Maritime Industry: Cargo Preference Laws--Estimated Costs and Effects
Published: 1994-11-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO provided information on cargo preference laws, focusing on their effect on: (1) federal transportation costs; and (2) the U.S. merchant marine industry.
section_title: What GAO Found
paragraphs: GAO found that: (1) cargo preference laws have increased federal agencies' transportation costs by an average of $578 million per year; (2) cargo preference laws increase agencies' transportation costs because U.S.-flag vessels generally charge more than foreign vessels to carry cargo; (3) although some agencies paid an estimated $3.5 billion in additional transportation costs to ship cargo on U.S.-flag vessels, DOD estimated that $659 million of those costs were related to the Persian Gulf War; (4) the effect of cargo preference laws on the U.S. merchant marine industry has been mixed; (5) the share of oceanborne cargo carried aboard U.S.-flag vessels has declined because most internationally shipped cargo is exempt from cargo preference laws; (6) in 1992, foreign-flag vessels carried about 96 percent of international cargo; and (7) although eliminating cargo preference laws could cause two-thirds of the U.S.-flag vessels to leave the U.S. fleet and result in the elimination of about 6,000 U.S. shipboard jobs, it would have a minimal impact on the U.S. shipbuilding industry.

section_title: Letter
paragraphs: This report, prepared at your request, provides information on (1) the cost to the federal government of laws requiring that certain government cargo shipped internationally be carried on a U.S.-flag vessel and (2) the effect of these cargo preference laws on the merchant marine industry.
As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. We will then send copies to the Secretaries of Agriculture, Defense, Energy, and Transportation; the Administrators of the Agency for International Development and the Maritime Administration; and other interested parties. We will make copies available to others upon request.
Please contact me at (202) 512-2834 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IX.
subsections: section_title: Introduction
paragraphs: The United States is the world’s largest trading nation, with over $1 trillion in trade in 1993. Nearly 50 percent of this trade, by value, was transported by sea. Throughout much of this century, however, the U.S. merchant marine industry has struggled to compete effectively in the international market. The U.S. ocean-going fleet is the ninth largest fleet in the world by deadweight tonnage, comprising about 3 percent of the world fleet’s tonnage. The U.S. fleet, as of September 1993, comprised 371 privately owned vessels.
U.S.-flag vessels are not competitive in international trade—cargo carried between U.S. and foreign ports or between foreign ports—because they generally have higher operating and capital costs than foreign-flag vessels. (Foreign-flag vessels are restricted from carrying cargo between domestic ports.) According to Maritime Administration (MARAD) officials, crew costs account for the largest portion of the difference between the operating costs of U.S.- and foreign-flag vessels. U.S. crews receive higher wages and other benefits, and U.S.-flag vessels have higher manning level requirements than comparable foreign-flag vessels. Also, because U.S. shipyards generally charge more to build and maintain vessels than foreign shipyards, U.S.-flag vessels have higher capital and maintenance costs.
To help the U.S. merchant marine industry compete, the Congress has enacted a number of laws supporting the industry, including cargo preference laws, which require that most government-owned or -financed cargo that is shipped internationally be carried aboard U.S.-flag vessels. This cargo is known as preference cargo. Cargo preference laws guarantee a minimum amount of business for the U.S. merchant fleet; this additional business, in turn, promotes the remainder of the maritime industry because U.S.-flag vessels are required by law to be crewed by U.S. mariners, are generally required to be built in U.S. shipyards, and are encouraged to be maintained and repaired in U.S. shipyards. However, because U.S.-flag vessels often charge higher rates to transport cargo than foreign-flag vessels, cargo preference laws increase the government’s transportation costs.
Cargo preference laws have long been controversial both from an economic and a political point of view. The proponents of cargo preference laws point to this nation’s economic dependence on waterborne transportation for international trade and the role that merchant vessels play in transporting military supplies during wartime. They maintain that a strong merchant marine industry is vital to the nation’s economic and military security and that cargo preference laws help to counter the subsidies that many foreign countries provide to their merchant fleets.
