In less than a year, a message from the President to Congress, stating the urgent need for restoration of the U. S. shipping fleet, was translated into H.R. 15424 and signed into a law which is said to contain “something for everybody.”
With all the recent commotion in naval and maritime circles about the condition of our merchant fleet, there apparently exists a pervasive lack of understanding as to just what is being done about it. Too much emphasis is being placed upon the rejuvenation of American shipyards. Trite phrases and long-winded, laudatory articles praising the U. S. shipbuilding industry for pulling itself up by its bootstraps are flooding maritime trade publications, when its backsliding position among international shipbuilders was largely the result of its own poor management and the inability (or perhaps blustering unwillingness) to negotiate with labor. All too often the President’s message to the American merchant marine industry is taken to imply a healthy shot-in-the-pocketbook to failing shipyards.
Yet that is specifically not what the proposed revisions to the 1936 Merchant Marine Act are intended to accomplish. True, one of the major changes would be the direct payment of construction subsidies to the shipyards and not to the final purchasers of the vessels. However, this was included partly as an economizing treasure and partly because such Construction Differential Subsidy (CDS) funds would reach the shipbuilder in the end—so why not pay him outright? But much more exists in the new provisions—changing the 1936 Act so broadly that they have been labeled the Merchant Marine Act of 1970. After introduction and hearings before the House, the final result—H.R. 15424—passed by a 307-to-1 vote. Senate passage in October was by a similar margin, 68 to 1. Senator John J. Williams (Rep., Del.) a long-time critic of shipping and shipbuilding subsidy policies, was the lone dissenter. The Joint Congressional Committee quickly resolved the minor differences in the two bills and the completed legislation was ready for the President’s signature less than one year after his Message to Congress.
The Merchant Marine Act of 1970 is more than a balm for the economic ailments of American shipyards, it implies substantial additions to the number of ships eligible to obtain construction or operating subsidies and it both restructures and streamlines the handling of funds involved in these programs. Major revisions of the 1936 Act which highlight H.R. 15424 are:
► The bill authorizes the President to appoint a Commission on American Shipbuilding to review the progress of the American shipbuilding industry in meeting production and subsidy goals of the new program.
► Sec.501.d allows Secretary of Commerce to require that vessels built with the aid of construction differential funds for a specific foreign trade be restricted to that trade or service.
► Sec.503.b places an upper limit on construction subsidies at 50% after 30 June 1970, to be reduced to 45% in 1971, and calls for subsequent cuts in maximum allowable payments by 2% per annum, lowering the overall maximum construction subsidy to 35% in 1976.
► Sec.505.a (the “Buy American” clause) The Secretary of Commerce may authorize procurement of foreign components and equipment other than major hull and structural components only if vessel construction would be delayed because of extended deliveries by U. S. manufacturers.
► Sec.601.a extends funds for operating differential subsidy to bulk carriers.
► Sec.607.a promotes “Any citizen of the United States who owns vessels that operate in the United States foreign trade. . . .”
► Sec.607.f imposes interest on such tax deferred capital reserve funds in such a manner as to discourage conserving funds in order to gain interest. Withdrawn earnings from the fund are still taxed only on the year of withdrawal; yet interest payments shall be charged on the amount of tax that would have been due on the year of interest.
[“Ship Stack Insignia” chart]
In addition, the proposed Senate version is more liberal in its definition of U. S. foreign commerce in order to allow U. S.-flag vessels, operating between foreign nations without calling at a U. S. port, to be constructed with the aid of CDS funds.
Of course, there are other important facets in the two adopted revisions. Among these are allowances to expand loan and mortgage coverage to apply to research vessels and to extend the total liability of these loans to a ceiling of $3 billion. Surprisingly for such a fragmented industry, there is something for everyone in the revisions: owners, operators, unions, and shipbuilders alike will benefit.
