An Assessment of Maritime Trade and TechnologyAn Assessment of Maritime Trade and Technology Photo credit: Hampton Roads MSrltlms Association One of the wo~d's largest coal export

An Assessment of Maritime Trade andTechnology

October 1983

NTIS order #PB85-239887

Recommended Citation:An Assessment of Maritime Technology and Trade (Washington, D.C.: U.S. Congress, Officeof Technology Assessment, OTA-O-220, October 1983).

Library of Congress Catalog Card Number 83-600606

For sale by the Superintendent of Documents,U.S. Government Printing Off Ice, Washington, D.C. 20402

Foreword

World trade now totaling nearly $2 trillion— a fourfold increase in the past twodecades—has become a dominant factor in the economic performance of both industrializedand developing countries. The international shipping industry exists to serve that trade.In the past two decades its capacity has grown almost 250 percent, as well as changedin character in response to new trading conditions and cargo demand. However, both tradeand shipping volume reached a plateau in recent years, and the industry’s concerns aboutmeeting demands for growth have been replaced by concerns about managing overcapacityand improving efficiency. Prospects for merchant shipping and shipbuilding therefore mustbe evaluated in terms of these changing trade patterns.

Because of their concerns about the viability and productivity of U.S. maritime in-dustries as well as the future U.S. position in world trade, the House Committees on Mer-chant Marine and Fisheries and on Ways and Means jointly requested OTA to preparethis assessment. The committees asked OTA to undertake an analysis and forecast of long-term trends in global seaborne trade and maritime technology in relation to the U.S. mar-itime industry.

This assessment of Maritime Trade and Technology traces prevailing conditions anddominant trends that are important to the way the Federal Government assumes its respon-sibility for developing and implementing policy. The report contains analyses of the worldoutlook for trade, shipping, and shipbuilding. It identifies the extent of U. S. participationin these enterprises. It analyses the U.S. shipping and shipbuilding industries and identi-fies certain weak and strong attributes. It discusses trends in technology as well as in thepolicies of the United States and of our major trading partners.

OTA received valuable assistance in the preparation of this assessment from its advi-sory panel, which represented a cross section of U, S. maritime industry, labor, and userinterests. The panel provided critiques and advice throughout the assessment and partic-ularly during a detailed review of this final report. Other contributors to the assessmentwere contractors and individual consultants who provided valuable analyses of specifictopics that were integrated into the overall report. OTA sincerely appreciates the qualityof work and dedication of all contributors.

OTA has found that, although there are both healthy and troubled segments of theU.S. maritime industries, all sectors are becoming increasingly dependent on Federal policydecisions. And, with increasing competition in world trade as well as shipping servicesto carry that trade, intervention by all governments is more and more prevalent.

.,.I l l

Advisory Panel Members

Leslie Kanuk, ChairmanProfessor of Marketing, Baruch College

Vera Alexander R. J. LowenDirector, Division of Marine Science PresidentUniversity of Alaska Masters, Mates and Pilots of America

Richard F. Brunner C. M. LynchSenior Operating Officer PresidentAvondale Shipyards, Inc. ARGO Marine, Inc.

PaulJ. Burnsky David L. PearsonPresident Chief of EngineeringMetal Trades Department, AFL/CIO General Dynamics Corp.

H. Clayton Cook, Jr. Eugene K. PentimontiPartner Vice PresidentCadwalader, Wickersham, & Taft American President Lines

J. P. Elverdin Paul F. RichardsonPresident Paul F. Richardson Associates, Inc.Navies Corp. John P. ScallyPeter J. Finnerty Manager of Export TransportationVice President General Electric Co.Sea-Land Industries Lawrence A. SmithJack Goldstein PresidentVice President and Economist Lockheed Shipbuilding Co.Overseas Shipholding Group, Inc.

Contributors to This Report

A & P Appledore, Ltd.Newcastle-upon-TyneUnited Kingdom

Gary BahamThe Baham Corp.Columbia, Md.

Deborah CichonArlington, Va.

E. G. Frankel, Inc.Boston, Mass.

John LeeperSimat International, Ltd.Washington, D.C.

Manalytics, Inc.San Francisco, Calif.

Robert TaggartFairfax, Va.

Wharton Econometrics, Inc.Philadelphia, Pa.

Jacques GorlinRashish Associates, Inc.Washington, D.C.

iv

OTA Maritime Trade and Technology Assessment Staff

John Andelin, Assistant Director, OTAScience, Information, and Natural Resources Division

Robert W. Niblock, Oceans and Environment Program Manager

Project Staff

Peter A. Johnson, Project Director

Dale T. Brown, * Policy Analyst

Patricia A. Catherwood, ” Policy Analyst

Nan Harllee, ” Policy Analyst

Administrative Staff

Kathleen A. Beil Kay Senn Jacquelynne R. Mulder

Contributing Staff

John Burns

OTA Publishing Staff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debra M. Datcher Joe Henson

Glenda Lawing Linda A. Leahy Cheryl M. Manning

“0-1’~ consultant/contractor

Contents

Chapter

1.

2.

3.

4.

5.

6.

7.

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . .

World Trade and Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Shipping Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The U.S. Shipbuilding Industry: Status and Trends in Technologyand Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Status and Trends in Ship Design and Operating Technology . . . . . . . . . . . . . . . . . . . . .

U.S. Maritime Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Trade and Cargo Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix

A. Administration Announcements on Maritime Policy, 1982-83 . . . . . . . . . . . . . . . . . . . .

B. Maritime Cargo Policies of 64 Foreign Countries 1982-83 . . . . . . . . . . . . . . . . . . . . . . . .

C. Federal Departments With Maritime Responsibilities Related toCommercial Shipping and Shipbuilding Industries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D. Glossary of Terms and Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3

19

57

85

117

141

173

203

206

219

221

227

Chapter 1

Summary

Contents

Page’

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Policy Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Federal Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The U.S. Shipping Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The U.S. Shipbuilding Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Cargo Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Incentives for U.S. Ship-Operating and Shipbuilding Industries . . . . . . . . . . . . . . . 12Regulatory Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Taxation Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Federal Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Policy Coordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

FIGURES

Page

World Seaborne Trade-1960-82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Grain: Seaborne Trade-1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Fleets of the Leading Maritime Nations, 1960-81 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11U.S. SeaborneTrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter 1

Summary

INTRODUCTION

Almost all international trade in goods istransported by sea. Thus, ocean shipping playsa central and essential role in the world economyand in world trade. The United States is theworld’s largest trading nation, and internationalmarkets are increasingly important to U.S. indus-tries. The United States annually engages in tradeof $1 billion or more with each of 58 other coun-tries worldwide.

The importance of world trade for the U.S.economy has increased dramatically in the pasttwo decades. During the 1970’s, the value of U.S.international trade more than doubled. Althoughthe U.S. ratio of exports to gross national productis still below that of most other industrial countries,it stood in 1980 at 8.5 percent, nearly double the4.4 percent of 1970. Some projections of that per-centage reach 15 percent by 1990.

In 1982, world maritime trade in goods totaled3.21 billion metric tons (tonnes), down from an all-time high of 3.77 billion tonnes in 1979. Maritimetrade generally is divided into three broad catego-ries: liquid-bulk, dry-bulk, and general cargo. Pe-troleum alone accounts for nearly all of the liquid-bulk trade and for almost half of the total worldtonnage shipped. About one-fourth of world ton-nage consists of dry-bulk commodities—principallymineral ores, coal, and grain. The remaining one-fourth consists of the variety of manufactured goodsand consumer products called general cargo.

The two principal modes of ship operation arethe liner mode, which serves the general cargotrade, and the bulk mode, which serves both thedry- and the liquid-bulk trades. The liner industrycarries general cargo from port to port at fixed ratesand on regular schedules. Modern container shipsare typical of the vessels used in liner trade. Theindustry commonly operates within conferences—international groups of private liner companies thatcollectively agree on routes, schedules, rates, andother aspects of liner service. The bulk industry nor-

mally does not form conferences. It employs a varie-ty of ships, usually on a time- or voyage-charter(rental) basis, to carry single, large-volume com-modities (e. g., iron ore, grain, coal, crude oil) overfixed and sometimes long periods of time. The linerindustry thus tends to manage competition amongmajor companies while the bulk industry operatesunder much more open competition. The linertrades involve by far the largest portion of worldtrade when measured by dollar value, while thebulk trades account for the largest portion of volumeor tonnage.

The world shipbuilding and operating industries,generally referred to as ‘ ‘maritime industries, ”recently have been through a major boom followedby a drastic downturn. Prospects for early recoveryare uncertain. Not only has the recent world reces-sion reduced total trade, but overbuilding of ships—particularly oil tankers—in the 1970’s has addedsubstantially to a huge surplus of shipping capaci-ty in the 1980’s. Scrapping supertankers has be-come more profitable than building them, and 25to 50 percent of the world bulk fleet is laid-up orunderemployed. The world’s major shipbuilders inEurope and Japan are facing serious declines in de-mand and turning to their governments for sup-port. The U.S. maritime industry has been affectedby this slump in world trade but not to the sameextent as many other major maritime nations—pri-marily because the U.S. maritime industry hadalready declined to a minor role among the largernations.

A variety of rapid changes over the past few dec-ades have transformed the maritime industries ofthe world and of the United States in particular.In just 25 years, the U.S.-flag merchant fleet haschanged from the largest and most diverse in theworld to a specialized fleet of modest size, aggres-sively engaged in the foreign liner trades and serv-ing a variety of domestic bulk and liner trades.Many of the U.S. maritime business interests that

3

4 ● An Assessment of Maritime Trade and Technology

Photo credit: Hampton Roads MSrltlms Association

One of the wo~d's largest coal export tennlnals at Norfolk, Va

Photo credit: Su-Land Industrlss

The world's largest privately operated containership terminal at Elizabeth, N.J., and a model for port planners the world over

Ch. l—Summary ● 5

were dominant in U.S.-flag merchant shipping in1950 are now owners of huge bulk fleets registeredin Liberia and Panama. These fleets (known as“U.S.-controlled, foreign-flag’ fleets) now carrypractically all of U.S. petroleum imports and sizableproportions of our exports of coal, grain, and otherkey commodities. U.S. shipyards, which built vir-tually the entire world’s merchant fleet in existencefollowing World War II, now rarely build merchantships but are world leaders in complex warship andoffshore oil-vessel construction. Japan and Korea,presently the largest commercial shipbuilding na-tions, have taken shipbuilding production systemsthat were introduced in U.S. yards during WorldWar II, and by combining these with modern as-sembly and manufacturing technologies and lowerwages, have gained a sizable productivity and com-petitive advantage in merchant ship construction.

Changes in the maritime industries have beenaccompanied by international political changes that

seem to be having a significant impact on the man-agement and economics of international shippingand shipbuilding. In recent years, there has beensignificantly more governmental control of tradeand access to cargo than at any time in the pastseveral decades. Of major importance is the im-plementation of a multinational regime to allocateliner cargoes among the fleets of importing and ex-porting nations, passed under the aegis of theUnited Nations Conference on Trade and Devel-opment (UNCTAD).

The nature of international marine transporta-tion itself also is changing, as evidenced by the con-centration of businesses in fewer, larger firms; byrapid worldwide transfer of technologies; and bymore and more ship-operating firms offering in-termodal rates and services, thus supporting the no-tion that ocean shipping is just one link in a largerintegrated transportation system that includes ter-minals, trucking and rail.

——— —POLICY STATUS

U.S. maritime policies have not kept pace withchanges in world trade or the maritime industry.They remain aimed at conditions that prevailed indecades past. The U.S. maritime policy frame-work that exists today is outdated and appearsinadequate to address critical maritime problemsof national concern.

Based on this OTA assessment of maritimetrade and technology, it is clear that major newor revised Federal policies are needed if the U.S.maritime industries are to remain healthy in thedecades to come. If there are no policy changes,most U.S. maritime industry segments probablywill continue to decline in size and influence.

Trade- and cargo-allocation policies related tointernational shipping often are considered sepa-rately, both within U.S. Federal agencies andamong international organizations. However, ade-quate consideration of cargo allocation would inturn make trade more efficient and effective. Forthe most part, U.S. shipping policies reflect his-torical patterns and do not cope effectively with ma-

jor shifts in trading patterns and increasing govern-mental intervention worldwide.