The opponents of cargo preference laws, on the other hand, argue that cargo preference laws cost the government money, have not been successful in maintaining a strong merchant marine industry, and do not always support the most militarily useful vessels. They also point out that the additional transportation costs hamper federal efforts to provide humanitarian aid overseas because the available funds are diverted to the transportation of that aid, instead of being used to purchase farm commodities and other types of aid.
subsections: section_title: The U.S. Merchant Marine Fleet
paragraphs: Recently, MARAD reported that U.S. citizens, corporations, or the federal government owns about 893 ocean-going vessels weighing 1,000 gross tons or more. (See fig. 1.1.) Of the 893 vessels, 586 were U.S.-flagged, and the remaining 307 were owned by U.S. citizens or corporations but were foreign-flagged. Of the 586 U.S.-flag vessels, MARAD reported that 371 were privately owned and 215 were owned by the federal government. Most of the privately owned vessels are actively engaged in commerce, while most of the federally owned vessels are in long-term storage—held in MARAD’s custody in case they are needed during a national emergency.
Foreign-flagged vessels owned by U.S. citizens or corporations, like all foreign-flagged vessels, are subject to the laws of the foreign country whose flag they fly, not the laws to which U.S.-flag vessels are subject. Sometimes, the laws of foreign countries include significant obstacles to the requisition of the vessels by the United States during national emergencies. Of the 307 U.S.-owned but foreign-flagged vessels, 219 are flagged in countries that do not have policies disallowing the U.S. government from requisitioning these vessels during national emergencies. The countries are the Bahamas, Honduras, Liberia, the Marshall Islands, and Panama. U.S.-flag vessels registered in these countries are said to be under “Effective U.S. Control” (EUSC). But according to MARAD officials, there is no guarantee, should requisitioning be necessary, that these nations will actually permit their vessels to be taken by the United States. And even if the United States is able to take foreign-flag EUSC vessels, the foreign crews cannot be compelled to operate the vessels, and the operators are not obligated to return the vessels to the United States. In addition, EUSC vessels are not subject to any of the other laws or regulations that apply specifically to U.S.-flag vessels.
As of January 1993, the privately owned U.S.-flag vessels constituted the ninth largest fleet in the world by deadweight tons (DWT). These vessels have a carrying capacity of 18.8 million DWTs, which comprises about 3 percent of the world fleet’s tonnage. Of the 371 privately owned U.S.-flag vessels, MARAD reported that 23 were inactive, 49 were chartered by the Department of Defense (DOD), 134 were engaged in domestic trade, and 165 were engaged in international trade. Since all preference cargo is international, cargo preference laws have the most direct effect on the portion of the U.S. fleet engaged in international trade. (See app. I for a list of vessel operators who carried preference cargo in 1993.)
section_title: Operating and Capital Costs of U.S.-Flag Vessels
paragraphs: U.S.-flag vessels generally charge more to carry cargo than foreign-flag vessels because they have higher operating and capital costs. MARAD officials identified several general reasons for this:
Most of the higher costs are crew costs. U.S. crews receive higher wages and other benefits, and U.S.-flag vessels have higher manning-level requirements than comparable foreign-flag vessels.
Approximately half of the U.S. fleet is old and/or steam-powered. Of the 165 vessels engaged in international trade, about 50 percent are within 5 years of the end of their statutory life expectancy, which depending on the type of vessel is 20 or 25 years. In addition, steam-powered vessels are less efficient and use more fuel than the newer diesel-powered vessels that comprise virtually all of the foreign-flag vessels engaged in international trade with the United States.
U.S. shipyards generally charge more to build and maintain vessels than foreign shipyards. As a result, U.S.-flag vessels generally have higher capital and maintenance costs. Although not all U.S.-flag ships were built in U.S. shipyards, the Tariff Act of 1930 (P.L. 361) imposes a 50-percent tariff on the cost of maintenance and nonemergency repairs performed on U.S.-flag vessels in foreign shipyards.
section_title: The Requirements and Purposes of Cargo Preference Laws
paragraphs: Since the passage of the first cargo preference law—the Cargo Preference Act of 1904 (P.L. 198)—the Congress has, in response to general downturns in the maritime industry, repeatedly reaffirmed its intent to support the U.S. merchant marine industry. Following the 1904 act, several major cargo preference laws were passed that guarantee cargo to U.S.-flag vessels; this guarantee was intended to promote the merchant marine industry. The 1904 act generally requires that only U.S.-flag vessels be used to transport supplies for the U.S. armed forces by sea. However, if the President finds that the rate charged by those vessels is excessive or otherwise unreasonable, contracts for transportation may be made as otherwise provided by law.
