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In 1975, this author characterized the Merchant Marine Act of 1970 as “An Act of Faith and Hope.” With the decade of the 1970s now history, he evaluates the results of the act and offers insight as to what lies ahead.
After World War II, despite considerable government attention and expenditures, the U. S.- flag fleet steadily declined in world importance and ln its ability to carry the ocean-borne trade of this nation. The act of 1970 was a major revision in U. S. Maritime policy, intended to stem the decline of both (he shipbuilding and ship operating industries.1 The act followed three major approaches:
It encouraged the most energetic peacetime shipbuilding effort in U. S. history, setting as a goal the construction of some 300 vessels over a ten-year Period.
^ The importance of previously neglected non-liner vessels was recognized by provision for subsidies nnd other benefits.*
Recipients of operating differential subsidies and c°nstruction differential subsidies were forced to take measures to increase the efficiency of these tvvo industries.**
;'ners
It is important for two reasons to distinguish be- .Ween the ship operating industry and the shipbuilders industry. First, the world competitive climate ls different. Second, the promotional aids provided uuder the 1970 act have achieved different degrees success for these two industries. Suggestions been made for Congress to continue aids to shipowners and operators but to eliminate those to ue shipbuilding industry. Requiring U. S.-yard conduction in order to receive the operating differ- ent|al subsidy has placed U. S. carriers at a competitive disadvantage in spite of operating and °ustruction subsidies. Another factor is that the dfluirement for U. S. construction of energy car- 'ers, such as domestic tankers carrying petroleum r°ni Alaska, places an increasing burden on energy
e°nsumers.
One other item of prologue is also worthy of men- l11- the military merits of maintaining a U. S. mer- ^ant marine. Some individuals argue that if World ar III erupts, nuclear retaliation will be so quick „ u severe that there will be no time for a merchant
Th^ to suPPort*ve r°Ie 'I has 'n tI'e Past-
y.ls viewpoint ignores recent history such as the 4letnarn War and the current Soviet activities in Snanistan. A merchant fleet to serve as the fourth ut of defense is essential to build and maintain PPly lines over the oceans.
the same time, the commercial need for a vi- operate as common carriers, operating on fixed routes with fixed uereri f
the CaIor roovement on those schedules. Non-liners are likely to go to by tL rather than vice versa, and to operate on schedules established *>Oper'na'v'auals who charter the ships.
the rat'ng an^ construction differential subsidies are made available by enjoyed°knmCnt IO *-*• S- ship operators to help offset the advantages operat foreign shipowners in the form of lower costs for building and ""g merchant vessels.
able U. S.-flag merchant marine is greater today than in 1970. At least two recent factors lead to that conclusion. One is the increased “rationalization” of cargo between trading partners and proposals to increase this practice. Such proposals reserve a certain portion of the foreign water-borne trade for the trading partners and leave a small (or even no) share for third-flag carriers. An example is the 40-40-20 UNCTAD Liner Code. The UNCTAD (United Nations Committee on Trade and Development) guideline reserves 40% for each trading partner with 20% left for cross-traders. The second factor is increased activity in the U. S. liner trades by state-owned vessels of Eastern European Communist nations—the so-called Comecon countries. An example is the increasing activity of Soviet vessels in the U. S. trades up to the time of the grain embargo imposed in the wake of the invasion of Afghanistan.
U. S. Shipyards: By 1969, few vessels were on order, and it cost more than twice as much to construct a given vessel in a U. S. yard as in a foreign yard. By specifying a 10-year, 300-vessel production run and encouraging standardized designs, Congress hoped that the work force could be stabilized and significant efficiencies of scale could be attained. In addition, a whole new market was opened by permitting subsidies to be used for non-liner vessels. The limit for construction differential subsidies was set at 50% of the cost of a ship with guidelines for decreasing this figure to 35% of the cost of a ship by 1976. At the same time, more funds were made available for shipbuilding by creating the Capital Construction Fund and increasing funds for Federal Ship Mortgage Insurance. The total thrust of the act was to attempt to make the U. S. shipbuilding industry truly competitive on a worldwide basis.
The results of the 1970 act in providing needed support for U. S. shipyards have been mixed but generally poor. The Capital Construction Fund has been quite successful. The annual number of agreements has averaged between 90 and 100, compared with 13 for the old Capital Reserve Fund program. This has led to the construction, reconstruction, and purchase of vessels and equipment with a total cost of $5.2 billion. Of this, $3.6 billion is from the Capital Construction Fund. The overall construction subsidy program, however, has been only marginally successful. Since 1970, only 184 vessels have been ordered from U. S. yards. Of these only 83 have been produced under the 1970 act using subsidy funds. The ships have been as follows: 30 liner vessels, 2 OBO (oil-bulk-ore) carriers, 30 tankers, 11 liquefied natural gas carriers, 5 dry bulk vessels, 3 integrated tug-barge chemical carriers, and 2 heavy- lift vessels.2
In the past, U. S. shipyards lost out to those in Japan and other overseas nations when it came to tanker construction because of lower prices elsewhere. The situation remains bleak because of reduced world demand for tankers.