The Federal Government has a wide range ofpolicies and programs with the goal of aiding orpromoting the U.S. maritime industry. However,analysis indicates that the United States has nooverall, coordinated and effective maritime pol-icy that responds to the major trends and reali-ties confronting the U.S. maritime industry inthe increasingly competitive and complex arenaof world seaborne trade. Existing maritime pol-icies are a patchwork of measures adopted at var-ious times to address specific needs. They do notadd up to a comprehensive and coherent policy withclearly defined purposes and elements specificallydesigned to achieve those purposes. In particular,there is no sharp definition of what the Federal roleshould be in maintaining a maritime industrialbase, in assuring competition, and in coordinatingnational and international initiatives.

Whatever maritime policies are developed for thefuture, if they are to be broadly supported and ef-


4,000

3,500

3,000

1,500

1,000

500

World Seaborne Trade–1960-82

1960 1965 1970

SOURCE: OECD & Fearnleys, 19S2.

fective, they will require balancing a variety of na-tional interests. There is a vital link between theU.S. economy and U.S. participation in inter-national commerce of which ocean transporta-tion is an integral component. However, it is notclear what level of Government assistance or in-volvement in maritime affairs is in both the nationalinterest and in the interest of a healthy, competitiveenterprise. Therefore, an overriding objective ofany future maritime policy is to clarify national ben-efits as well as benefits to any one industrial sec-tor. Such national benefits could include:

● maximizing U.S. participation in world tradeand its overall economic benefits;

1975 1980 1985

promoting international stability through tradeand economic interdependence;maintaining technological preeminence inU.S. industries;providing for national defense needs;ensuring independence from foreign controlof vital trade or shipping services;assuring the viability of the essential and pro-ductive sectors of the maritime industry;promoting fair trading practices for U.S. bus-iness interests; andproviding an adequate level of employment,skills, and training in a vital transportation in-dustry that is important to the national econ-omy.

THE FEDERAL ROLE

The Nation clearly depends on international vious interest in those areas where the public as atrade and shipping services to maintain a healthy whole would accrue benefits. Policies to promoteeconomy. The Federal Government thus has an ob- U.S. participation in world trade, to assure fair ac-

Ch. l—Summary ● 7

Grain: Seaborne Trade–1981Main inter-area movements in million tonnes. (million ton-miles in brackets.) Only main routes are shown. Area figures are totals including smallerroutes not shown separately.

cess to cargoes, to assure adequate and efficientshipping services, or to provide for just considera-tion of U.S. interests in international bodies—allfit into such a Federal role. Policy options for thesepurposes thus can be judged on the basis of howeffectively the Federal role is carried out and howefficiently the national goals are pursued.

The Federal Government also may have a rolerelated to support or promotion of the maritime in-dustries. The extent of this role is more difficultto measure, but it is based on two possible nationalbenefits. One is that the maritime industry providesfor national security and must be measured byneeds for and costs of national defense options. Thesecond is the overall economic benefit that shippingand shipbuilding may provide the Nation as a ma-jor industrial sector in promoting or maintainingU.S. participation in world trade.

Naturally, there are a range of plausible levelsof Federal promotion or support to any U.S. in-dustry. If the support requires merely “fair” tax-ation or regulatory treatment, then it may be jus-tified based on inherent benefits to an importantindustry and labor force. If the support requiresmajor Federal subsidies or other outlays that the

public must provide, then national benefits needto be quantified and demonstrated.

If a stronger merchant marine encourages greateropportunities for export of U.S.-produced goods,specific Federal support of the industry might bejustified but must be compared to other effectiveways to utilize finite Government resources. Onlyif the net economic gain from Government subsidyof the maritime industry were greater than the gainto the economy from equal Government supportof another industry, could maritime subsidies bejustified on purely economic grounds.

The rationale used by most maritime-subsidyproponents is that U.S. shipyards and the U. S.-flag merchant fleet are vital components of our na-tional defense. The U.S. Navy historically has sup-ported this contention. The so-called shipyard mo-bilization base consists of those yards that wouldbe essential to a war effort, either in building orrepairing vessels. Virtually all major merchant ship-building facilities are considered to be part of thisbase. Likewise, it is contended that during a con-flict the U.S. merchant marine would have vitalresponsibility in logistic support for the military andcarriage of goods essential to support the civilian

—.


economy at home. There is little question that theseroles would have to be filled. However, a numberof questions remain unresolved. The required sizeof the mobilization base never has been defined ade-quately, although a number of studies have ad-dressed the issue. Another question is the adequacy

of the fleet of U.S.-owned, foreign-flag ships or thenational flag ships of friendly nations to fulfill someor all of the duties of merchant-ship support dur-ing a national emergency.

An in-depth analysis of national defense require-ments is outside the scope of this assessment. How-ever, it is important that such questions be resolvedbefore any cohesive policy about the role of the U.S.Government in support of the maritime industrycan be developed, and if it is determined that na-tional defense is a legitimate reason for Govern-ment aid to the industry, logically such aid shouldbe directed toward those types of yards and vesselsthat are most useful to the military.

THE U.S. SHIPPING INDUSTRY

Many define the present condition of the U.S.shipping industry as one of universal nonprof-itability. Even with substantial subsidies, the U. S.-flag liner operators as a group showed a loss forthe first quarter of 1983. Large portions of the U. S.-flag tanker and bulk fleet are in layup. Some of themost productive sectors, such as the offshore oil,tug, and barge businesses, also are now in a seriousslump.

In the U.S. shipping industry, the two major dis-tinct business sectors (liner and bulk) have very dif-ferent problems and outlooks. Policies directed to-ward each sector need to reflect those differ-ences. During 1982 and 1983, the U.S. liner in-dustry suffered substantially from the worldwiderecession, and the overall cargo volume in the keytrades shrank markedly. Some companies now areleft in a difficult financial position—especiallythe smaller operators who are not well capital-ized. On the other hand, a few of the larger com-panies are aggressively expanding their serviceand building new, large container ships to mod-ernize their fleets. The most prominent liner com-panies increasingly are engaged in the transporta-tion of cargo to and from inland locations in whichocean-going ships serve as only one link in an over-all transport system. The liner fleet has growth po-tential but is very dependent upon new Federal pol-icy initiatives.

Bulk companies include the shipping depart-ments of major petroleum corporations who operatetanker fleets, as well as independent bulk-shipoperators, who may operate tankers, dry-bulk car-

riers (ore, coal, grain), and combination ships. TheU.S.-flag dry-bulk and tanker fleets face a very un-certain economic picture. Very few U.S.-flag bulkcarriers are engaged in international trade becausethey have not been able to compete with foreign-flag operators, even with substantial subsidies. Thedomestic trade U.S. bulk fleet also is small and onlyserves what may be considered captive markets.Pressures to shift subsidized U.S.-flag tankers fromthe international to the domestic trades and to re-duce both subsidies and preference cargoes couldaffect the remaining U.S. bulk-carrier and tankerfleets dramatically.

A long-term world trade outlook developed forthis assessment indicates that U.S. trade volumeprobably will grow throughout the rest of the cen-tury, but at slower rates than in the last 10 to 15years. Trade with developing countries, particularly

in the Far East, could grow at a faster rate thantotal trade. However, such trade growth could beaffected adversely by aggressive protectionism inthe United States and abroad, particularly in theshort term, as a response to the worldwide economicproblems of many countries.

If the trade growth rate is slow in comparisonto the previous decade, U.S. carriers will b e

forced to compete with rapidly growin g foreign-flag fleets for the limited cargo available—andwill need continually to increase service efficien-cy and capability. It also is likely that intermodalservices will continue to expand and increase theefficiency of international transport. This trend mayoffer opportunities for those U.S. liner operators

Ch. l—Summary ● 9— — —

that are in the forefront of intermodal technologyand management systems.

The future of the U.S.-flag fleet is uncertain.Some experts believe that without policychanges, the size and capabilities of the U. S.-flag fleet will decline markedly over the next 10years, Policies to promote growth in U.S. tradeand assure fair access to all international trade forU.S. carriers naturally would benefit all sectors ofthe shipping industry. However, such policieswould be most useful for continued success of thosebusinesses that already have attained high produc-tivity and now are reasonably competitive in worldshipping. Such characteristics apply to certain U. S.-flag liner companies and to the U.S.-controlled,foreign-flag bulk fleet.

Several other Federal policy initiatives are alsoof major importance to the U.S.-flag liner opera-tors. These include: maintenance of existing Gov-ernment impelled cargo preference; modificationto the Shipping Act of 1916 granting wider antitrustimmunity, which would promote higher utility ofcapital assets through service rationalization; andmodifications to taxation policies or other finan-cial incentives, which would allow future capitaliza-tion on a cost competitive basis with other shippingnations. Policies to promote more competitive in-dustry capitalization are also critical to the U. S.-controlled fleet. For the already small U.S.-flag bulkfleet (tankers and dry bulk) in foreign trades, futureviability appears bleak unless support is applied,either in the form of direct Federal subsidies or ofcargo preference.

THE U.S. SHIPBUILDING INDUSTRY

Over the past two decades, the United States hasbuilt major merchant ships only when Federal sub-sidies were used to pay a large portion of the costor when laws, such as the Merchant Marine Actof 1920, required that the ship be built in a U.S.yard. U.S. shipyards have been isolated from in-ternational competition for these types of vesselsby virtue of having a protected domestic market.The U.S. shipbuilding industry today therefore isbasically quite different from that of Europe, Japan,and Korea, where most of today’s modern mer-chant fleets are built and where companies com-pete for orders in a world market.

However, the United States does have a largeand diversified shipbuilding industry and isforemost in construction of large and complexnaval warships. Its total employment ( 175,000 in1982) is even larger than Japan ’s. The U.S. indus-try also has some very productive and technologi-cally innovative segments, including those whobuild barges, tugs, supply boats, and offshore oilrigs.

The U.S. shipbuilding industr y has faced asevere decline in new buildings of major mer-chant ships. The elimination of Federal fundsfor construction subsidy programs has made fu-

ture prospects for commercial shipyards bleak.While the U.S. Navy has embarked on an ex-panded building program, it will not require muchadditional shipyard capacity until 1985-86, and onlythe yards that specialize in major warships will ben-efit substantially. The trends in the industry thusare toward more U.S. Navy work, more concen-tration in fewer large firms and hard times for thosefirms that, in the past, have depended on commer-cial shipbuilding subsidies. Although U.S. yardshave made recent strides in improving productivi-ty in the construction of merchant vessels, theprimary focus of the industry remains on buildingU.S. Navy ships, which require high-technologyand custom work and where productivity is not ofparamount concern.

One approach to improving U.S. shipbuildingproductivity would focus on developing otheremerging markets for U.S. shipyards, assumingthat there is little chance that the U.S. industry canreduce costs of conventional merchant ships belowthe level of the low-wage countries. The U.S. ship-building industry is geared to custom work and theintegration of highly technical with conventionalsystems. Markets for such skills may develop in thefuture in fields like Arctic or deepwater resource


extraction. A challenge for industry and Govern-ment would be to cooperate to identify and developthe most promising markets.

OTA analysis suggests that U.S. shipyards canimprove their competitive position in the world,but only with a major concerted effort on thepart of both industry and the Federal Govern-ment. However, productivity improvements aloneprobably will never close the very large foreign-mer-chant-ship price differentials of today, which arepartly the result of lower wages and partly the resultof direct and indirect subsidies of other govern-ments. Federal policy therefore must assume thatthe future viability of U.S. commercial ship-building will depend on some form of Federalsupport.

At present the large U.S. Navy building programis supporting the U.S. shipbuilding industry. Itwould be useful for policy makers now to look be-yond the current U.S. Navy building program anddevise a plan for U.S. shipyards at least 5 yearshence. While the existing U.S. Navy program canbe helpful for encouraging productivity im-provements in the near term, new markets mustbe developed or Federal support must be increasedwhen U.S. Navy work slackens, or U.S. shipyardswill probably contract to a much smaller base.

POLICY OPTIONS

OTA analysis suggests that whatever new mar-itime policies are developed, a comprehensive andcoordinated approach is necessary to clarify the na-tional interest, bring effectiveness to Federal pro-grams, and ensure consistency in any industry pro-motion offered. The following policies are subjectto current debate and are important elements ofsuch a comprehensive approach. Each will be dis-cussed here and some options presented. Furtheranalyses are contained in the policy chapters of thecomplete report.