In 1934, the Congress passed Public Resolution 17, which requires that all cargo financed by the Export-Import Bank be shipped on U.S.-flag vessels, unless granted a waiver. In 1936, the Congress passed the Merchant Marine Act of 1936 (P.L. 835), which required that a “substantial portion” of internationally shipped cargo be transported on U.S.-flag vessels. In 1954, the Congress passed the Cargo Preference Act of 1954, which amended the Merchant Marine Act of 1936 to require that at least 50 percent of any government-controlled cargo shipped by sea be carried on privately owned U.S.-flag vessels. However, the 50-percent provision can be waived if U.S.-flag vessels are not available at “fair and reasonable” rates and in certain emergency situations. And finally, the Congress passed the Food Security Act of 1985 (P.L. 99-198), which increased from 50 to 75 percent the percentage of food aid cargo that the U.S. Department of Agriculture (USDA) and the Agency for International Development (AID) must ship on U.S.-flag vessels (however, the act exempted other USDA cargo).
section_title: Support of the U.S. Merchant Marine by Other Federal Programs
paragraphs: Besides cargo preference laws, a number of other programs were designed to promote the U.S. merchant marine industry. To help offset some of the higher operating and capital costs faced by U.S.-flag carriers engaged in international trade, the Merchant Marine Act of 1936 authorizes MARAD to pay operating-differential subsidies (ODS) and construction-differential subsidies (CDS) to operators of vessels in international trade. Additionally, the Jones Act restricts foreign-built U.S.-flag vessels from engaging in domestic trade.
ODS payments support the portion of the U.S. fleet engaged in international trade by offsetting the higher costs to operate U.S.-flag vessels. ODS recipients normally enter into 20-year contracts with MARAD, during which time they may not engage in domestic trade or reflag the vessel to another country, and their subsidy will be reduced if they carry cargo between U.S. ports as part of a voyage involving foreign ports. In fiscal year 1993, the federal government provided 75 vessels with a total of $215.5 million in ODS payments. No new ODS contracts have been awarded since 1981.
CDS are payments based on the difference in cost to construct vessels in U.S shipyards and foreign shipyards. Vessels built with CDS payments may not reflag for 25 years (20 years for tankers), may not enter into domestic trade (voyages with stops exclusively at U.S. ports), and must pay back a portion of the CDS if they carry cargo between U.S. ports as part of a voyage involving foreign ports. Although the program has not been eliminated, the last vessel built under this program was contracted for in 1981 and delivered in 1984. Currently, 79 vessels are under CDS restrictions.
All vessels in international trade provide either charter or liner services.Charter-service vessels do not have regularly scheduled sailings, fixed routes, or fixed freight rates. They typically carry a shipload worth of cargo for only one or a few customers at the same time. Conversely, liner-service vessels have regularly scheduled sailings on fixed routes at fixed freight rates. They typically carry small amounts of cargo for many customers at one time and will sail even if not completely full. Vessels providing charter service cannot receive ODS payments while carrying preference cargo; vessels providing liner service can. Freight rates on liner-service vessels typically are higher than those on charter-service vessels. In addition, most liner-service vessels, whether U.S.-flagged or foreign-flagged, belong to shipping conferences. Members of shipping conferences agree to charge similar prices for similar services in order to minimize price competition. However, U.S. law contains a number of provisions that mitigate this effect.
section_title: Other GAO Reports
paragraphs: In our 1994 report, Cargo Preference Requirements: Objectives Not Significantly Advanced When Used in U.S. Food Aid Programs (GAO/GGD-94-215, Sept. 29, 1994), we reported that the application of cargo preference to food aid programs does not significantly contribute to maintaining a naval auxiliary in time of war or national emergency or to the carriage of domestic and foreign commerce. We also reported that cargo preference laws adversely affect the operation of U.S. food aid programs. In our 1990 report, Cargo Preference Requirements: Their Impact on U.S. Food Aid Programs and the U.S. Merchant Marine (GAO/NSIAD-90-174, June 19, 1990), we found that the differential between the food aid shipping costs of U.S.- and foreign-flag vessels decreased by 50 percent per ton between 1981 and 1989. We also found that during this same time period, despite an increase in the amount of government-owned or -financed cargo shipped on U.S.-flag vessels, the number of U.S.-flag vessels decreased. Additionally, in 1984 we issued Economic Effects of Cargo Preference Laws (GAO/OCE-84-3, Jan. 31, 1984). In that report, we estimated that in 1980, between 21 and 33 additional ships and from 1,400 to 2,200 shipboard workers were employed because of cargo preference laws and that those laws cost the federal government between $71 million and $79 million (between $123.1 million and $136.9 million, respectively, in constant 1993 dollars). However, that report did not include DOD in its analysis because DOD’s policy was (and is) to ship on U.S.-flag vessels even if cargo preference laws were eliminated.