, This is a far cry from the 30 vessel-per-year goal. Moreover, no real production run ever materialized with the efficiencies that were envisioned. A further reflection of the situation is the fact that no orders at all were placed in 1980. These figures, however, are somewhat misleading and understate the growth in carrying capacity of the fleet. Technological change and the increased sizes of merchant ships have led to an overall increase in cargo-lift capacity of at least 20% over the U. S.-flag fleet of 1970.
Further factors have been the depressed condition of the world shipping industry since the mid-1970s and the resulting reduction in the world orderbook for vessels. This has been especially true of the tanker and dry bulk fleets; these vessels accounted for 80% of the world’s shipyard business. This depressed demand, coupled with the entry of nations such as South Korea and Poland into this industry, produced severe excess capacity. This excess capacity led to intense price competition so that by the late 1970s the 50% maximum rate for construction differential subsidies was unable to offset the lower prices of foreign yards. In addition, some foreign yards contracted at a set price, whereas their U. S. counterparts required cost flexibility to take inflation into consideration.
By the end of 1979, U. S. yards faced a bleak future. Seatrain Shipbuilding Corporation discontinued new ship construction.3 Avondale, one of the most efficient yards, suffered financial difficulties, and the future of Maryland Shipbuilding and Dry- dock Company was uncertain. In January 1981, Sun Ship started a phaseout of shipbuilding to engage solely in ship repair and conversion work. Overall shipyard employment in the past few years has remained fairly constant, standing at about 170,000 as of December 1980. Recent reports from Washington indicate employment on building of merchant vessels will continue to decline, and naval construction employment will rise.
The case of Avondale is particularly noteworthy. In 1973, that shipyard won the contract to build three liquefied natural gas tankers. The shipbuilder hoped to catapult itself into the world market for the construction of these high technology vessels. No such luck. In 1979, the tankers failed to pass the U. S. Coast Guard certification tests. The required repairs would be too costly—about Si00 million per ship—so Lloyds of London has been forced to settle $300 million in claims. In addition, the Maritime Administration has lost S52 million in subsidy pay
ments, and all three vessels are up for sale for $5^ million—possibly for nothing more than scrap- Suits and counter-suits abound. To add insult to injury, Avondale’s parent company, Ogden Corp0' ration, has turned to General Dynamics Corpora' tion’s Quincy (Massachusetts) shipyard for three new LNG vessels for its possible use in the imp°r' tation of Indonesian gas to California.
r
The lesson is clear. The promotional programs the 1970 act have been unable to provide the base for a viable shipbuilding industry. The question no becomes what to do in the 1980s. .
There are some in Congress who believe ship yards are not needed to meet commercial (non-m1 itary) objectives. Others question the value of yards to the military. The various agencies of 1 government concerned with national defense ha been unable to arrive at an articulated policy vVI appropriate facilitating programs. As a result, private shipyards have suffered. On the one ha there is rhetoric that the private yards are essen for national defense. On the other there is no agr . ment as to how much shipyard capacity is nee or how it is to be used. The Navy itself shouloe^ much of the blame. The Navy has been unable provide the private yards with a sound program -r naval construction on which they can base t planning and hence achieve greater levels ot ciency and productivity. Based on preliminary^ dications, this situation should improve during Reagan administration. (js
To compound the problem, the Navy thinks i important to support less efficient naval shipy3 j, at the expense of the private yards. And politic5 enter in, as in the case of the current SLEP (ser
V -he
^'"'ng to bid on naval jobs because of problems that p |.e arisen over past contracts. There is also the y dlCal issue of the potential lost jobs if the naval ar as are closed. The real issue, however, revolves duUr,d whether we can afford the potentially re- 0r?ed nat‘°nal defense capability we may suffer in pato save the money currently being spent on a* yards.
prn fhis issue I side with the position taken by Pot es?0r Clinton H. Whitehurst. He argues that the yae,ntial benefits of giving this work to private Sas outweigh the potential costs.6 The money ed can be spent for increasing the size of the
1 e extension program) overhaul of the Saratoga S-V-60). The General Accounting Office estimated at the Navy could save $119.2 million by doing e work at Newport News Shipbuilding and Dry ^°ck instead of the Philadelphia Naval Shipyard.5 tevertheless, the job is being done in the naval yard 0 redeem a 1976 campaign promise by Walter Mon- ca e' Private yards perform only 33% of the Navy’s onversion, alteration, and repair work in spite of ^!r economic advantage.