One of the prime considerations in evaluating such legislation is the motivation behind it. While Administration sponsors have not been lax in letting their feelings be known, the same determination to act now appears to have been written into the revisions. Much of the bill is aimed at economizing practical administration of the Merchant Marine Act, and some of the major proposals outlined above are in reality currently effective because of various other regulations. For instance, the bill authorizes the Secretary of Commerce to restrict the operation of a CDS-funded ship to the intended trade for which she was built. Currently, the operating differential is the only subsidy that restricts a vessel’s area of trade or her service construction subsidy has seldom been extended to vessel owners who did not also have an operating subsidy. Since it is anticipated that some vessels built with the aid of CDS funds will not require operating subsidies to remain competitive (e.g., the North Atlantic and West Coast-Far East Trades), this proposal merely allows continued federal guarantee of U. S. vessels on a service or trade. Another such proposal to do away with federal recapture of excessive profits from subsidized operators only facilitates what is presently accomplished by corporate income tax.
Clearly, though, there is more than just administrative streamlining involved here. The provision of declining subsidy payments for construction is accompanied by an inherent push to meet President Nixon’s stated 30-new-ships-per-year objective. These two goals have both the carrot and the stick effect. The multi-ship, multi-year procurement, necessarily coupled with design standardization, have provided the carrot to induce the shipyards to react. To obtain such prize contracts required imaginative management and large investment in more efficient and modern equipment. On the other hand, the annual decline in subsidy payments to shipyards should have the effect of pushing yards into job-shop, production-line techniques, and a more unequivocal attention to efficiency. In the last several years, it is estimated that the Gulf Coast yards alone have invested or anticipated an investment of over $200 million in new and expanded yard facilities. Right in step have come the East Coast yards, with the largest construction facilities—up to 300,000-ton capacity—and the West Coast with huge repair capacities such as the new 230,000-ton capacity floating drydock at San Francisco.
The extension of operating subsidy to dry and liquid bulk carriers comes as a long awaited equalizer for tankers and bulk ore ships. Since its inception in 1936, only 23 different steamship companies have benefited from this subsidy—a total of over two-and-one-half billion dollars, with another $152 million still to be paid. This somewhat narrow picture is given in Figure 1, which enumerates the 14 lines presently receiving subsidy payments.
[Figure 1: (1 January 1937 to 30 June 1969) Ship Operators Subsidized at Present vs. Ship Operators No Longer Subsidized or Combined with Other Subsidized Lines . . . “Of the 23 ship operators who received operating differential subsidy since the inception of the Merchant Marine Act of 1936, 14 still do.”]
One might question the fairness of such a program should he recognize that there are now some 2,350 cataloged vessel owners and operators in the United States. However, many of these owners may be eliminated owing to size, area of operations (domestic carriers by law are ineligible), and vessel type. Figure 2 gives a breakdown of employment of the U. S. Merchant Fleet as of 31 March 1970. Of the 891 total privately owned vessels indicated, 393 are in foreign trade—that portion eligible for operating subsidy. U. S. tankships account for about 32% of the entire privately owned fleet. (As of 31 March 1970, the U. S. privately owned fleet consisted of 822 active ships: 16 combination passenger/cargo types, 547 freighters, and 259 tankers.)
By excluding the 32% which are tankers, this gives us a rough figure of 271 vessels that were eligible for operating subsidies in March of last year. As of June 1969, some 293 vessels had ODS contracts with the Maritime Administration—an almost perfect coverage, with the complete exception of bulk carriers. It is high time for Congress to recognize that the economies-of-scale—supposedly so all-encompassing in bulk-carriers—are not great enough to offset U. S. construction and operating costs.