section_title: Objectives, Scope, and Methodology
paragraphs: On April 29, 1993, Senators Hank Brown, John C. Danforth, Charles E. Grassley, Don Nickles, and Malcolm Wallop asked us to provide information on the cargo preference programs and related information on the U.S. merchant marine industry. On the basis of subsequent discussions with their staff, we agreed to provide information on the cost to the federal government of cargo preference laws and their effects on the U.S. merchant marine industry along with certain additional information. This report does not make conclusions regarding the desirability of cargo preference laws or recommendations for changes that could be made to those laws. Additional details on our scope and methodology are contained in appendix VIII. We performed our review from June 1993 through September 1994 in accordance with generally accepted government auditing standards.
section_title: The Costs of Cargo Preference Laws to the Federal Government
paragraphs: Because the cost to transport cargo on U.S.-flag vessels is generally higher than it is on foreign-flag vessels, cargo preference laws add directly to a federal agency’s transportation costs. Although cargo preference laws apply to most federal agencies, four agencies—DOD, USDA, AID, and the Department of Energy (DOE)—were responsible for more than 99 percent of the 100 million tons of government cargo shipped internationally during calendar years 1988 through 1992. The estimated additional costs for transporting preference cargo for these agencies, including DOD’s costs associated with the Persian Gulf War, totaled, on average, about $710 million per year in fiscal years 1989 through 1993. (The average is about $578 million when the costs associated with the Persian Gulf War are excluded.) The $710 million estimate is about 50 percent of the $1.4 billion spent annually by the federal agencies to ship preference cargo on U.S.-flag vessels.
DOD maintains that its policy is to ship a substantial portion of its cargo on U.S.-flag vessels and that it would continue this policy in the absence of cargo preference laws. However, because DOD ships about 50 percent of the cargo subject to the preference laws, we have included estimates of its additional transportation costs in order to give a more complete picture of the cost to the federal government of reserving cargo for U.S.-flag vessels even though DOD’s portion might continue without cargo preference laws. DOD’s cost estimate is based on an approximation of the total cost to ship cargo on U.S.-flag vessels and on judgmentally selected data on the cost to ship cargo on foreign-flag vessels. Because foreign-flag carriers do not consistently bid for DOD cargo, the Department cannot ascertain what rates foreign-flag vessels would have actually charged to carry its cargo. As a result, DOD’s cost estimate is based on DOD officials’ expertise and judgment—DOD does not keep complete records that show how it derived its estimates. We did not independently verify these figures.
Table 2.1 shows each agency’s estimated cost of reserving preference cargo for U.S.-flag vessels in fiscal years 1989 through 1993. MARAD is included because it must, by law, pay a portion of USDA’s food aid transportation costs.
subsections: section_title: The Department of Defense
paragraphs: DOD ships more preference cargo than any other federal agency—approximately 50 percent of the total in 1988 through 1992. Almost all of the cargo that DOD ships is categorized as “troop support.” Troop support includes spare parts, food stuffs, ammunition, commissary items, and privately owned vehicles. In 1988 through 1992, DOD shipped about 51 million metric tons of cargo. Of this amount, 45 million tons (88 percent) was shipped on U.S.-flag vessels. DOD estimates that its additional transportation costs to ship preference cargo on U.S.-flag vessels in fiscal years 1989 through 1993 was $2.4 billion, or an average of $482 million per year for the last 5 years. The average is about $350 million per year when the costs associated with the Persian Gulf War are excluded.
section_title: The Department of Agriculture and the Agency for International Development
paragraphs: USDA and AID are responsible for food assistance programs under which U.S. agricultural commodities are donated or sold abroad for humanitarian and developmental purposes. The food assistance is provided primarily through five programs: titles I, II, and III of the Agricultural Trade Development and Assistance Act of 1954 (P.L. 480, commonly called, collectively, the P.L. 480 program); section 416 of the Agricultural Act of 1949 (P.L. 439); and the Food for Progress Act of 1985 (P.L. 99-198). Although AID administers some of the food aid programs, the transportation costs of these programs that are borne by the federal government, and hence the additional costs to ship on U.S.-flag vessels, are paid for through USDA and MARAD appropriations.