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cq Course- there are noneconomic reasons for this pcentration of work in naval shipyards. It is pern,v^d that such yards offer a margin of capacity tLeded for meeting short-term military demands and itv KSUc^ yards will give the naval vessels the prior- 13 kCy re9u're- This line of thinking is compounded Wii]-- ^act that private yards are sometimes un-
fleet—a stated objective of the Navy and of the Reagan administration. The additional workload should provide a dependable base on which the private yards can attract capital, stabilize the work force, and become more efficient in the production of both naval and merchant vessels. I see no problem in determining priorities in time for a national need. U. S. shipyards have always responded when required to. And, the government always has the ability to “encourage proper priorities” if need be.
No sound promotional program can be developed until the government can determine whether private shipyards are needed for national defense, and, if so, how many. The government must also determine whether naval shipyards are needed and, if so, how much work they should get as opposed to their more efficient private counterparts. The current approach is costly, inefficient, and is not producing what is needed: economically viable shipyards.
Given the past record and current debate, it seems unlikely that Congress will provide meaningful statements of needs and objectives. Therefore, the 1980s will result in nothing but more of the same: financially troubled yards producing costly vessels- This is not to say that U. S. yards are not attempting to be efficient, for they are. They have spent substantial sums over the last decade to modernize their operations. The majority of the blame rests with the government for not providing a climate conducive to competitive shipbuilding.
The debate continues over whether Navy overhaul and repair work should be done in naval shipyards or in more economical private shipyards. The training carrier Lexington (AVT-16) is shown above at a private yard, Alabama Dry Dock & Shipbuilding Company in Mobile. At right, the carrier Saratoga (CV-60) is in the midst of a controversial service life extension program (SLEP) at the Philadelphia Naval Shipyard.
ALABAMA DRV DOCK ft SMIPBU"
U. S. Carriers: To control labor costs, the 19^ act provided for the size of the crew to be dete mined prior to construction of the vessel. Furth • a wage index was established to help control escalation of crew wages. Again, the thrust was provide additional aid where needed, and to e courage fleet growth and operating efficiency- .
Since 1970. there has been overall improveme^ of U. S. carriers in all segments of the fleet. has not, however, met expectations. In 1971. R° Blackwell, Deputy Assistant Secretary of
Table 1 U. S. Oceanborne Foreign TradelComrnercial Cargo Carried
1970-1975-1979
Tonnage Value
(Millions of Tons) (Billions of Dollars)
| 1970 | 1975 | 1979* | 1970 | 1975 | 1979* |
Total | 473.2 | 615.6 | 823.3 | 49.7 | 127.5 | 242.1 |
p- S- flag | 25.2 | 31.4 | 35.4 | 10.3 | 22.4 | 35.6 |
percentage | 5.3 | 5.1 | 4.3 | 20.7 | 17.5 | 14.7 |
Liner Total | 50.4 | 44.3 | 59.3 | 33.5 | 64.0 | 118.3 |
L'ner U. S. flag | 11.8 | 13.6 | 15.8 | 9.7 | 20.0 | 32.5 |
U. S. percentage | 23.5 | 13.7 | 26.7 | 28.8 | 31.2 | 27.5 |
Non-Liner Total | 240.7 | 275.3 | 340.2 | 12.2 | 36.6 | 61.3 |
^ne-Liner U. S. flag | 5.4 | 3.8 | 3.4 | 0.4 | 1.0 | 1.0 |
j^i^-Liner U. S. percentage | 2.2 | 1.4 | 1.0 | 3.3 | 2.8 | 1.6 |
Tanker Total | 182.1 | 296.0 | 423.8 | 4.0 | 26.9 | 62.5 |
janker U. S. flae | 8.0 | 14.0 | 16.1 | 0.2 | 1.4 | 2.2 |
^J^ker U. S. percentage 4.4 ^liminary Source: Maritime Administration Census data. | 4.7 | 3.8 | 5:6 | 5.1 | 3.5 |
^erce for Maritime Affairs projected that by 1980:
, U- S. liners would carry 50% of the U. S. liner trade.
tJ. S.-flag vessels would carry about 8% of the ^ • S- bulk trade.
U. S.-flag vessels would carry about 15% of the J?tal tons in U. S. foreign waterborne trade.7 actual figures are reflected in Table 1.