Figure 2
U. S. Merchant Ship Employment
(Oceangoing Vessels of 1,000 Gross Tons and Over) As of 31 March 1970
| Privately Owned | MARAD Owned |
|
| ||
| Vessels | Vessels | TOTAL U.S. | |||
Employment | No. | Dwt. tons | No. | Dwt. tons | No. | Dwt. Tons |
ACTIVE | ||||||
Foreign Trade: | ||||||
Nearby Foreign | 10 | 104,000 | — | — | 10 | 104,000 |
Overseas Foreign | 383 | 5,568,000 | 4 | 42,000 | 387 | 5,610,000 |
Domestic Trade: | ||||||
Coastwise | 163 | 4,239,000 | — | — | 163 | 4,239,000 |
Intercoastal | 20 | 313,000 | — | — | 20 | 313,000 |
Noncontiguous | 71 | 1,179,000 | — | — | 71 | 1,179,000 |
Other U.S. Agency Operations: | ||||||
G.A.A. & M.S.C. Charter | 175 | 2,876,000 | 17 | 174,000 | 192 | 3,050,000 |
Other (Custody), etc. | — | — | 21 | 192,000 | 21 | 192,000 |
Active Total | 822 | 14,279,000 | 42 | 408,000 | 864 | 14,687,000 |
INACTIVE | ||||||
Temporarily Inactive: | ||||||
Merchant Types | 26 | 368,000 | 7 | 75,000 | 33 | 443,000 |
Laid Up (Privately Owned): | 43 | 500,000 | — | — | 43 | 500,000 |
National Defense Reserve Fleet: | ||||||
Merchant Types | — | — | 612 | 6,226,000 | 612 | 6,226,000 |
Military Types | — | — | 310 | 2,057,000 | 310 | 2,057,000 |
Inactive Total | 69 | 868,000 | 929 | 8,358,000 | 998 | 9,226,000 |
Grand Total | 891 | 15,147,000 | 971 | 8,766,000 | 1,862 | 23,913,000 |
Source: Maritime Administration
It is important to note here that only those vessels operating in a U. S.-foreign trade will now be eligible for operating subsidy. Domestic liners and non-liners are still to be excluded, and rightly so. There exists at present a slowly-growing group of non-subsidized operators of both freight and bulk cargo ships that owe their existence to the protection extended by trade laws over domestic, A.I.D. and U. S. military cargoes. Should new, subsidized vessels be allowed to compete for this traffic, then the demise of non-subsidized operators is assured. To make certain that the legislators are aware of this, several non-subsidized American owners have testified in both the Senate and House hearings on the bill, as well as in subsequent rate-setting hearings held before the Federal Maritime Commission throughout last November.
The opening of tax-deferred capital reserve funds to owners of vessels operating on U. S.-foreign trade routes will quite likely prove to be the most important clause in the entire stack of revisions. Not only are the giant bulk carrier and tanker operators thereby provided with added incentive to expand and update their fleets, but, in addition, previously ineligible non-subsidized dry cargo ships running overseas carriage are still not able to participate. Major unsubsidized lines, such as Matson, Sea-Land, and Seatrain could then participate in tax deferment which has the overall effect of increasing the amount of money an owner has available to invest in new construction. Also, vessel operators on the Great Lakes and those that serve the non-contiguous trades are now eligible, as are barge and fishing vessel operators. With a tax deferment such as suggested in the amendments, a company in the 50% tax bracket can virtually double the vessels which it would otherwise be able to build.
Testifying on the bill, Joseph Kahn, Chairman, Seatrain Lines, Inc., summarized the possible implications of capital reserve funds:
Assume that an American shipping company’s earnings are subject to a 50% tax rate. Further, assume that a vessel which cost $10 million to build in the United States would cost $5 million if built in a foreign shipyard.
To have $10 million available for the new construction, the American owner would be required to earn $20 million before tax in order to have $10 million after tax. To build a similar vessel abroad, he would only have to earn $10 million before tax which would give him the necessary $5 million after tax.
With tax deferment, however, he would only have to earn the same $10 million and he could still build the $10 million ship in an American shipyard. The earnings of the new ship as well as the earnings of existing ships can then be used on a pretax basis for repayment of the mortgage on the new vessel.