The title I program provides financing to developing countries to purchase U.S. agricultural commodities. It is administered by USDA.
The title II program donates packaged, processed, and bulk commodities to the least-developed countries. Commodities are used directly to feed refugees and children as well as for other authorized purposes. It is administered by AID.
The title III program (known as the Food for Development Program) provides donations to governments to support long-term growth in agriculture and related activities in the least-developed countries. It is administered by AID.
The section 416 program donates bulk grain and other surplus agricultural commodities to the least-developed countries. It is administered by USDA.
The Food for Progress program provides agricultural commodities to developing countries that have made commitments to expand free enterprise in their agricultural economies. It is administered by USDA.
In 1988 through 1992, USDA and AID shipped 36 million metric tons of food aid. Of the total amount, 27.5 million tons (approximately 77 percent) was shipped on U.S.-flag vessels. These agencies, as well as MARAD, which must pay a portion of the transportation costs, estimate that the additional transportation costs to ship preference cargo on U.S.-flag vessels in fiscal years 1989 through 1993 was about $1 billion, or an average of $200 million per year for the last 5 years.
Besides food aid, AID is also responsible for providing aid such as generators, automobiles, corrugated metal, and lumber to developing countries. In 1988 through 1992, this cargo totaled about 5 million metric tons. Of this amount, 2.6 million metric tons (about 52 percent) was shipped on U.S.-flag vessels. On the basis of the cost to ship its cargo on U.S.-flag and foreign-flag vessels, AID estimates that its additional transportation costs to ship preference cargo on U.S.-flag vessels for calendar years 1989 through 1993 was $116 million dollars, or an average of $23 million per year for the last 5 years.
section_title: The Department of Energy
paragraphs: The Strategic Petroleum Reserve is a program administered by DOE to store 750 million barrels of crude oil in salt domes along the U.S. Gulf Coast to guard against disruptions in international oil supplies. In 1988 through 1992, DOE reported that it shipped approximately 7.6 million metric tons of oil. Of this amount, 3.7 million tons (49 percent) was shipped on U.S.-flag vessels. On the basis of data that DOE provided us on the amount and cost of oil that it shipped on U.S- and foreign-flag vessels, we estimate that the Department’s additional transportation costs to ship preference cargo on U.S.-flag vessels for fiscal years 1989 through 1993 was approximately $9 million dollars, or an average of less than $2 million per year for the last 5 years.
section_title: Conclusions
paragraphs: Cargo preference laws add directly to a federal agency’s transportation costs. In fiscal years 1989 through 1993, the five agencies responsible for the transportation costs of most of the government’s international cargo paid an estimated additional $3.5 billion in transportation costs to ship cargo on U.S.-flag vessels. However, DOD estimates that $659 million of this cost was related to the Persian Gulf War. The $3.5 billion estimate represents about 51 percent of the $6.9 billion spent to ship preference cargo on U.S.-flag vessels.
section_title: Cargo Preference Laws and the U.S. Merchant Marine
paragraphs: By guaranteeing business for U.S.-flag vessels, which (1) are required to be crewed by U.S. mariners, (2) are generally required to be built in U.S. shipyards, and (3) are encouraged to be maintained in U.S. shipyards, cargo preference laws promote the U.S. maritime industry. However, their effect on the U.S. merchant marine industry is mixed. Although cargo preference laws have not had the effect of maintaining the share of international oceanborne cargo carried by U.S.-flag vessels, the U.S. fleet is dependent on preference cargo for a significant portion of the international cargo that it carries.
subsections: section_title: The Historical Impact of Cargo Preference Laws on the U.S. Merchant Fleet
paragraphs: Historically, cargo preference laws have not prevented a decline in the share of oceanborne cargo carried by U.S.-flag vessels. Throughout most of this century, with the exception of the periods immediately following World Wars I and II, the U.S. fleet has comprised a small percentage of the world fleet and carried a small percentage of the United States’ international cargo. Additionally, the amount of cargo reserved for U.S.-flag vessels has averaged only 5 percent of international cargo since 1961.