Cargo Policies

All trading nations have a self-interest in expand-ing their exports and controlling their imports. Astrading complexities increase, governments haveattempted to manage their flow of imports and ex-ports. As nations try to manage trade policy to theirbest economic advantage, they tend to increase gov-ernmental involvement in shipping. Most countrieshave policies which unilaterally reserve some por-tion of their import/export cargoes for their own

Ch. 1—Summary ● 11

national fleets. In addition, many nations, partic-ularly developing countries that are attempting bothto capture more export trade and to bolster theirnational-flag fleets, are pushing for the estab-lishment of bilateral and multilateral cargo-sharingagreements. The latter objectives have beenachieved recently in the form of the UNCTADCode of Conduct for Liner Operations. The requi-site number of countries has ratified this code toenable it to go into effect in October 1983. It callsfor an even division of liner conference cargoes be-tween trading partners, with a small percentagepossibly reserved for vessels of other nations, ifagreed by the national-flag lines engaged in thetrade. The United States is not a signatory to thecode and has opposed it since it was first proposedseveral years ago. As a result, there are concernsthat U.S. carriers may be prohibited from some

40

30

20

10

0

Fleets of the Leading

90

80

70

a

cargoes and that the United States may be forcedout of certain trades when it is implemented.

U.S. ship operators face a significant disadvan-tage in dealing with countries where industry andgovernment have established close ties and wherenational and corporate goals are better meshed thanin the United States, which tends to disavow gov-ernmental interference in international trade andcargo allocation. U.S. shipping companies find itincreasingly difficult to compete in markets that areprotectionist. Many foreign governments also tendto intervene specifically on behalf of their nationalinterests and their own carriers while the U.S. Gov-ernment has usually not intervened.

There have been attempts by the United Statesand some of its industrialized trading partners tocounter protectionist trends by working within in-

Maritime Nations, 1960”81

● ● ● b ● ● ● *●

● ●● ●

● 99

●●

●

●

●

●

●

●

●●

✏

Japan*

●●

United Kingdom● 1

1-

s -* “ - / . - ’ - - / - * , .

\

‘ United

? - > - - - - “ _ . - - ~ ” l ” I pa n a m a

- - – - -i - - I

U.S.S.R.

I I

States

1960 1965 1970 1975 1980 1985

Year

SOURCE: Lloyd’s Register of Shipping Statistical Tables 1981.


ternational organizations for tariff-barrier reduc-tion and freer trade. However, the reality is thattrade is becoming more, not less, managed. Thusfar, the United States has not developed a nationalresponse that would be effective in protecting oureconomic position and at the same time remain con-sistent with our national philosophy of free trade.

Federal policies and practices could have aprofound influence on whether U.S.-flag shipoperators are treated fairly by other countriesand given equal and competitive rights to carrycargo. There is at present no generally acceptedU.S. cargo policy because national interests arenot defined and no strategies for internationalnegotiation have been developed. Lacking suchstrategies, the United States has remained on thesidelines while the rest of the world defines the rulesof cargo access.

To assure more equitable access to cargoes forU.S. operators in the future, Congress could:

●

●

●

●

authorize and direct appropriate agencies todevise guidelines for U.S. Government initi-atives in negotiated bilateral agreements withour major trading partners including rules formaintaining certain competitive practices, forassuring fair treatment for both U.S. shippersand carriers, and for promoting future trade;authorize and direct appropriate agencies todevelop guidelines for similar consideration ofmultilateral agreements on cargo access;define specific and comprehensive unilateralU.S. cargo reservation practices followingclearly stated national interest guidelines;develop an overall strategy for both U.S. cargoreservation and international agreements oncargo-sharing which could be used in futurenegotiation.

Incentives for U.S. Ship-Operatingand Shipbuilding Industries

There is widespread agreement that U.S. mari-time subsidy programs of the past have been largelyineffective and counterproductive to the goal ofstimulating a healthy and productive commercialmaritime industry in the United States. The pres-ent administration has eliminated funding for shipconstruction subsidies and has sought to phase out

U.S. Seaborne Trade

“ 6 m~1,40+ I ““ 1

mg 1,000

: 800.-: 600z

400

200

0 k1975 1980 1985 1990 1995 2000

Year

SOURCE: Wharton Econometric Forecasting Associate.

ship-operating subsidies. New policies are neededto substitute for these programs, however, if aFederal role of promoting U.S. maritime inter-ests is justified by overall national interests. Thelevel of Federal promotion also needs to be justi-fied by specific national benefits.

Direct subsidy policies of the past have beenaimed at maritime industry promotion in generaland assume that different sectors of the industry(i.e., shipbuilding, liner operators, bulk operators)could be cured by the same medicine. These sub-sidies have not been broadly effective. In fact, themost productive companies appear to be those whodid not participate in subsidies.

The current administration has proposed severalpolicies, including allowing foreign construction ofU.S.-flag subsidized ships, that would help the U.S.liner industry. Promotion of certain U.S. liner in-terests is possible with indirect incentives, and thistype of approach appears to be consistent with otheradministration policies. Also, indirect subsidies suchas loan guarantees to U.S. operators have been en-couraged. The shipbuilding industry, however, hasnot been encouraged by recent administration mar-itime policies. Except for the large Navy buildingprogram, no Federal incentives have been pro-posed. Since the shipbuilding sector was so depend-

Ch. l—Summary ● 1 3— —

ent on subsidies in the past, it is difficult for thesecompanies to plan adequately for a future with noFederal support.

Past incentives in the form of loan guaranteesappear to have been more successful than directsubsidies in promoting investment in new vesselsand in covering broad sectors of the maritime in-dustry. Both builders and operators claim to havebenefited from such an approach.

Future policies concerning industry support, ifdeemed to be in the national interest, could includeconsideration of which maritime sectors can benefitfrom each type of promotional effort and how Fed-eral support can encourage high productivity andefficiency. If Federal incentives for the maritimeindustry are judged consistent with national goalsand

●

●

benefits, Congress could:

revitalize Federal loan guarantee and financ-ing assistance programs for industry sectorsthat could utilize such incentives to improveproductivity, to expand, to increase profitabili-ty, or to enter new markets;devise new Federal subsidy programs directedtoward sectors that must compete directly withsubsidized industries of other nations, includ-ing productivity enhancement incentives.

If, however, no justification for Federal assistanceto the maritime industry can be made, Congresscould :

● phase out all subsidy programs and Federalrequirements related to subsidies and allow in-dustry to compete on the open market withoutFederal intervention.

In any case, it appears important for Congress to:

define specific national defense needs in termsof a shipbuilding base, an operating fleet, anda reserve fleet, and develop a funding programto maintain each utilizing either Governmentor defense expenditures for that portion of thebase that is commercially uneconomic.

Regulatory Systems

It is difficult for U.S. ship operators to competewith foreign operators when international rules ofconduct do not match traditional U.S. concepts,

which give the Government the role of protectingthe public against fixed-pricing or business cartels.In many other major maritime nations, the industrynot only is allowed but also encouraged by the gov-ernment to collaborate. A bill now in Congressseeks to amend the 1916 Shipping Act, assurebroader antitrust immunity, and provide other in-centives for improving the capability of U. S. oper-ators to compete with foreign carriers. This issuehas been debated in Congress for the past severalyears, and some resolution appears near. Whateverthe outcome, it will continue to be important forU.S. policy makers to evaluate international rulesof conduct for U.S. and foreign operators and tostrive to develop an approach so that U.S. operatorscan compete on equal terms with foreign carriers.

Passage of some form of regulatory changes isclearly in the interest of the major U.S. liner oper-ators. Proper consideration of U. S. shipper interestsand broader goals of enhancing U.S. trade in thefuture are equally important. U.S. participationin world maritime trade and shipping likely willdepend on how well our regulatory policy bothprotects the national interests and allows for ef-fective competition internationally. Congression-al choices include the following alternatives:

●

●

●

pass the Shipping Act of 1983 and follow withcareful oversight of how well carriers, shippers,and the general public are served;develop an approach to international shippingregulations that could be presented to othernations for consideration in the future, possiblyincluding cargo-sharing options as well;make no changes to the law but monitor momcarefully Federal regulatory policies.

Taxation Policies

Taxation policies for U.S. shipping interests arebased on sometimes conflicting goals of providingequivalent advantages to industries that must com-pete in the international market and of assuringfairness and equity among U.S. businesses. Pasttaxation policies for shipping (e. g., the Capital Con-struction Fund) have sought to encourage invest-ments in new U.S. built ships through tax defer-rals and to strengthen the U.S. merchant marine’scompetitive position. Future taxation policies re-


quire careful analysis of the many approaches avail-able and in use to ensure that targeted industry sec-tors receive the intended benefits.

This assessment includes an overview of Federaltaxation policies related to shipping, but furtheranalysis of alternative tax treatments is necessary.However, Congress could address taxation policiesfor shipping in a comprehensive way, including:

●

●

●

a review of U.S. industry treatment comparedwith other competitive maritime nations;consideration of tax-incentive goals such as in-vestment in new ships and equipment, busi-ness for U.S. shipyards, modernization of thefleet, maintenance of a defense base, or ex-panding U.S. markets; andreview of tax treatment versus the sectors thatreceive principal benefits considering U.S.-flagfleet, effective U.S.-controlled fleet, U. S.-domestic fleet, and U.S. shipyards.

Federal Research and Development

OTA analysis suggests that there is a need formaritime research and development (R&D). Animportant part of such research is a continuingassessment of those areas in which technological in-novation can be applied to acquiring a greater shareof the world maritime transportation market anda greater share of world shipbuilding orders. Ad-ditionally, the R&D should include an evaluationof the work ongoing in marine and other fields (bothU.S. and foreign) that can contribute to commer-cial marine innovation. It also is important to in-corporate these innovations into design, produc-tion, and training programs that would lead tobuilding and manning ships, and selling ships toother nations to give the United States an improvedposture in world shipbuilding and ship operations.Both long-term financial support and a researchplan are needed to assure effective utilization ofresources.

There are several basic problems associated withexisting Federal maritime R&D programs. First,since there is no comprehensive policy defining theFederal role in maritime affairs in general, thereis also no clear policy regarding the Federal rolein maritime R&D. While the Federal approachto industry promotion has changed drastically

in recent years, little attention appears to havebeen given to the resulting impact on R&D.Thus, the R&D program now under the authori-ty of the Maritime Administration has no clearfocus or set of long-range goals. This program ismuch too small to be expected to address in depththe broad range of technical opportunities in themaritime transportation business; furthermore,there is no rationale for the selection of projects asworthy of Federal support while others are left forindustry or some other research enterprise.

Congress could define a more specific Federalrole in maritime research before additional fundsare allocated and a new program is designed. Asdiscussed in this assessment, near-term needs forenergy-saving and automation technology are be-ing addressed by numerous industries and private

Photo credit: Maritime lnst/tute of Technology

The Masters, Mates and Pilots Union operates thistechnology training facility for its members

Ch. 1—Surnrnary 15

research groups worldwide. New maritime technol-ogies have been developed in a number of othercountries and are readily adaptable. The U.S. Navyand other Federal agencies spend considerablefunds on basic and applied maritime research prob-lems, and applicable data can be transferred. TheNational Shipbuilding Research Program has iden-tified promising areas for improving U.S. ship-building productivity. Elements of a congressionallydefined Federal role in future maritime R&D couldinclude:

●

●

●

●

identifying R&D objectives as a subset of anoverall maritime policy;determining what U.S. industry can do bet-ter itself and formulating indirect incentivesfor industry R&D;stimulating coordination and transfer of tech-nology within the industry and from military,foreign, and other sources; andfocusing on high-risk areas and long-rangeproblems that are not adequately addressed byindustry or elsewhere, the solution of whichcould contribute to national goals.

In addition to the definition of proper Federalsupport for maritime R&D, Congress may alsowish to consider new or modified institutional ar-rangements to encourage, coordinate, and fosterR&D with either or both private and Governmentsupport.

Policy Coordination

It has been difficult in the past to develop acomprehensive policy that integrates the impor-tant aspects of trade promotion, cargo access,maritime regulation, industry incentives, andmaritime research. Federal agencies, lacking acoordinated approach, often have sought con-flicting goals. While one agency seeks to prosecutealleged antitrust activities, another seeks to allowmore industry cooperation. While one agency seeksto broaden cargo preference policies, another seeksto eliminate preference for U.S.-flags. While the

U.S. Navy claims the need for an extensive com-mercial shipbuilding industrial base, it shifts theexecution of such a policy to the Maritime Admin-istration which has been able neither to devise astrategy nor provide the resources to maintain sucha base,

Congress could seek to resolve some of the ma-jor conflicts through comprehensive legislation orthrough a joint consideration of a range of legisla-tive proposals. While this approach could consumea great deal of time, it may offer compensating long-range benefits.

