based on the irregularity of the ship’s service in U. S. ports.
At roughly the same time as the Nikolos decision, a group of four flag-of-convenience cases was referred to the NLRB. The issue was whether or not the NLRB should, as the unions wished, take jurisdiction, in effect placing the ships under domestic U. S. labor law. The operation and background of the ships involved were not typical of flag-of- convenience registries: the ships had been built in the United States, and had been under the U. S. flag in the same Gulf Coast-to- Caribbean service which they continued to follow under flags of convenience.
There was concern within the Executive Department that precedents established in these essentially untypical cases would be used to extend domestic labor law coverage to the new, large, foreign-built PanLib ships. Shipowners had often stated that if brought under U. S. labor laws and required to meet U. S. wage standards, they would be unable to compete with foreign shipping and would have no choice but to sell or transfer the ships to foreign interests and registries completely divorced from U. S. control. These new ships, having been built abroad and registered initially under PanLib registries, could be sold to foreign interests or their registries transferred at the option of the owners. To point up to the NLRB that there were issues involved that were external to the labor- management dispute, the Secretaries of State and Defense requested the Attorney-General to intervene in order to bring to the NLRB’s attention certain questions of international policy and the position of flags-of-convenience shipping in the defense picture.
The NLRB decision in one of the three cases so far decided, took jurisdiction stating, “ . . . here we have substantial continuing American foreign commerce and the American employer. These factors, we find, warrant application of the Labor Act in this proceeding.” In another case, the Board appears to have extended its jurisdiction to cover foreign crews of foreign-owned (as well as foreign- registered) ships, provided that the ships touch periodically at U. S. ports.
Whether these factors could be found to apply broadly to other flag-of-convenience cases is a matter for future determination. The Board’s decision has been appealed.
The future continuance of the American use of flags of convenience would appear to depend upon some future affirmative Congressional action. Recent court decisions, stemming principally from the Supreme Court action in the Nikolos case have been almost unanimously unfavorable to flag-of- convenience operations. Industry opinion seems to be that the NLRB is likely to continue to extend its jurisdiction over flags-of- convenience cases. At present, some of the largest and most conservative of flag-of- convenience operators appear to be considering seriously movement away from the PanLib registries. There have been a number of transfers in recent months and more appear likely in the near future.
Serious efforts are being made to achieve a national policy on flags of convenience. An exchange of correspondence in late August 1961 between the Deputy Secretary of Defense and the Chairman of the House Armed Services Committee affirmed as the Defense Department position, “It is considered imperative that United States effective control of flags-of-convenience shipping be retained. ...”
It was further stated in the same letter that the Defense Department, “ . . . intends to do all it can to have its position adopted as national policy.” The Chairman of the House Armed Services Committee said in his reply, “ . . . I fully agree with the national policy position which you propose. ...”
Many observers are of the opinion that unless some firm policy is obtained, American use of the present flags of convenience may last only for another five to eight years. Although this year’s strike and labor negotiations have not resulted in significant organizing of the flag-of-convenience fleet, they did point up the unions’ determination to organize or eliminate it. Many operators are convinced that without some Congressional action to restrict the application of the domestic labor statutes in these cases, they cannot stave off union organization, which, they are convinced, will be so expensive that they will no longer be able to compete with European shipping. They find it difficult to see why foreign investments in shipping should be singled out for application of domestic U. S. labor laws, while American factories overseas are, at least at present, immune from their counterpart unions in the United States.
Fully as important in its effect on the future of flags of convenience is the growing lack of confidence in convenience shipping of lending agencies, such as the major insurance companies, which in the past have furnished the capital to construct the newer, foreign- built segment of this fleet. Indications are that new construction for flags of convenience is becoming much more difficult to finance.
What will the owners of these ships do if present adverse trends continue? Their reactions will probably depend on the scope of their operations. Owners with large, modern, flag-of-convenience fleets, but with relatively few ships under the U. S. flag, might well sell their U. S.-flag vessels. Operators such as the oil companies, which have to operate a considerable U. S.-flag fleet for coastwise use, might sell their flag-of-convenience fleets to some responsible European shipping corporation, who would then place them under some European flag, man them with nationals of that flag who are members of the maritime union of that country, and then charter the ships back to the oil company on a long-term time charter.
The likelihood of any of the flags-of-convenience ships being placed under the U. S. flag is very slim under the present law, except in isolated circumstances for use in carrying foreign-aid grain. No ship which has been built abroad or registered in other than the United States can engage in U. S. coastwise trade. Coastwise privileges provide one of the few incentives to tanker operation under the U. S. flag, as operating costs under the U. S. flag preclude profitable direct competition with foreign shipping in the foreign trades. Last year an attempt was made to obtain legislation which would allow a group of modern, desirable, flag-of-convenience ships to be registered under the U. S. flag and given coastwise privileges. The proposed legislation was strongly opposed by groups of independent U. S.-flag tanker owners. Without some such action, however, the future for moving any of these modern, valuable ships to the U. S. flag would appear bleak.
The most important thing, however, in considering the future of the flags of convenience should be the protection and serving of the national interest. Where this national interest lies in this situation is, of course, a matter of opinion. In the opinion of the writer, the important thing is to have under our national control the means to move the import flows of raw materials that are such an essential part of our economic capability, and the means to augment our shipping capability in time of emergency.
In this regard, the national interest would (again in the opinion of the writer) be better served were this shipping capability available under the U. S. flag. To this end, every avenue should be explored in a co-ordinated industry-labor-government search for some means whereby tankers and bulk carriers equivalent to those now registered under flags of convenience could compete economically under our own flag.
Until some means can be found to accomplish this, we should maintain the control we have of the American-owned ships flying flags of convenience.