As shown in figure III.1a (see app. III), since 1906, the U.S. fleet has experienced significant growth only during the World Wars. In both instances, this growth was followed by extended periods of decline. The size of the U.S. fleet increased from about 6 percent of the world fleet’s size, by gross tonnage, to 23 percent during and immediately following World War I but steadily declined to about 13 percent just prior to World War II. The relative size of the U.S. fleet increased again during World War II—to about 38 percent of the world fleet’s size in 1948, shortly after the war’s end—but declined steadily thereafter to about 3.9 percent of the 397 million gross tons in the world fleet in 1992. The relative decline in the U.S. fleet since 1948 can be attributed in large part to the 460-percent increase in the size of the world fleet, even though the size of the U.S. fleet decreased about 42 percent during this time. The decline in the relative size of the U.S. fleet also corresponds to the decline in the percentage of international trade carried on U.S. ships. As figure 3.1a shows, the percentage of international trade carried on U.S.-flag ships was substantial following World Wars I and II—49 percent and 58 percent, respectively—but declined immediately thereafter. In 1992, U.S.-flag vessels carried approximately 4 percent of the nation’s oceanborne international trade.
Additionally, figure 3.1b shows that since World War II, there has been a dramatic increase in the amount of international oceanborne cargo. Most of the increase has been in privately owned cargo, which is not subject to cargo preference laws and is often shipped on less expensive foreign-flag vessels. The amount of cargo reserved for U.S.-flag vessels is a very small portion of total international cargo and therefore has not contributed substantially to the total share of cargo carried by U.S.-flag vessels. As a percentage of international cargo, preference cargo carried on U.S.-flag vessels ranged from 11 percent in 1962-63 to less than 2 percent in 1992 and averaged 5 percent during this time period.
section_title: The Impact of Cargo Preference Laws on the U.S. Maritime Industry
paragraphs: While cargo preference laws do not appear to have significantly affected the share of international oceanborne freight carried on U.S.-flag vessels, we estimate that in the absence of preference cargo, a significant portion of the U.S. fleet would reflag or cease operating. This would significantly affect the number of shipboard jobs on U.S.-flag vessels engaged in international trade. However, the impact on shipyards would be minimal.
subsections: section_title: Impact of Cargo Preference Laws on the U.S. Fleet
paragraphs: The 165 vessels active in international trade on September 30, 1993, have an aggregate carrying capacity of 7.3 million DWTs. We estimate that in the absence of preference cargo, vessels with a carrying capacity of between 4.4 million and 5 million DWTs might leave the active U.S.fleet. Table 3.1 summarizes our findings.
Some of the vessels leaving the U.S. fleet will likely be vessels that have traditionally operated in the domestic trade but are displaced by vessels from the international trade. Vessels that leave the U.S. fleet will most likely either reflag to achieve cost savings or cease operating (either being scrapped or laid up) if they are not competitive. Many of the vessels that reflag may continue to be owned by a U.S. parent company and may reflag to one of the five countries that allow vessels owned by U.S. citizens to be under Effective U.S. Control.
Our analysis of the reduction of tonnage in the U.S. fleet that would occur if cargo preference laws and policy were eliminated is based on the ability of the vessels to compete in the international trade and, if eligible, to compete in domestic trade. We included in our analysis an examination of other factors, such as international political considerations and the amount of preference cargo that vessels have carried. Additionally, we made the assumption that ODS payments alone, in the absence of preference cargo, are generally not sufficient to induce a carrier to remain U.S.-flagged. We conducted our analysis in consultation with MARAD officials and confirmed our estimate about which vessels would leave the U.S. fleet with information obtained from 18 vessel operators that controlled 112 of the 165 vessels engaged in international trade.
Because of the complexity of the issues, we did not include in our analysis several considerations that might have caused us to overestimate or underestimate the number of U.S.-flag vessels that would leave the fleet. The considerations that might have caused us to overestimate the effect on the U.S. fleet include the following factors: (1) U.S.-flag vessels need the permission of MARAD to change the nationality of their registry and (2) some vessel owners might keep their vessels under the U.S. flag for nationalistic or personal reasons. Additionally, some vessels, although not economically viable, may be militarily useful, prompting the U.S. government to purchase them instead of letting them be scrapped. This, however, would not affect our estimate of the number of vessels that would leave the privately owned U.S. fleet.