Even without comprehensive policy coordina-tion, it appears important as a minimum to ensurethe coordination of trade and shipping policies atthe Federal agency level. Trade policies and cargopolicies related to international shipping are oftenconsidered separately, both within the U.S. Federalagencies and among international organizations.Those policies can have a direct impact on futureinternational trade and the participation of theUnited States and its shipping industry in thattrade.

The current debate between those advocatingcompletely free trade or free access to cargoes andthose advocating degrees of government interven-tion to protect domestic industries will undoubtedlycontinue. For example, the national value of adomestic industry can sometimes convince govern-ments to provide certain levels of protection. Eventhough industries and governments publicly statetheir opposition to protectionism, they often do notapply those principles to themselves. In addition,reaction to other governments’ policies will oftenalso bring restrictions on trade.

The growing involvement of governments andinternational organizations in trade and shippingpolicies and growing protectionism worldwide re-quires the United States to develop and coordinatethose trade and shipping policies which serve thenational interest. It is also vital for the United Statesto implement policies which can remain consistentover the long terms that many international issuesrequire for resolution.

•

Contents

Page

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 19Maritime Trade Patterns . . . . . . . . . . . . . . . 19Linkage of Economic Activity, Trade,

and Shipping . . . . . . . . . . . . . . . . . . . . . . . . 23

Current Status of and Trends in WorldShipping . . . . . . . . . . . . . . . . . . . . . . . . . 25

Overview of the World Shipping Industry. 25Liquid Bulk. . . . . . . . . . . . . . . . . . . . . . . . . . . 29Dry Bulk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29General Cargo . . . . . . . . . . . . . . . . . . . . . . . . 31Trends in National Fleets . . . . . . . . . . . . . . . 31Trends in Ship Types and Features . . . . . . 32Trends in Shipping Economics . . . . . . . . . . 32

Current Status of and Trends in WorldShipbuilding . . . . . . . . . . . . . . . . . . . . . 34

Shipbuilding Industry Today . . . . . . . . . . . . 34Shipyard Capabilities and Capacities . . . . . 34Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Outlook for Commercial Merchant

Shipbuilding . . . . . . . . . . . . . . . . . . . . . . . . 40

World Economic and Trade Outlook1982-2000. . . . . . . . . . . . . . . . . . . . . . . . 42

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 42Economic Forecast . . . . . . . . . . . . . . . . . . . . . 42Outlook for Trade Flows, 1982-2000 . . . . . 43Outlook for Seaborne Trade . . . . . . . . . . . . . 44

Implications of the Trade OutlookforU.S. Shipping . . . . . . .

TABLES

7“able No.

1.

2.

3.4.

5.

6.7.8.

Beneficial Ownership of theRegistry Fleets . . . . . . . . . . .

● O . * * . . . . . 52

Page

Open-. . . . . . . . . . . 28

Comparison of Changes in the Dry-BulkFleet and Dry-Bulk Seaborne Trade. . . . 30Ships Currently on Order . . . . . . . . . . . . 37Approximate Percentages of the WorldOrderbook . . . . . . . . . . . . . . . . . . . . . . . . . 41Comparison of Shipbuilding ForecastTonnages and 1975 Production forSelected Countries . . . . . . . . . . . . . . . . . . . 41World Economic Outlook, 1982-87. . . . . 42World Economic Outlook, 1987-2000. . . 43Growth of Real GDP . . . . . . . . . . . . . . . . 43

Table No. Page

9. Average Compound Growth Rates forWorld Trade Exports and GDP . . . . . . . 44

FIGURES

Figure No. Page

1.2.

3.4.5.6.7.

8.

9.

10.

11.120

13.14.15.16.

17.

18.

19.

20.

21.

22.23.

24.

25.

World Seaborne Trade—1960-82 . . . . .Principal Commodities in WorldSeaborne Trade . . . . . . . . . . . . . . . . . . . .Iron Ore: Seaborne Trade—1981 . . . . .Coal: Seaborne Trade—1981 . . . . . . . . .Grain: Seaborne Trade—1981 . . . . . . . .Crude Oil: Seaborne Trade—1981 . . . .Total OECD Industrial Output inPercentage Quarterly Change Related toPercentage Yearly Change of WorldSeaborne Trade in Dry Cargo . . . . . . . .Composition of the World Fleet—Jan. 1, 1982 . . . . . . . . . . . . . . . . . . . . . . .Composition of World Fleet byTonnage July 1, 1981 Total:421 Million GRT . . . . . . . . . . . . . . . . . .Fleets of the Leading Maritime Nations,1960-81 . . . . . . . . . . . . . . . . . . . . . . . . . . .World Bulk Fleet . . . . . . . . . . . . . . . . . . .World Merchant ShipbuildingProduction, 1976-81, by Country ...,.Merchant Ships on Order Worldwide .New Building Demand Forecasts, 1982World Seaborne Trade . . . . . . . . . . . . . .World Seaborne Dry-Bulk Exports,Regional Distribution . . . . . . . . . . . . . . .World Seaborne Dry-Bulk Imports,Regional Distribution . . . . . . . . . . . . . . .World Seaborne Liquid-Bulk Exports,Regional Distribution . . . . . . . . . . . . . . .World Seaborne Liquid-Bulk Imports,Regional Distribution . . . . . . . . . . . . . . .World Seaborne General CargoExports, Regional Distribution . . . . . . .World Seaborne General-CargoImports, Regional Distribution . . . . . . .U.S. Seaborne Trade . . . . . . . . . . . . . . .U.S. Seaborne Dry-Bulk Trade,Regional Distribution . . . . . . . . . . . . . . .Seaborne Liquid-Bulk Trade, RegionalDistribution . . . . . . . . . . . . . . . . . . . . . . .U.S. Seaborne General Cargo Trade,Regional Distribution . . . . . . . . . . . . . . .

20

2021212222

24

26

27

2830

35364045

45

46

47

48

49

5050

51

51

52

Chapter 2

World Trade and Shipping

OVERVIEW

Almost all international trade in goods is trans-ported by sea. Ocean shipping plays a central andessential role in the world economy and in worldtrade. Therefore, it is vital to understand the fac-tors affecting trade and shipping growth or declinein order to develop effective policies influencingU.S. participation in world trade or in the transpor-tation industry that serves the trade. This chapterdescribes the status and trends in world seabornetrade and the international shipping and shipbuild-ing industries. It will present an outlook for thefuture for each and note problems and uncertain-ties.

In recent years, international trade has becomea dominant factor in economic growth for most in-dustrialized countries. Many newly industrializedcountries have become so through major tradegrowth. For this reason, OTA commissionedWharton Econometrics, Inc., to prepare a worldtrade outlook to the year 2000, utilizing a worldeconomic model to make projections of future mar-itime trading patterns. The results and implicationsof that trade outlook are presented in this chapter.

While that outlook is based on a series of eco-nomic assumptions with ‘ ‘no major surprises, itis clear that the most radical changes in the pasthave occurred because of unpredicted events suchas wars, oil price ‘‘shocks, the Suez Canal clos-ing in 1967, and numerous politically motivatedactions. Less radical, but important, changes like-wise have been caused by unpredicted technologicalinnovations, economic pressures, and more gradualpolitical forces. This chapter, therefore, will pre-sent an overview of which important forces are act-ing today to influence maritime trade and shipping,how the world maritime community is reacting tothese influences, and what future trends now ap-pear to be most significant.

Maritime Trade Patterns

Maritime trade in goods worldwide totaled 3.21billion metric tons (tonnes) in 1982. This is downfrom the high of 3.77 billion tonnes in 1979 (fig.1). As shown in figure 2 (for 1980), petroleum isthe dominant single commodity and accounts foralmost one-half of the total world tonnage trans-ported. The dry-bulk commodities traded likewiseare dominated by a few major groups: iron ore,coal, and grain. These and other bulk goods tradedtotal another one-fourth of world tonnage. The re-maining quarter, referred to as general cargo, in-cludes a great diversity of manufactured goods andconsumer products.

The differences in requirements of the tradeshave led to establishing two principal modes ofworld shipping—the liner mode, which provides thegeneral cargo trade with regular, scheduled serviceincluding container carrying ships; and the bulkmode, which employs a variety of ships on a time-or voyage-charter (rental) basis serving both the liq-uid- and dry-bulk trades. The liner trades involveby far the largest portion of world trade when meas-ured by dollar value, while the bulk trades accountfor the largest portion of volume or tonnage.

Figures 3, 4, 5, and 6 provide examples of trad-ing networks that have developed for petroleum anddry-bulk commodities. They illustrate both the ma-jor trade routes and the relative tonnages carriedon each. If one were to expand these pictures tocover the huge variety of other products and goodstransported worldwide, the lines would fill the mapsolidly. The United States is involved in almostevery aspect of this trading network.

The United States is a major trading nation, withinternational markets increasingly important toU.S. industry. During the 1970’s the value of U.S.

19

20 An Assessment of Maritime Trade and Technology

Figure I.–World Seaborne Trade–1960=82

4,000

3,500

3,000

1 ,50C

1,000

500

.

1960 1965 1970 1975 1 9 8 0

Y e a r

SOURCE: OECD & Fearnleys, 1982.

Figure 2.—Principai Commodities in Worid Seaborne Trade—1980

3,8003,6003,4003,2003,0002,8002,600

g 1,600.-= 1,600z 1,400

1,2001,000

800600400200

0

oilcargoes

Crudeoil

Oil products I

1 9 8 5

SOURCE: Fearnleys Review, 1982.

Ch. 2—World Trade and Shipping ● 2 1

Figure 3.— Iron Ore: Seaborne Trade-1981

Main inter-area movements in million tonnes. (MMM ton-miles in brackets.) Only main routes are shown. Area figures are totals including smallerroutes not shown separately.

3=-●

$)

+’”X 7

.

-%

Total trade 303 million tonnes,v

3)

1,508 MMM (000 million) ton-miles.SOURCE: World Bu/k Trades 1981, Fearnleys, Oslo, Norway, 1

Figure 4.— Coal: Seaborne Trade–1981


East Europe13(56) n17\ Japan 79(476)

Total1,120

,&

\ bSouth Fi2 Africa .

k,. 29(201) & . &

vtrade 210 million tonnes,MMM (000 million) ton-miles.

SOURCE: Worid Bulk Trades 19S1, Fearnleys, Oslo, Norway, 1982.

22 ● An Assessment of Matitime Trade and Technology

Figure 5.- Grain: Seaborne Trade—1981


Total1,131

USA Canada

SOURCE: Wortd Bulk Trades KXN, Feamleys, Oslo, Norway, 1982.

Figure 6.— Crude Oii: Seaborne Trade–1981

Main inter-area movements in million tonnes. (MMM ton-miies in brackets.) Oniy main routes are shown. Area figures are totals including smallerroutes not shown separately.

Total7,371

Ch. 2–World Trade and Shipping 23

international trade rose by a factor of 2.5. TheUnited States engages in trade of $1 billion or moreeach year with each of 58 other countries in Northand South America, Europe, the Near East, South-ern and Eastern Asia, Oceania and Africa. The fol-lowing illustrates some of the major commoditiesthat are imported to and exported from the UnitedStates. 1

In 1982, U.S. exports totaled $212.2 billion, withless developed countries (LDCS) receiving $82.6 bil-lion, Western Europe $60.0 billion, and Canada$33.7 billion. U.S. imports reached $244.0 billion,with the greatest share from the LDCS ($99.0 bil-lion), followed by Western Europe ($52.3 billion),Canada ($46.5 billion), and Japan ($37.7 billion).

In terms of volumes of trade, the United Statesis a major exporter of dry-bulk commodities. In1980 the United States exported 97.2 million tonnesof grain, 72.8 million tonnes of coal, 28.8 milliontonnes of soybeans/meal, and 27.6 million tonnesof forest products. On the import side, the biggestU.S. import was petroleum, 318 million tonnes in1980.

The single most important export sector was cap-ital goods. Out of total exports of $212.2 billion in1982, capital goods accounted for $75.2 billion.Nonelectrical machinery and parts made up $47.8billion of this. Industrial supplies accounted for$61.7 billion, food and beverage for $31.3 billion,and consumer goods for $27.5 billion.