In the future he will have to pay additional taxes; but tax deferment will provide the money which we need now to build the expanded fleet which is required today because of obsolescence of many unsubsidized ships.
Tax deferred capital reserve funds are not, however, open sailing for unlimited tax evasion. Such capital reserves are more than an accounting tool for shifting monies on paper to tax-free ledgers; indeed, their very use is specifically limited to mortgage payments and reconstruction/replacement costs of vessels operating in the U. S. foreign trade. Hence, operators with fleets in both domestic and foreign trade areas are quite limited in their reserve fund usage. Moreover, it should be emphasized that taxes on earnings are deferred, not eliminated. Whereas the 1936 Act provided that deposits in such reserve funds were exempt from all federal taxes, and additionally taxed withdrawn earnings from the fund as though earned in the year of withdrawal, the 1970 Act imposes interest on the amount of tax that would have been due in the year the earnings were deposited. The current Internal Revenue Code rate of interest for such taxes is 6%.
With all the economic stabilizers proposed—and indeed the key to international shipping lies in economics—there are two major areas that have been glaringly avoided—those of port development and labor negotiations. While federal aid to ports is a particularly touchy area, it seems almost absurd that the revitalization of the American deep-water transport industry does not include some consideration for the development of equally efficient shore facilities. At the moment there are only 10 ports in the world which are capable of discharging a 200,000-ton tanker—none of which is in the United States. Should giant tankers be used to bring in crude petroleum to the West Coast from the North Slope of Alaska, there will necessarily have to be built both docking and repair facilities.
Only one yard in the United States (Bethlehem-Sparrows Point, Maryland) can drydock a vessel of the 200,000-ton size, and two of these 225,000-ton giants have recently been ordered from the old Brooklyn Navy Yard, now undergoing modernization by Seatrain Lines. Overseas container trade is demanding huge investments in shore cranes and transfer equipment in time frames which do not allow adequate planning for future technology. In short, there should be some guiding influence to assimilate and plan for the expanding shore side needs of an expanding merchant fleet.
The other noticeably deficient area is that involving the maritime labor unions. While newly added provisions for operating subsidy especially exclude payments for “. . . those officers or members of the crew . . . unnecessary for the efficient and economical operation . . .” (Sec.603.c.1A.i), this is one of the few directly labor-oriented phrases in the revisions. Moreover, the phrase “unnecessary for efficient operation” is pointedly vague. That “. . . the new maritime program is intended to ensure that increases in subsidized wage costs will be consistent with the wage gains achieved by a basic cross-section of labor in other industries . . .”* doesn’t appear a very forceful or genuinely effective policy for such an important piece of legislation. Such deficiencies seem a rather disquieting tribute to the power of organized labor. Apparently the track of least resistance was navigated rather than the more difficult tack of striking at the principal contribution to U. S. flag inefficiency. Saddeningly, this was quite possibly the most destructive compromise made to get the legislation enacted.
Overall, H.R. 15424—The Merchant Marine Act of 1970—is indeed a monumental piece of legislation. And, while it is certainly not a panacea, it may just provide the shoring and legislative bailing [sic] wire needed to brace an outmoded fleet against the stresses of a sternly competitive world.
* Andrew E. Gibson, Assistant Secretary of Commerce for Maritime Affairs, remarks before the Propeller Club of Charleston, S.C., 17 November 1970.
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Top man in the Naval Academy Class of 1968, Lieutenant (j.g.) Emery subsequently served as weapons officer in the turbine-powered gunboat USS Gallup (PG-85) in Vietnam. As a Burke Scholar, he is presently pursuing a Ph.D. in Industrial Engineering at Stanford University after completing the requirements for a Master’s degree in Operations Research in June 1970. His maritime experience includes work as a Trident Scholar at Annapolis, and an article in the 1970 Naval Review, wherein he explored the economic intricacies of flag-of-convenience shipping.