However, we also did not include in our analysis the number of vessels likely to leave the fleet regardless of the status of cargo preference. The fleet of privately owned, ocean-going vessels has declined 16 percent (by DWTs) since 1988. Additionally, nearly one-quarter of the 165 vessels engaged in international trade have already exceeded their statutory life expectancy, and another quarter will do so within 5 years. The statutory life of a vessel is 25 years, except for tankers, whose expectancy is 20 years.
section_title: Types of Vessels Affected by Cargo Preference Laws
paragraphs: Four general types of vessels—general cargo ships, bulk carriers, tankers, and intermodal ships—would be affected if cargo preference laws and policy were eliminated. General cargo ships are traditional multipurpose freighters that carry nonuniform items packaged as single parcels or assembled together on pallet boards. Cargo is typically lifted on or off the general cargo vessels using wire or rope slings and a crane. Bulk carriers are ships that carry homogenous, unpacked cargo, usually in shipload lots. If they are designed to carry dry bulk commodities such as grain and ore, they are classified as bulk carriers. If they are designed to carry liquid commodities such as oil and petroleum products, they are classified as tankers. Some tankers are specially designed to carry liquified natural gas (LNG) and are called LNG tankers. Intermodal ships include container ships and roll-on/roll-off ships known as RO/ROs. Container ships are designed to carry cargo in standard-size preloaded containers that permit rapid loading and unloading and efficient transportation of cargo to and from the port area. RO/ROs are designed to permit trucks, trailers, and other vehicles carrying cargo to drive on and off.
section_title: General Cargo Vessels
paragraphs: MARAD reported that 18 general cargo vessels with a total of 282,000 DWTs are employed in international trade. We believe that about 81 percent of these vessels, by tonnage, would leave the U.S. fleet if cargo preference laws and policy were eliminated; most would be scrapped. The vessels that would leave are steam-powered and unable to compete effectively with the more efficiently configured intermodal carriers. Additionally, many of these vessels rely on preference cargo for a substantial portion of their business. The vessels that would remain have specialized uses and/or are of a more modern design.
section_title: Bulk Carrier Vessels
paragraphs: MARAD reported that 17 bulk carriers with a total of 842,000 DWTs are employed in international trade. We believe that between 90 and 96 percent of these vessels, by tonnage, would leave the U.S. active fleet if cargo preference laws and policy were eliminated; many would remain U.S.-owned but foreign-flagged. Most of these vessels are ineligible to enter domestic trade because they were built in foreign shipyards or built with construction-differential subsidies. Many are relatively new (built in the mid-1980s) diesel-powered vessels that could be competitive in international trade if they reduced their operating costs by reflagging.
section_title: Tankers
paragraphs: MARAD reported 45 tankers employed in international trade with a total of 3,384,000 DWTs. We believe between 38 and 45 percent of these vessels, by tonnage, would leave the U.S. active fleet if cargo preference laws and policy were eliminated. Generally, steam-powered tankers would likely be scrapped because they are not competitive in international trade and are either ineligible to enter the domestic trade or would not find sufficient business in the domestic trade to remain in operation. However, there are several notable exceptions to potential scrapping. We believe the LNG tankers would remain U.S.-flagged because they do not receive ODS subsidies and do not carry preference cargo. Also, some of the double-bottom tankers may be competitive in the domestic trade because the Oil Pollution Act of 1990 (P.L. 101-380) phases out these tankers at a slower rate than tankers with a single bottom. However, the double-bottom tankers will likely displace tankers of similar size that are already operating in the domestic trade. Additionally, we believe it likely that the diesel-powered tankers that operate without ODS subsidies and generally do not carry preference cargo would be unaffected by changes to cargo preference laws and would remain U.S.-flagged. Also, several tankers would continue operating for international political reasons having to do with the Persian Gulf War. Finally, several diesel-powered tankers are or will soon be eligible to enter the domestic trade but could be competitive internationally; consequently, we are unsure of what would happen with them.
section_title: Intermodal Vessels
paragraphs: MARAD reported that 85 intermodal vessels with a total of 2,804,000 DWTs are employed in international trade. If cargo preference laws and policy were eliminated, we believe about 77 to 86 percent of the vessels, by tonnage, would leave the U.S. active fleet, many remaining U.S.-owned but foreign-flagged. We believe that many of the steam-powered intermodal vessels not already engaged in domestic trade would be scrapped because they would not be competitive in international trade and the domestic trade has no room for substantial additional tonnage, although it is uncertain whether none would enter the domestic trade. Most of the diesel-powered intermodal vessels are foreign built and would be competitive in the international trade. We believe that many of these vessels would reflag and most that remain U.S.-flagged would do so because of international political considerations.