U.S. imports in 1982 were valued at $244 billion,with fuels ($66. 4 billion) and consumer goods($67.7 billion) virtually equal as the leading com-modities. Of the fuels, petroleum accounted for al-most all of the total, at $60.8 billion. Passengercars—$20.2 billion—were the most importantsingle consumer good. “Other” industrial suppliesamounted to $45.7 billion, and capital goods werevalued at $40.6 billion (of which about half wasnonelectrical machinery and parts). Food and bev-erages totaled $17.1 billion.

1 Data compiled from the Draft Analytical and Statistical Supple-ment to the $tatcment of Lionel H. OImer before the Joint EconomicCommittee, prepared by the International Trade Administration, U.S.Department of Commerce, Feb. 3, 1983.

Linkage of Economic Activity,Trade, and Shipping

Many comparisons have been made of trade andeconomic activity. The linkages are important ifnot always clear and consistent. Figure 7 traces thegrowth rates since 1970 of both world seabornetrade in dry cargo and total industrial output of thecountries belonging to the Organisation for Eco-nomic Cooperation and Development (OECD).This indicates that if one leaves out petroleum, ship-ping closely follows economic activity in industri-alized countries. For total trade including petrole-um, however, the picture is more complex. Between1965 and 1973, when the gross national product(GNP) of OECD countries rose by 4.6 percent an-nually, and that of the world rose by 5 percent, totaldemand for shipping grew more rapidly at 8.4 per-cent per year. On the other hand, when between1973 and 1980 OECD GNP rose annually only by2.3 percent and that of the world by only 2.6 per-cent, demand for shipping only increased by 2.2percent. 2 Trends in the global economy and inter-national trade are clearly related to and can pro-mote or inhibit international shipping activity.

The importance of international trade for theU.S. economy has grown progressively since WorldWar II. Although the U.S. ratio of exports to GNPstill is below that of other industrial countries,3 itstood in 1980 at 8.5 percent, up from 4.4 percentin 1970. Imports also doubled between 1970 and1980, going from 4.1 percent to 9.5 percent ofGNP.

The increased interdependence of the U.S. econ-omy with the international economy is reflectedgraphically in some of the data contained in thelatest Annual Report of the President on the TradeAgreements Program. 4 For example, the UnitedStates Trade Representative (USTR), which au-thored the report, estimates that over 5 millionworkers are dependent on foreign trade for theirlivelihood, and that 80 percent of all new manufac-

——‘Maritime Transport, 1981: A Study by the Maritime Transport

Committee (Paris: Organisation for Economic Cooperation and De-velopment, 1981).

3Twcnt}’-Sixth Annual Report ofthr President of (he United Stateson the Trade ,4 Agreements Program, 1981-82 (Washington, D. C,:United States Trade Representative (USTR), 1983).

‘Ibid.


Figure 7.-Total OECD Industrial Output in Percentage Quarterly Change Related to Percentage Yearly ChangeU I T w U r I u Q U u ” ” , . , T z , , ~ “ !

14 [\

SOURCE: OECD, Fearnleys.

turing jobs created in the late 1970’s were linkedto exports. In addition, 1 out of every 3 acresplanted by American farmers produces crops forexports. This interdependence is expected to con-tinue to grow, with some estimates putting U.S.exports as a percentage of GNP in 1990 at 15 per-cent.

For the industrialized countries of OECD as awhole, exports accounted for 16 percent of GNPin 1980, up from 9 percent in 1962, The develop-ing countries, especially the newly industrializing

countries,5 also increased their participation in in-ternational trade in the last 10 years, with theirshare of the value of free world exports increasingfrom 20 to 30 percent between 1970 and 1980.South Korea, for example, increased its exports ofgoods and services from 3 percent of GNP in 1960to 34 percent of GNP in 1977, while Taiwan wentfrom 11 to 59 percent in the same period, G

of the Newly Industn’alizing Countries on Productionand trade in Manufactures: Report by the Secretary General (Paris:Organisation for Economic Cooperation and Development, 1979).

op. cit., 1983.

Much of the economic growth in the postwar pe-riod has been the result of international trade. Re-cent studies have demonstrated that when the econ-omies of OECD countries grow by more than 1.5to 2 percent per year—the situation during the post-war period until recently —nonoil imports tendedto grow three times as fast. The same studies showa similar negative relationship, with zero growthin OECD economic activity, resulting in a 5-per-cent drop in nonoil imports. 7

The foregoing implies that economic prosperityover the long term can result from and lead togrowth in world trade, and that a healthy futurefor world trade both depends on and contributesto the health of maritime transport. There also arenegative aspects of trade growth such as the needto promote conservation of world resources, includ-ing ener~, over the next several decades—partic-ularly into the next century. This study has not con-sidered such problems except when they obvious-

Bergsten and William R. Trade Policy in the 1980’s(Washington, D. C.: Institute for International Economics, 1983),

Ch. 2—World Trade and Shipping 25— . ————— —

ly have affected economics (e. g., with fuel prices).

However, it should be recognized that uncontrolleduse of vital resources on a large scale will have prac-tical or needed limits. World trade may reach some

CURRENT STATUSIN WORLD

Overview of the WorldShipping Industry

World shipping follows the trade it serves, butbecause of its international and entrepreneurialnature, the industry tends to be even more volatilethan trading patterns. The industry presently is ex-periencing a major excess of tonnage, but large fluc-tuations in supply and demand in shipping havebeen quite common for a long time.

The shipping industry consists of several diversebusinesses and sectors. In total, it includes thosecompanies that operate the world fleet of over35,000 major, cargo-carrying ships—tankers,chemical and liquefied gas carriers, combinationbulk and oil carriers, ore and dry-bulk ships, gen-eral cargo ships, container ships, and many evenmore specialized types such as automobile carriersand roll-on, roll-off (RO/RO) ships.

The principal sectors today are the tanker oper-ators, the dry-bulk operators, and the liner opera-tors. The tanker and dry-bulk-carrier operators aresimilar in that fleets of ships usually are ownedand/or chartered to carry single, large-volume com-modities (i. e., iron ore, grain, coal, crude oil, andpetroleum products) over fixed, and sometimes,long periods of time. Shipping thus is closely relatedto a larger enterprise. Many independent operatorsparticipate under ‘ ‘time-charter’ or voyage-chartercontracts; in other cases, major petroleum or otherresource companies own and operate their ownfleets.

The liner industry, or general cargo business,on the other hand, operates more like a railroad—carrying freight from port to port at fixed rates andon a regular schedule. The modern containerships

of these limits and adjustments may be neccessary,especially if economics does not bring about naturaladjustments.

OF AND TRENDSSHIPPING

and RO/RO ships are typical of the ships used inthis trade within the industrialized world. The linerindustry is characterized further by the predomi-nance of conferences, international groups of car-rier lines that collectively agree on routes, schedules,rates, and other aspects of liner services.

The composition of the world merchant fleet, asof January 1, 1982, is shown in figure 8. Viewedin the conventional shipping categories, there areroughly twice as many general cargo ships as bulkships. Within the bulk fleet, nearly two-thirds ofthe ships arc devoted to carrying liquid (mostly pe-troleum) cargoes. However, the numbers of shipsdo not accurately reflect the magnitude of the var-ious shipping sectors. As shown in figure 9, thegeneral cargo ships represent a much smaller por-tion of the fleet when measured in gross tonnage.The general cargo tonnage is less than one-thirdof that in the combined bulk fleets. Tankers domi-nate the bulk fleet in gross tonnage as well as num-bers.

While shipping always has been an internationalbusiness, reflecting the nature of foreign trade, theinternational complexity of world shipping is in-creasing. Prior to the 1960’s, the relative magnitudeof the shipping industries owned in various nationscorresponded to the size of the fleets registered ineach country. The significant fleets were found al-most exclusively in the industrialized nations withthe largest trading volumes.

In the 1960’s, some countries (Cyprus, Lebanon,Liberia, Panama, Singapore [to 1980], Oman, Ba-hamas [since 1976], and Honduras) developed fleetsof ‘open registries’ or ‘ ‘flags of convenience’ thatdo not require owner citizenship. Tax advantagesand, often, less strict vessel and crewing standards

25-417 0 - 83 - 3 QL 3


Figure 8.–Composition of the World

World Fleet(75,720)

Fleet (by number) -Jan. 1, 1982

Fishing Cargo-carrying Offshore vesselsvessels fleet ferries & harbor craft(21 ,000) (40,061) (14,700)

Liquid Drycargo cargo

(8,529) (31 ,532)

Gas Special Oil Dry-bulk Generalcarrier tanker tanker cargo cargo(686) (1 ,490) (6,353) (4,867) (26,665)

OBO Ore Special Bulkcarrier bulk carrier carrier

(451) (310) (538) (3,568)

Singledeck Multideck Refrigerated Special Semi- Container ROIROgeneral cargo general cargo cargo cargo container

(1 1,332) (9,550) (826) (2,161) (183) (685) (1,928)

SOURCE: A & P Appledore, 1982.

Ch. 2–World Trade and Shipping 27

Figure 9.–Composition of Worid Fieet by Tonnage Juiy 1, 1981

—180

160

120

80

.“‘.

40 ~

20

0 tOil

Totai: 421 Miiiion GRT

Dry- General OBObulk cargo

SOURCE: Lloyd’s Register of Shipping Statistical Tables 1981.

attracted ship registrations to these countries. Thus,while the United States had the largest registeredfleet by tonnage 20 years ago, Liberia now has thelargest fleet in the world (fig. 10),

The spectacular growth in the Liberian fleet (800percent in 20 years) and other open registries is at-tributable primarily to business practices of U.S.and other companies of the industrialized world.Two-thirds of the world fleet is registered in eightcountries, which are (in order of fleet size): Liberia,Japan, Greece, the United Kingdom, Panama, theU. S. S. R., Norway, and the United States. Fleets-of-open-registry countries accounted for 25 percentof the world fleet in mid-1981.

When the tonnage registered under flags of con-venience is distributed among the countries ofbeneficial ownership* (see table 1), the UnitedStates, Hong Kong, Greece, and Japan total 75percent—clear leaders in ownership of world ship-ping. Flags of convenience are far more widely used

● ’ ‘Beneficially owned ‘‘ is defined as designating the owner who re-ceives the benefits or profits from the operation.

Container Liquid Passenger Chemical Othergas

Ship type

in bulk trades than in the general cargo industry.The Liberian fleet is the predominant world tankerfleet (now over one-half of all ship tonnage) thatis, for the most part, owned by or chartered by themultinational petroleum companies.

Liner ships have a greater diversity of traderoute, flag, ownership, and design than the othersegments of the industry. For example, container-ships make up 3 percent of the world fleet by ton-nage and the largest portion of this fleet is U. S.-flag, followed by the United Kingdom, Japan, andWest Germany. Since these countries are also thepredominant nations trading in manufacturedgoods, this fleet tends to match the trade in nation-ality.

Today, world shipping is in a major slump.Much of the tanker fleet (about one-third in 1982)is surplus to the need for transporting petroleum.8

A substantial portion of the dry-bulk fleet also issurplus to demand, and the liner trades have notexpanded at all in recent years. The oversupply of

1982,


Figure 10.-Fleet 5 of the Leading Maritime Nations, 1960-81

u~ I 11960

11965 I

1970 . -—— J1975

Year1980 1985

SOURCE: Lloyd’s Register of Shipping Statistical Tables 19S1.

Tabie 1 .–Beneficiai Ownership of the Open. RegistryFieets (reglstered Llbaria, Panama,

Cyprus, Bermuda, and Bahamas)

Percent of totalopen-registfy fleet,Country of beneficial owners by deadweight tonnage

United States . . . . . . . . . . . . . . . . .31Hong Kong . . . . . . . . . . . . . . . . . . .22Greece . . . . . . . . . . . . . . . . . . . . . . .12Japan . . . . . . . . . . . . . . . . . . . . . . . .10West Germany . . . . . . . . . . . . . . . .3Norway. . . . . . . . . . . . . . . . . . . . . . .310 other European Countries

plus Korea and Indonesia. . . . .1-2Y0 each

~othercountries ... ... .m. ..o. less than o.5%e a c h

SOURCE: UNCTAD, 1961 Rev/ew of A@Wme Transpon, data supplied by

A & P Appledore Ltd.

ships has caused substanti~ adjustments in theworld fleet, with ship scrapping (especially of largetankers) at an all-time high.

