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. 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.) 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. 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). 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.