section_title: Impact of Cargo Preference Laws on Maritime Employment
paragraphs: If cargo preference laws and policy were eliminated, we estimate that up to about 6,000 U.S. mariners would lose their jobs aboard U.S.-flag ships. This is approximately 71 percent of the 8,500 mariners employed on the 165 U.S.-flag vessels that MARAD reported are engaged in international trade. Our estimate of the impact on the maritime industry resulting from the elimination of cargo preference laws and policy stems from our analysis of the number of vessels we believe would have valid reasons to either reflag or leave service entirely if cargo preference laws were eliminated. On the basis of the size of the crews on the vessels we believe would leave the U.S. fleet, we estimated the number of seafaring jobs that would be lost. On the basis of the information provided to us by MARAD, the vessels associated with the 4.4 million to 5 million DWTs we believe might leave the fleet if cargo preference laws were eliminated support 2,600 to 3,000 billets (crew positions aboard a vessel). Since most mariners work aboard ship for 6 months of the year, and taking into account sick leave and other reasons for their not working full time, we estimate that 2.1 mariners are employed for every billet.
section_title: Impact of Cargo Preference Laws on Shipyards
paragraphs: We do not anticipate that the elimination of cargo preference laws and policy will significantly affect the number of vessels built in U.S. shipyards. The workload at U.S. shipyards is dominated by federal contracts. Fourteen privately owned U.S. shipyards are engaged in or seeking contracts for the construction of ocean-going or Great Lakes vessels of over 1,000 gross tons. Since 1983, 90 percent of the production workers employed by these shipyards, on average, were engaged in Navy or Coast Guard ship construction or repair. Additionally, the number and deadweight tonnage of private ocean-going merchant vessels built in U.S. shipyards has declined dramatically over the last 20 years. (See fig. 3.6.) U.S. shipyards have delivered only one privately owned ocean-going merchant vessels of 1,000 gross tons or larger in fiscal years 1988-93.
We did not evaluate the effect of eliminating cargo preference laws and policy on the amount of maintenance and repair performed at U.S. shipyards. However, to the extent that U.S.-flag vessels reflag or are scrapped, less maintenance and repair work will be done at U.S shipyards because foreign-flag vessels have less incentive to use U.S. shipyards.
section_title: Conclusions
paragraphs: The effect of cargo preference laws on the U.S. merchant marine industry is mixed. Cargo preference laws appear to have had little impact on maintaining the share of U.S. oceanborne cargo carried aboard U.S.-flag vessels, since most internationally shipped cargo is owned by private citizens, not subject to cargo preference laws, and thus shipped on less expensive foreign-flag vessels. Nevertheless, the U.S. fleet is dependent on preference cargo for a significant portion of the international cargo it carries. While we cannot estimate with precision the effects that eliminating cargo preference laws would have on the merchant marine industry, we believe the equivalent of up to two-thirds of the U.S.-flag vessels engaged in international trade, by tonnage, would leave the U.S. fleet. This would likely result in the elimination of about 6,000 U.S. shipboard jobs but would have a minimal impact on the U.S. shipbuilding industry.
section_title: Agency Comments
paragraphs: We discussed the contents of this report with the Chief, Transportation Division of the Office of Procurement, AID; cognizant officials of the Office of the Under Secretary of Defense for Acquisition and Technology, DOD; the Director, Operations and Readiness Division, Strategic Petroleum Reserve, DOE; and the Deputy Administrator for Commodity Operations, USDA. These agency officials generally agreed with the facts, respective to their agencies, contained in the report and provided only minor clarifications where appropriate.
Also, we met with the Deputy Administrator for Inland Waterways and Great Lakes, MARAD, and other MARAD officials, who generally agreed with the facts respective to their agency but believed that DOD does not have the data necessary to accurately estimate its cargo preference costs. However, DOD’s cargo preference cost estimates are the official figures that DOD reported to the Office of Management and Budget or that were published in the federal budget and are the best estimates available. (See ch. 2 for how the estimates were derived.) We clarified this and other points raised by these officials, where appropriate. As requested, we did not obtain written agency comments on a draft of this report.