The diversity in maritime transportation makesit difficult to characterize the shipping industry inother than very general terms and adds to the dif-ficult y in developing effective policies on which na-tional governments can agree. In the following sec-tions, trends in three major sectors of world ship-ping (liquid-bulk, dry-bulk, and general cargo) willbe discussed separately.

‘Statistics on the three shipping sectors were taken primarily from Transport 1981 (Paris: Organisation for Economic Coopera-

tion and Development, 1982).


Liquid Bulk

Today, 94 percent of the gross registered ton-nage (grt) in the liquid-bulk fleet is in oil tankers,Demand for transportation of oil peaked in 1977at 10.5 trillion ton-miles. The current slump in thisfreight market has brought it to pre-1973 levels(under 8 trillion ton-miles) with the recent rate ofdecrease in ton-miles at 13 percent for 1980 and12 percent for 1981. This rate of decline in the de-mand for oil tanker tonnage far exceeds the shrink-age in the oil tanker fleet.

In tonnage, tankers remain the single largestshipping sector, comprising 41 percent of the worldmerchant fleet. Fifty-four percent of the 172 milliongrt in oil tankers is registered in OECD countries,with another 31 percent registered in open-registrycountries.

I

After annual growth rates of 12 to 16 percent inthe mid-1970’s, the tonnage in the oil tanker fleethas been stable or declining since 1977. Frommid-1980 to mid-1981, it declined 1.9 percent (grt)(1.4 percent in deadweight tons (dwt)). The net de-cline in the tanker fleet in 1981 is comprised of anaddition of 7.7 million dwt delivered and a reduc-tion of 12.5 million dwt lost or scrapped. Most ofthe decline is accounted for in the larger tankercategories. Since 1980, the tonnage in ships under150,000 dwt has been increasing, while that in shipsover 150,000 dwt has been declining. Similarly, 10million dwt were on order as of January 1, 1982in the smaller category, with only 2 million dwt inthe larger tankers. The largest amount of scrap-ping was in very large crude carriers (VLCCS), to-taling 41 ships of 8.9 million dwt in 1981.

Photo credit: Atlantic Richfield

A supertanker transferring its cargo of crude oil to asmaller tanker in the Gulf of Mexico

The surplus of tonnage resulting from the rela-tively slow shrinkage of the available fleet is ex-pected to prevail throughout 1983 with no apparentreason for improvement before 1985. The excesstonnage results from ships being used for storage,ships in layup (laid-up tonnage increased 11 milliondwt to 17.3 million dwt at the end of 1981), andin less efilcient use of available tonnage, e.g., slowersteaming.

Fearnley’s estimates that the world tanker fleetwill continue to decline at a rate of about 5 to 6percent per year from 1983 through 1986 (see fig.11). While crude-oil tankers (particularly the verylarge ones over 100,000 dwt) are being scrappedat a very fast rate, certain specialized liquid-bulkcarriers are showing some growth. Liquefied gas,chemical, and special-product carriers are viewedby some as an area of future shipping growth. Suchvessels will never reach the huge tonnage of oil car-riers but could serve a variety of changing worldeconomic and trading needs, such as a switch inrefining and chemical manufacturing closer to pro-duction fields and the need to produce petroleumfrom smaller and more remote oil and gas finds.

Dry Bulk

While total trade in crude oil was at a level ofabout 1.2 billion tonnes in 1981, the three majordry-bulk trades (coal, grain, and iron ore) totaled700 million tonnes.

The dry-bulk fleet is the single major categoryof ships that was increasing in tonnage in 1982.While the number of tankers in the world fleet to-day is the same as 15 years ago, the number of dry-bulk carriers is three times the level of 15 years ago.Ore and dry-bulk carriers included 87.24 milliongrt in mid-1981, showing a 4. 7-percent annual in-crease. When grouped with the combination-carrierfleet (73 percent of which, on average, were in thedry-bulk trades in 1981), at 25.84 million grt, theseships comprise 27 percent of the world fleet. Therate of expansion of the dry-bulk fleet is increas-ing, owing to the delivery of ships ordered duringgood freight years in 1979 and 1980. Fearnley’sdata shows annual increases for the dry-bulk fleetof 8.9 percent and 9.4 percent for 1982 and 1983respectively. Cargoes, however, are expanding lessrapidly, only 2.5 percent in 1981, resulting in sur-


Figure 11.– World Bulk Fleet

1/1 1973 -74 -75 -76 -77 -78 -79 -80 -81 -82 -83 -84 -85SOURCE: Fearnleys, World Bulk fled, January 19S3.

plus tonnage in the fleet, Relatively little scrappinghas occurred in the dry-bulk fleet in recent years.

The major commodities in the dry-bulk tradesare grains, iron ore, and coal. Table 2 presents dataon recent growth or decline in the volume of thesecommodities, as well as changes in the tonnage inthe various ship-size categories. Most of the growthin the fleet is occurring in the larger size categories,while the iron ore trade, which uses the largestships, is declining as steel production shrinks in theworld recession.

Predictions of growth in the major dry-bulktrades include wide variations. Forecasts of growthin the 1980’s of the iron ore trade, which is verysensitive to changes in economic growth, vary from1.4- to 7.3-percent annual increase. For the coaltrade, estimates of the tonnage to be shipped bythe year 2000 range from 3.5 to 6 times the 1979levels. Grain tonnages are closely linked to climaticevents and are even more difficult to predict. Eventhough trade may grow, Fearnley projects that thesize of the dry-bulk fleet will level off by 1985because of the large present oversupply of tonnage.

Table 2.—Comparison of Changes in the Dry-BulkFleet and Dry-Bulk Seabome Trade

End 1980 End 1981

DWT category 1,000 dwt 1,000 dwt 0/0 growth

Drybulk fleat10,000-17,999 . . . . . . . . . . . 11,624 11,643 0.218,000-24,999 . . . . . . . . . . . 18,522 19,110 3.225,000-39,999 . . . . . . . . . . . 47,312 49,126 3.840,00049,999 . . . . . . . . . . . 11,379 11,739 3.250,000-79,999 . . . . . . . . . . . 38,917 42,663 9.6Over 80. . . . . . . . . . . . . . . . 61,570 65,682 6,7

Total . . . . . . . . . . . . . . . . 189.324 199.963 5.6Commodity 1960 1981 (est.) O/O growth

Major bulk seabome tradeGrain:

Miiiion tonnes . . . . . . . . 198 204 3.0Miiiion tonne-miies . . . 1,087 1,120 3.0Average cargo size 27,000 dwt

Coai:Miiiion tonnes. . . . . . . . 188 1% 4.3Miiiion tonne-miies . . . 952 1,030 8.2Average cargo size 51,400 dwt

iron ore:Miiiion tonnes . . . . . . . . 314 303 -3.5Miiiion tonne-miies . . . 1,613 1,580 -2.0Average carao size 88,500 dwt

SOURCES: Fearnley8, World Bulk Fleet, January 19S1 end January 19S2, includ-ing combination carrtere.Fearnleys, “Review 19S1.” Compiled in Maritime Transport, 19S1OECD.

Ch. 2—World Trade and Shipping ● 3 1—

Future developments in the world dry-bulk fleetcould have a significant impact on the United Statesas a major bulk exporter and significant importer,with the possibility of substantial future growth inselected commodities later this century. The fleetand the trades need to be monitored carefully bythe Federal Government if policies are to reflect ac-curately changing world needs.

General Cargo

The world general-cargo fleet encompasses a va-riety of ship types, including breakbulk, partiallyor fully containerized, vehicle carriers, lighter ships,and RO/RO ships. Due to the greater diversity ofthis fleet, there are fewer general statistics describ-ing its status and trends. The amount of tonnagein all types of general cargo ships either was declin-ing or was growing at a slower rate in 1980 and1981 than in previous years, The general-purposecargo fleet included 81 million grt in mid-1981 foran annual decline of 2.2 percent, the first absolutereduction in the fleet since 1974. In part, this reduc-tion is due to the shift to containerization, as shipswithout container-handling capabilities are ex-cluded from some trades. The tonnage in unit-loadships (including fully container, vehicle, and lightercarriers) grew at a reduced annual increase of 10.5percent to a level of 15 million grt. The slowingof the expansion of the unit-load carriers reflectsovercapacity in this sector. However, growth in thecontainer fleet is expected to surge again over thenext few years due to orders for new ships placedin 1981. At the end of 1981, the additional capaci-ty on order was 23 percent of the existing fleet. In-terestingly, however, most of the ordering in 1981was for ships capable of handling both containersand breakbulk cargoes.

In 1981, growth of the containerized fleet (esti-mated at 15 percent in twenty-foot-equivalent units(teu)), far exceeded the 8-percent growth in contain-erized cargo. For the liner trades in general, theamount of cargo available has been level. Thus,the rate of increase in supply of shipping is exceed-ing the increase in demand. Part of this may beexplained by a switch to slower speeds to save fuelcosts, which in turn requires more ship capacityto move cargo at the same rate. An additional pres-sure on the historically dominant fleets is increas-

Photo credit: Maryland Depadment of Transportation

A heavy-lift crane loading general cargo (a largemachinery part) for export

ing competition from noncommercial nationalizedshipping lines, notably from the U.S.S.R. and new-ly industrialized East Asian countries.

Trends in National Fleets

Comparing the distribution of ship tonnage to-day with that in 1970, the developing countries andthe open-registry countries significantly have ex-panded their share of the world fleet, at the expenseof OECD countries. The most recent data (mid-1980 to mid-1981) indicate that the developingcountries are continuing to make gains in absoluteand relative terms. Several of them, notably inSoutheast Asia, are pursuing explicit policies to ex-

32 ● An Assessment of Maritime Trade and Technology— . — .— — — . — — — . — . — — — — — — . —

pand their fleets and to carry a substantial portion pulsion systems and ship design to promote energyof their foreign trade in their own ships. efficiency, also discussed in ch. 5.)

The composition and age of the fleets vary. Inthe OECD and open-registry flag fleets, nearly one-half of the tonnage is in oil tankers, with almostanother one-quarter in ore and dry-bulk carriers.In contrast, nearly one-half of the fleets of theU.S.S.R. and Eastern Europe are general cargoships, with oil tankers comprising another one-quarter. The developing countries have more di-verse fleets, consisting of about 30 percent of thetonnage in each of the oil tanker and general cargocategories. In comparing the age of the major fleets,the United States has by far the greatest percent-age, 21 percent, of its fleet by tonnage, in the oldestcategory, greater than 30 years, with 45 percentless than 10 years old. About 73 percent of the Jap-anese fleet is less than 10 years old. In general, theOECD fleet tends to be younger than the rest ofthe world, which often receives OECD ships sec-ondhand. 1°

It is important to note that major U.S. maritimebusiness interests participate in the ownership,management, and decisionmaking for very largeshipping enterprises that use the so-called flags ofconvenience, This fleet typically operates outsidedirect U.S. Government control or influence butwithin a variety of internationally agreed standardsand accepted practices. This ‘‘United States effec-tive control’ fleet, however, does ci.rry almost allof our petroleum imports, a large portion of ourcoal and grain exports, and many other commod-ities significant to our international trade. U.S.maritime policies, therefore, must recognize the im-portance of this fleet both to U.S. business interestsand as a factor in our ability to promote trade inthe future.

Trends in Ship Types and Features

Two major changes influencing shipping in re-cent decades, and likely to continue to do so in thefuture, are automation of ship systems and special-ization of ship types. Developments in both of theseareas are discussed in greater detail in chapter 5.(A third important trend is in changes in both pro-— . . —

IOD~ta on the composition and age of the fleets is from MaritimeTransport 198J (Paris: Organisation for Economic Cooperation andDevelopment, 1982).

The past decade has seen a proliferation of spe-cialized ship types, causing a number of changesin the world shipping industry. One result is thatthere is now less flexibility to shift ship tonnage fromone trade to another as markets change. As an ex-ample, ships designed for specific trades, such asVLCCS for the Arabian crude oil trade, cannot beused economically in other oil transport routes,Consequently, the economic risks when a tonnagesurplus exists are magnified.