Before discussing U. S. foreign trade, the focus
this article, a digression to consider domestic
water transportation is in order. It is worthy of note that both the liner and non-liner segments of the domestic industry (sometimes called “protected trades”) showed development over the decade. The liner carriers emerged from the 1970s with a more modern and efficient fleet than before. Matson Lines, an example of a major offshore carrier, has updated its fleet and shoreside facilities so that it is taking advantage of the most modern equipment available in the container-carrier industry. Likewise, Crowley Maritime Corporation provides modern barge services including advanced roll-on/roll- off vessels. This development is a natural outcome of overall economic growth coupled with carriers’ needs to provide efficient service. In the non-liner trades, especially tankers, the fleet is also more modern and efficient. A major impetus has been the shipment of Alaskan crude to various U. S. ports.
The primary thrust of the 1970 act was the foreign trades. Progress in the dry bulk industry was most disappointing. By 1979 only 1.6% of dry bulk U. S. foreign trade was carried in U. S. ships. The U. S.- flag dry bulk fleet comprised only 17 vessels, 14 of which were built before 1950. This is a sad state of affairs when one considers that more than one-third of the U. S. trade (in tons) is in dry bulk commodities. See Table 1.
The picture in the tanker market is only slightly better. Almost 60% (in tons) of the U. S. foreign trade is in tanker cargoes. U. S.-flag vessels carry only 3.3% of this trade. There has been growth in the U. S. fleet, but too little to even maintain the 2% share of the world fleet enjoyed in 1970. In ad-
dition, the average age of the U. S. tanker fleet is the oldest of the major maritime nations and the vessels are of comparatively small size.
One of the thrusts of the 1970 act was to attract owners of flag-of-convenience vessels “back” to the U. S. flag by providing operating differential subsidies to non-liner vessels. A check with the Maritime Administration reveals no cases of such changing of flags. The 1970 act has therefore produced virtually no tangible progress for the nonliner segment of the U. S. foreign trade fleet. The liner carriers, on the other hand, enjoyed an increase in both market share and vessel efficiency. The world movement to unitization, especially containerization, coupled with a leading role in technology development and use by U. S. carriers, has made the current U. S. liner fleet the most modem in the world.***
In addition, there has been considerable success in reducing wage costs. The wage index used for companies under the 1970 act is constructed by the
•••Unitization is the term which reflects the trend of combining many individual pieces of cargo into larger units (containers, lighters, barges, etc.). Vessel loading and discharging are therefore more efficient, and port time is drastically reduced.
Bureau of Labor Statistics and combines wage leV' els in transportation and other non-farm industries- The subsidized shipping companies held wage m* creases within the given limits, and in some cases even held seagoing wage increases under the indeX increase. Moreover, manning scales of new l<ne.r vessels built and operated with government subsi' dies have been held to 32 to 38 men. The figure prlX,r to 1970 was 38 to 58. For subsidized tankers the figures are 25-26 men as opposed to 40-45 men be fore 1970. The five dry bulk vessels built under th 1970 act operate with crews of 26 apiece.8 The over all effect has been to increase the efficiency of U- • vessels and to increase their competitiveness wi their foreign counterparts.
However, when comparisons with foreign conn terparts are made, one must question the overa^ results. As far as the bulk trades are concerned. 1978 the Norwegians experimented with crew si by reducing the crew of a 70.000-ton bulk cam from 24 to 15. It was discovered that the vess could be operated safely with the reduced ere • Union and government pressures, however, P vented a permanent reduction.9 . , 6
Despite the progress, all is not as bright in liner trades as it could be. The 50% market sha predicted earlier has not been realized. Nor has operating subsidy played a major role in liner tra^ development. In fact, the leading U. S. liner cart (Sea-Land) does not receive such a subsidy. t over two subsidized companies. Pacific Far £ Lines and States Lines went bankrupt and vv forced to cease operations in 1978. Indeed, so
50%
causes U. S. shipyards to be far from compet-
contend that governmental “red tape” and the reporting requirements which go along with operating subsidies prevent carriers from being as efficient as {hey could be; the resulting costs exceed the benefits.10 There are counter opinions, but there is little to support the contention that the receipt of operating subsidies was the essential ingredient of progress in the liner trades.
Conclusion: The thrust of the Merchant Marine Act of 1970 was to provide an improved package of a'd to the U. S. merchant marine and shipbuilding industries. The act’s success has been limited.
* The shipbuilding industry, especially with respect jo merchant vessels, is in a state of decline, or at best, stagnation. Based on current orders, all merchant shipbuilding will cease by 1983."