A second major impact from specialization is thetrend toward unitization of cargo. Many ships aredesigned now to carry a specific type of cargo, suchas vehicles, or cargo that is transported in uniformunits, such as containers. Containerization hastransformed the general cargo business. Not onlyhas the type of ship changed dramatically, but traderoutes are shifting depending on the availability ofcontainer-handling facilities at the various ports.The compatibility of containerized cargo with bothland and water transportation systems has led tothe streamlining of intermodal transportation serv-ices with the introduction of single through ratesand through bills of lading. Ocean carriers haveexpanded their activities from providing strictlyport-to-port service to offering consolidated inter-modal transport in which the seaborne leg is justone part of point-to-point service. As a result, theavailability and interface with rail service is alsoaltering traditional trade routes.

The rate of technological change in general is in-creasing and maritime policies must be able bothto foster and to accommodate that change if theUnited States is to participate in future shippinginnovations.

Trends in Shipping Economics

The economic status of any shipping operationwill be determined by the relative levels of costs(capital and operating) and revenues. As discussedpreviously, demand and freight rates, which deter-mine revenues, are presently at severely depressedlevels in all shipping sectors. Given the globalnature of the shipping business, the slump in themarket tends to affect all operators. Competition


among commercial fleets for the available revenuesis intensified by political factors. More and morecountries have instituted cargo preference policiesreserving some or all cargoes for their own fleets.In addition, some countries have nationalized, non-commercial fleets that are insensitive to nonprof-itable freight rates. These political trends are dis-cussed more fully in chapter 7.

Traditionally, operators in the liner trades haveformed cartels or adopted cooperative businesspractices within conferences that are intended torestrict competition and allocate the availablemarket. Such practices are common worldwide andcompetition is even more restricted in non-U. S.trades. Bulk operators, on the other hand, tradi-tionally have favored and followed practices of opencompetition. Bulk shipping also has been populatedby many individual entrepreneurs who take ex-treme risks for high returns. Present economic con-ditions and the massive oversupply of bulk-ship ton-nage, placing some large banks at risk, have ledsome to reconsider bulk-shipping practices. Thelarger economic risks of future shipping ventures

probably will foster industry restructuring towardmanaging competition.

There are wide variations in both the capital andoperating costs among various countries. Nationalpolicies to protect and promote national fleets andindustries (see ch. 7) complicate this side of theeconomic equation as well. Capital costs are a majorconcern to shipping interests. New investmentpackages are becoming larger and more difficultto finance. Joint ventures and cooperative arrange-ments are growing. And there is a trend towardreducing high-risk investments caused by specula-tive building in the past.

Increasing fuel costs are felt by all fleets. ForU.S.-flag vessels, they currently represent nearly50 percent of operating costs, as compared to 10to 15 percent in the early 1970’s. Responses includeboth changes in ship design and propulsion systems,notably shifting from steam to diesel ships, andchanges in operating procedures, such as slowersteaming speeds to increase fuel efficiency. Whilefuel prices currently are lower than in the recent

Photo credit: Sea-Land Industries

Economics have forced a shift to slower speed, fuel-efficient containerships—the Sea-Land Patriot, first of 12 diesel-powered ships built in Japan and Korea in 1980 for Sea-Land Service


past, they can be expected to resume their increaseslater in the decade, and fuel conservation will con-tinue to be an important influence on shipping. Ad-vances in fuel efficiency are discussed further inchapter 5.

Crew costs represent one of the larger variablesamong maritime nations. One estimate places U.S.wage costs at six times that of a Chinese crew andtwice that of a Japanese crew. 11 With wages on

U.S.-flag vessels accounting for 20 to 50 percentof operating costs, 12 13 depending on vessel type)there are increasing pressures for greater automa-tion of ship systems. It is particularly important formaritime policy makers to monitor trends in crewrequirements and costs as key factors in the com-petitiveness of shipping operations.

—1 I Paul Ackerman, ‘ ‘Comparative Operating Costs for U. S.- and

Foreign-Flag Ships, ” SNAME, A Combined Symposium on ShipCos(s and Energy, New York, Sept. 30-Oct. 1, 1982.

‘zIbid.13Gary J. Baham, “Final Report, Trends in Vessel Technology for

Maritime Trade and Shipping, ” for the Office of Technology Assess-ment, December 1982.

CURRENT STATUS OF AND TRENDSIN WORLD SHIPBUILDING

Shipbuilding Industry Today

Merchant shipbuilding serves the demand forworld shipping discussed above. The output of mer-chant shipbuilding over the recent past is summa-rized in figure 12. Output is expressed as grt, whichis a measure of total ship volumetric capacity, andthus provides a better guide to shipbuilding out-put than the number of ships.

The dominance of Japan is readily seen in figure12, followed by the Association of West EuropeanShipbuilders (AWES), which was responsible forone-third of world merchant shipbuilding outputin the period. AWES is strictly a voluntary associa-tion with the main purpose of lobbying the Euro-pean Economic Community (EEC) and in no senserepresents a unified commercial force. The relativesignificance of the nations participating in worldshipbuilding today is seen best in the orderbookshown in figure 13 and table 3. The most strikingfeature is the rise of South Korea to second place,principally at the expense of AWES.

The majority of the shipyards of the developedworld are suffering from the lack of orders and cut-throat competition brought about by the worldrecession and the heavy overtonnaging in the ma-jor ship types. The yards that survive the crisiseither will be those with government support or

those that so improve productivity that they cancompete without actually losing money until arecovery comes.

Government aid has been available in one formor another to almost all the shipyards of the worldover the past few years. Now, however, many gov-ernments either are cutting aid altogether or tyingits provision to massive yard improvements in anattempt to drive the yards to greater productivityso that the aid is not wasted.

Thus, either as a result of the removal of govern-ment aid, the terms of its provision, or the orderscrisis previously mentioned, most of the shipyardsof the developed world are aiming for vast im-provements in productivity. These will be gainedby a mixture of improved efficiency of operationsand the applications of new technology in ship-building.

Meanwhile, technological advances are occurringin shipping operations, advances with which ship-yards must keep pace if they are to produce mar-ketable ships and remain competitive.

Shipyard Capabilities and Capacities

The period from 1970 to 1975 saw a general up-surge of expenditures on facilities development in

Ch. Z–World Trade and Shipping ● 3 5

Figure 12.—World Merchant Shipbuilding Production, 1976-81, by Country

Production in other major countriesmeasured in gross registered tons (grt)

Singapore ~

Production 26 million grt

European (AWES) production measuredin gross registered tons (grt)

Portugal

Production 40 miiiion grtSOURCE: Fairplay, Aprii 19S3.

most of the world ~hipbuilding nations. To someextent this resulted in improvement of existingfacilities, although many new yards also were built.The culmination of this investment period around1973 to 1975 saw the peak of world shipbuildingdemand. Since that time, demand (and thereforeoutput) has declined worldwide and only in certaindeveloping countries (notably South Korea) has in-vestment in new facilities continued. In the majorityof established shipbuilding countries the very sharpdecline in output since 1975 has led to:

● large reductions in labor force numbers;● closure of many facilities;

World production measured in grossregistered tons (grt)

Totai production 120 miiiion grt

diversification into other activities (notably off-shore and land-based industrial fabrication);anda virtual “credit war’ and, in many countries,a degree of overt or covert protectionism.

The last 2 to 3 years have seen the developmentof a second phase in most countries’ reactions tothe continuing surplus of shipbuilding capacity:

● those countries that had undertaken major cut-backs in capacity in the period 1975-81(including Japan and most AWES countries)have generally decided that “enough is


Figure 13.—Merchant Ships on Order Worldwide

SOURCE: Fairplay, April 1983.

●

●

●

enough’ and, for both sociopolitical and stra-tegic reasons, further cutbacks are being re-sisted increasingly;those countries that had resisted cutbacks dur-ing the late 1970’s—including some AWEScountries— are now facing up to the necessityof making cutbacks;in the majority of countries, increasing em-phasis has been placed on improving produc-tivity (i. e., making better use of existing fa-cilities) as a means of cutting losses; andwith the notable exception of South Korea,those advanced developing countries that inthe 1960’s and early 1970’s had seen shipbuild-

ing as a priority area for development (e. g.,Brazil, Taiwan) have lost much of their origi-nal enthusiasm.

Throughout this period, several developing coun-tries (e. g., India, Indonesia) have expanded theirshipbuilding industries in line with their generalpolicies of increasing industrial independence.

South Korea is the prime example of a countrythat intends to consolidate its past expansion,regardless of the lack of orders worldwide. Thecountry claims a total building capacity of 4.1million grt in 1981 and the aim is for 6 million grtper year by 1986. The South Koreans are aiming

Ch. 2–World Trade and Shipping ● 3 7

Table 3.—Ships Currently on Order (countries with 1 million dwt or more, with the United States added for compadson)

Dry cargo Tankers Bulkers Total

Millions Millions Millions MillionsCountry of build Number of dwt Number of dwt Number of dwt Number of dwt

Total (April 1983) . . . . . . . . .Total (September 1982) . . . .

I

60462061233040134624

776

349

8232

Japan . . . . . . . . . . . . . . . . . . . 4 c.

Republic of Korea . . . . . . . .Spain . . . . . . . . . . . . . . . . . . .Brazil . . . . . . . . . . . . . . . . . . .Poland ., . . . . . . . . . . . . . . . .Taiwan . . . . . . . . . . . . . . . . . .U.S.S.R. . . . . . . . . . . . . . . . . .China . . . . . . . . . . . . . . . . . . .Yugoslavia, . . . . . . . . . . . . . .Romania . . . . . . . . . . . . . . . .United Kingdom ....,.. . . .Portugal . . . . . . . . . . . . . . . . .Germany . . . . . . . . . . . . . . . .India . . . . . . . . . . . . . . . . . . . .Denmark . . . . . . . . . . . . . . . .United Statesa . . . . . . . . . . .All others. ...,..... . . . . . .

924929

0.80,30.20.80.40.30.40.10.20.10.10.70.10.30.21.8

9.09.3

; :161114

319

534

4375

—6

1381

318393

1.00.40.50.90.21.00.11.00.20.20,80.1—0.20.52.0

11.914.9

44374120151431

61721

69

2471

49

613650

3.22.52.10.91.30.50.80.31.00,90.30.41.00.40.12.1

30.333.4

1289972954163765367482090276222

362

1,8351,972

5.03.22.72.51.81.71,41.41.41.21.21.11.11.00.86.2

51.257.6

38 . An Assessment of Maritime Trade and Technology

for 10 percent of world orders by 1986; they nowhave 8.5 percent.

The productivity of South Korea’s shipbuildingworkers is only about half that of the Japanese—about 15 tonnes/man-year. (The South KoreanGovernment aims to double this to 30 tonnes/man-year by 1986,)14 The reasons for South Korea’s suc-cess are several, but the most important is undoubt-edly the low cost of labor.

If Korean yards succeed in doubling their pro-ductivity, coupled with their very large capacity,they will be a force with which to be reckoned.Their prices are already very low (average 15 per-cent below typical AWES prices), although it hasbeen suggested that they have been making littleor no profit at these levels. 15 They have in the pastattempted to gain a key position by massive under-cutting, and initially succeeded, but future petiorm-ance may be different. South Korea’s situation isimportant to the United States not only becausethey are a major ally and trading partner, but alsobecause U.S. ship operators recently have con-tracted for major new buildings in Korean yards,

Since the massive slump in orders in 1975, themajority of the world’s shipbuilders have agreedto reductions in capacity. Japan, by far the largestshipbuilding nation in the world, has reduced itscapacity by 35 percent, according to the Shipbuild-ers Association of Japan (SAJ). The 23 major com-panies represented by SAJ employed 112,000 peo-ple in April 1974. By mid-1979 this was reducedto about 72,000 and remained at about that levelthrough 1982. Unlike the Western European na-tions, whose capacity reductions took place in apiecemeal fashion, the Japanese industry cutbackstook place under what appears to have been fairlystrict government control.

Despite the reduction, total Japanese shipbuild-ing capacity still is massive, and the yards are awareof the need to contract further if they are to remaincompetitive under the dearth of orders expectedover the next 3 or 4 years. However, they do notintend to reduce their manpower further, exceptby the process of natural wastage,

~~A & P Appledore Ltd., Technical and Capability Developmentsin Shipbuilding, prepared for the OffIce of Technology Assessment,November 1982.

“Ibid.

The Japanese philosophy, which is aided by themakeup of their conglomerate firms, is to restruc-ture, shifting the emphasis away from direct marineinvolvement. The nonmarine activities consist pri-marily of shore-based machinery manufacture. Inthis way, they do not lose potential capability, butare not desperate for orders to maintain their pres-ent situation. They also are preparing to weatherthe orders slump by:

● concentrating on high-technoloy vessels; and. carrying out concerted market research and

a forceful marketing drive.