* U. S. non-liner carriers transport a minute portion °f relevant U. S. trade. The vessels are older and Smaller than the world averages, and our market share has actually declined over the period from
970 to 1979.
U- S. liner carriers are operating more modern and efficient vessels with superior lift capacity than hey did 11 years ago. Even so, their market share st|H remains far below the 50% objective.
Tart of the blame rests on world events such as he overall shipping depression in the mid-to-late 970s and increased competition from other flags. S. finer trades were a prime target of the Soviets. In spite of the world events, however, one must Place the major burden for the lack of development jjf the U. S.-flag fleet squarely on the shoulders of ,he U. S. Government. The aid package provided y the 1936 and 1970 acts is just not effective in baling with the competitive environment of the rebuilding and ship operating industries. For ex- arr>ple, if U. S. shipbuilding costs exceed foreign by more than 100%, then a subsidy ceiling of
ive. jf u g |awSi p0|jcjeS5 an(j regulations are not 'e to attract flag-of-convenience owners to the • S. flag, offering subsidies to non-liner companies •h be of little value to this segment of our fleet, help remedy this dire situation, the United t p.es must take a number of bold new steps: f lrst, the shipbuilding industry must be separated the ship owning and operating industry, yjnce the separation takes place, the government ust work to provide a climate within which the > "jate shipbuilding industry can develop.
0 n .til the shipbuilding industry can be put back n lts feet, the ship owners and operators should Put at a competitive disadvantage by policies sl. regulations tying the industries together. U. S. bin °Wners must be Perm'tted to have their vessels o 11 ar>d repaired in foreign yards and still receive Plating subsidies. U. S.-owned foreign-flag ves- s should be allowed to benefit from the Capital
Construction Fund, and the owners of the ships should also be allowed to operate both foreign and U. S.-flag vessels in all world trades.
Congress is currently studying the problems facing the U. S. merchant marine and various proposed solutions—including some of the above. However, from reports of tentative decisions on the proposed aid provisions, Congress does not appear ready to take the bold steps that are needed to help our merchant fleet. The recent congressional action on the budget bill to permit ODS payments to foreign-built/ reconstructed vessels is an example. Such permission must be based on the unavailability of ODS funds, and other strings are attached as well. In other words, Congress is not really convinced that separation of the shipbuilding and ship operating industries is desirable. Nor does there appear to be an alternate program to CDS waiting in the wings, especially one that separates the two industries. The outcome could be another “Act of Faith and Hope.” If this turns out to be the case, in 1990 the United States will find its fleet still unable to meet foreign competition in world trade. The majority of its foreign waterborne commerce will still be carried in foreign bottoms, and the U. S. fleet will still be unable to maintain essential supply lines. This is a sad state of affairs for both the commercial and military interests of the world’s major trading nation.
After graduation from the U. S. Merchant Marine Academy in 1961, Dr. Bess worked for the Hawaiian Tug and Barge Co. In 1963, he returned to school, earning an MBA and a Ph.D. with a major in transportation from UCLA in 1964 and 1967 respectively. Since 1967, he has been employed by the University of Hawaii, where he is an associate dean and professor of transportation in the College of Business Administration. During the academic year 1973-1974 , Dr. Bess was on sabbatical leave during which he served as a visiting professor at Kings Point and as a visiting scholar at UCLA. He is the author of Marine Transportation (1976) and coauthor of U. S. Maritime Policy (1981). In addition, he has written numerous articles and professional papers in the maritime and airport management fields.
'David Bess, “An Act of Faith and Hope." Proceedings, March 1975. pp. 43-49.
;Data from Maritime Administration.
’“Seatrain Deserts a Sinking Industry,” Business Week, 21 May 1979. p. 36. Shipbuilders Council of America. Shipyard Weekly, 10 May 1979.
4“Avondale's Ill-fated Dip Into LNG Waters,” Business Week, 3 November 1980, p. 37.
5Shipyard Weekly, 1 February 1979.
'’Clinton H. Whitehurst. Jr.. “Is There a Future for Naval Shipyards?” U. S. Naval Institute Proceedings, April 1978, p. 30.
7Robert J. Blackwell. "The Rationale of the Merchant Marine Act of 1970,” Transportation Research Forum Proceedings 1971, p. 224.
“Data from Maritime Administration.
’“Radical Changes in Crew Arrangements in Norway,” Fairplay International Shipping Weekly. 12 July 1979. p. 30.
'“For example see, “The Search for a Workable Maritime Policy,” Business Week. 17 July 1978, pp. 99, 101.
"Shipbuilders Council of America, 1979 Annual Report, 12 March 1980.