AWES is not a governing body, but acts as a con-sultative and monitoring organization. Thus, theactions taken by different yards and different coun-tries within AWES do not all correspond to thestated aims of that body. For instance, in Belgium,Cockerills Yard (one of only two major yards)closed in 1982, but the government has stimulatednaval building and construction for the inland wa-terways to help the industry. Building for theirinland waterway industry serves a useful purposein itself. In addition, the shipbuilding industry isa major consumer of steel, and the Belgian steelindustry also is suffering greatly from the recession.Also, in the Netherlands, the government turneddown a request for shipbuilding subsidies in early1983, a situation that has led to the closing of theVerolme yard and the loss of 6,000 jobs.

The reductions in numbers employed in mer-chant shipbuilding by the member countries ofAWES (except Portugal and Finland) are shownbelow:

Reduction in employmentEmployees (December 1975-

Country (end 1975) December 1981)Netherlands . . . . . 22,700 56%Sweden . . . . . . . . . 14,000 48%United Kingdom. 54,600 47%West Germany . . 46,800* 46%Italy . . . . . . . . . . . 25,000 36%Denmark . . . . . . . 16,600 30%France . . . . . . . . . 27,600 29%Norway. . . . . . . . . 18,600 29%Spain . . . . . . . . . . 43,000 24%Belgium . . . . . . . . 6,100 11%AWES (overall) . . 275,000 about 3370“Excludes military sh]pbuildmg,

SOURCE AWES/EEC/A & P Appledore

Ch. 2–World Trade and Shipping ● 3 9

Only Finland has a modest but very healthy ship-building industry by any standard. They have con-centrated on passenger cruise ships and ships thatnavigate in the polar regions and are recognizedworld leaders in these markets.

Other Nations

Not all LDCS have succeeded as South Koreahas. Taiwan is producing work for its only majoryard (China Shipbuilding Corp. ) by building upthe national fleet. This buildup follows in the spiritof multilateral cargo-sharing, although they aremainly building bulk carriers.

Brazil expects to lay off from 21 to 42 percentof its 178,000 shipbuilding work force in the nearfuture. In the latter 1970’s, Brazil was able to builda healthy shipbuilding industry by attracting foreignshipbuilders to open yards there to build their rapid-ly growing national fleet and to build ships for for-eign buyers, backed by healthy credit facilities.Now, faced with a crippling national debt, they areunable to finance foreign buildings, and have toseek foreign finance packages and aid to build shipsat all.

In the People’s Republic of China the ship-building industry neither is expanding nor contract-ing to any marked degree. The work force remainsfairly steady. However, they are making greatstrides to improve their productivity, which,coupled with low costs (labor and materials), willenable them to become very competitive. At thesame time they are building up their national fleet,and the work so generated is keeping their yardsbusy. In addition, they are now marketing outsidethe People’s Republic of China. They are in thefortunate position of taking orders for foreign newbuildings without being driven to it from lack ofwork. Thus they are only taking work they want—work that brings learning, or that opens trade witha new country. They are building a modern, com-petitive industry within the existing framework.Should they choose to enter the international ship-building market in a major way, they would un-doubtedly be a force to reckon with. There is, how-ever, some doubt whether this will happen, giventhe depressed state of the industry worldwide andthe large number of other industrial sectors com-peting for finance within the People’s Republic ofChina.

The United States has a very large shipbuildingindustry (described in ch. 4) compared with othermaritime nations, with over 175,000 total employ-ees in 1980 (compared with 160,000 in Japan).However, the United States has not competed inthe world market for construction of merchant shipsin the past 20 years. Merchant ship constructionin the United States during the 1960’s and 1970’shas been almost entirely under Federal Governmentsubsidy or for the domestic market where construc-tion must take place in the United States by law.During these years the U.S. shipyards have beendominated by U.S. Navy construction, and todaynaval warship or auxiliary ship construction makesup over 90 percent of the major U.S. shipyards’business.

Finance

The whole subject of finance of shipbuilding isa thorny one but it is certainly true that few, if any,ships are built at present without credit (exceptbehind the Iron Curtain). The battle to attractorders was waged largely with bigger and bettercredits until OECD laid down guidelines, knownas the ‘‘OECD Understanding’ on credit terms.These have been modified, and the limit is now amaximum of 80 percent credit over a maximumof 8.5 years at a minimum rate of 7.5 percent perannum.

Not all shipbuilding nations are in OECD, andnot all OECD members always abide strictly by theunderstanding. Thus, the understanding becomesa broad guideline. Meanwhile, merchant bankersfeel that the period should be extended more in linewith the life of a ship, while many governments,seeing large amounts of credit extended to develop-ing nations that are struggling to service their loans,would like to reduce the credit limit.

It would appear unlikely, with a lack of newbuilding orders and a massive shipbuilding over-capacity, that building credits will be terminated.On the other hand, it would appear very likely thatdirect yard subsidies will be reduced, if not re-moved, in many countries, as a means to force areduction in capacity. Financial assistance is avail-able in some countries for investment in new tech-nology, provided it is linked to reduction of capac-ity.


Thus, in the near future, shipbuilding subsidiesin the form of credit are likely to remain as a meansof attracting orders, but direct financing availableto the majority of shipyards is likely to be serious-ly curtailed.

Outlook for CommercialMerchant Shipbuilding

It is the volume and pattern of seaborne tradethat generate the demand for cargo-carrying ships.However, the long leadtime in building ships andthe uncertainty in predicting future trading marketscontribute to an imbalance between supply and de-mand and to boom and bust cycles in shipbuilding,In addition, there is some purely speculative order-ing of ships for the purpose of selling them laterat a profit.

The present gross surplus of tonnage is due toordering of tankers in the 1970’s and the more re-

cent ordering of bulk carriers. Petroleum and bulk-cargo markets were expected to expand rapidly, andship operators and speculative buyers alike antici-pated growing demand for new ships. Largely dueto the severity of the world recession, the growthin the freight markets did not materialize.

The presence of a tonnage surplus, which is al-most always present although fluctuating in size,tends to act as a check, dissuading operators fromthe more extravagant ordering. For this reason, nosharp increases in new tonnage delivered can beexpected for a number of years. The latest forecastsfrom AWES and SAJ (fig. 14) both show that thelevel of future ordering is likely to be suppressedfor the next 3 to 4 years.

The major shipbuilding industries in Japan,South Korea, Europe, and elsewhere, compete foreach order in a worldwide market. The U.S. in-dustry not only is insulated from that world market,producing only a few percent of the world output

Figure 14.—New Building Demand Forecasm, 1982

- - - 0 A ~ ~ I O W M a (SAJ foreoast wxwerted from gms rsgiotered tonnage)

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Year

SOURCE: A & P Appledore, 19S2.

Ch. 2—Wor}d Trade and Shipping 41— —

of commercial vessels, but does not meet its owndomestic demand for merchant ships.

Table 4 shows an approximate breakdown of the1982 world orders in terms of the percentages builtby each country or group of countries, the percent-age expected to be delivered that might go to ownersdomiciled in the various countries, and the resultingpercentage surplus or deficit. While these figuresare only projections, they are approximately of theright magnitude. Overall, West European builderswill satisfy their own demand, although certaincountries such as Denmark, France, and Spainmight get more than their share of ships built. East-ern European builders also will build predominantlyfor their own demand, although yards in Polandand Romania can be expected to take a percentageof external orders. Japan and South Korea havecaptured the remaining market for foreign construc-tion.

These percentages may well change by the endof the century. But it is of interest to take the ton-nages from the SAJ forecast (fig. 14) and to dis-tribute them according to the market shares shownin table 4. This is depicted in table 5. Tonnagesproduced in 1975, the peak year, are shown forcomparison. The forecast tonnages for Japan andWestern Europe are considerably less than the ship-building capacity remaining in those areas aftertheir reductions in capacity of approximately 35percent since 1975.

The picture that emerges, therefore, is one of:

. increased de facto dependence on nat ion a]fleets (including vessels owned by nationals butsailing under another flag) as the basis of fu-ture new building orders;

Table 4.—Approximate Percentages ofthe World Orderbook

Percentage PercentagePercentage for national building

Country of total dwt fleets a surplusJapan . . . . . . . . . . . . 40 ”/0 320/o 80/0 -

South Korea. . . . . . . 9 3 6China. . . . . . . . . . . . . 3 3 —Taiwan . . . . . . . . . . . 2 2 —AWES members . . . 23 23 —United States. . . . . . 1 2 - 1Eastern Bloc . . . . . . 20 18 2Other. . . . . . . . . . . . . 2 17 -15

Total . . . . . . . . . . . 100 100 0aAS per Count~ of domlcjle of owner (I e, not by registered f~a9)

SOURCE “Fairplay” World Ships on Order, October 1982

Table 5.—Comparison of Shipbuilding ForecastTonnages a and 1975 Production

for Selected Countries

1975b 1985C 1990’Country product ion forecast forecast

Japan . . . . . . . . . . . . . . . . . 17.0 5.6 9.9South Korea. . . . . . . . . . . . 0,4 1.3 2.2Taiwan . . . . . . . . . . . . . . . . N e g l i g i b l e 0 . 3 0.5AWES members . . . . . . . . 12.9 3.2 5.7United States. . . . . . . . . . . 0.5 0.1 0.2China . . . . . . . . . . . . . . . . . (d) 0.4 0.7Eastern Bloc . . . . . . . . . . . (d) 2.8 4.9aTonnages expressed In milllons of 9flbLloyds RegisterCSAJ Forecast‘Figures not available individually

. a much smaller international ‘ ‘open marketfor new buildings, in which the principal pro-tagonists are Japan and South Korea;

. many developing countries building up ormaintaining existing shipbuilding industriesspecifically to cater to local demand;

. continuing emphasis among the AWES na-tions, Japan and also Korea on:— diversification into allied sectors as a means

of creating work,— technological development, both of the \’es-

sels themselves and in the way they arebuilt, as a means of improving competitive-ness; and

. some further reductions in capacity (particu -larly among AWES countries) but much lesson average than has been seen over the 1975-82 period.

Most of the established shipbuilding nations ofthe world accept the need for the industry to con-tract further, but do not want to contract furtherthemselves. The Japanese need to maintain some40 percent of the world new building market in thefuture if they are to maintain reasonable employ-ment in their yards. South Korea is expanding andwill need to attain 10 percent of world output. Thisthey will probably succeed in doing since their pro-ductivity is rising faster than their costs.

China and Taiwan are unlikely to be in the mar-ket for foreign orders in any major way, but bykeeping their yards occupied with domestic orders,they will still have the capacity and capability totake foreign orders whenever the upturn in ordersshould occur. Improving productivity and low costswill make them competitive.

23-417 0 - 83 - 4 QL 3

42 ● An Assessment of Maritime Trade and Technology———

WORLD ECONOMIC AND TRADEOUTLOOK 1982-2000

Introduction

In order to assess the “long-run” outlook forshipping, OTA asked Wharton Econometrics, Inc.,to prepare an outlook for world trade through theyear 2000. It is presented because any analysis ofthe future of shipping or shipbuilding must con-sider the directions world trade will take. Trade isdependent on economic growth, and the demandfor ships is derived from trade. It is important to

note that any forecast that attempts to predict eventsmany or even several years ahead is subject to er-

ror. This forecast assumes no major surprises.

Based largely on their world econometric model,Wharton prepares 10-year world economic outlookscovering some 27 countries and regions, forecastingparameters such as gross domestic product (GDP),inflation, and unemployment. For purposes of thisstudy, Wharton’s 1982-92 outlook was extrapolatedto the year 2000. Using this baseline outlook, dy-namic trade-flow matrices, which ensure globalconsistency, were used to generate annual bilateraltrade flows in value terms for all countries and re-gions in the system, for all years of the forecast forthree merchandise groups: bulk commodities, fuels,and manufactured goods. The units of measure arebased on value converted to dollars for all coun-tries. These, in turn, are adjusted in order togenerate constant-dollar measures (in 1975 dollars)of the volume of exports and imports. At this point,the bilateral trade flows in constant-dollar volumeterms are converted to bilateral maritime trade ton-nages by application of conversion equations de-veloped econometrically on the basis of U.S. Bu-reau of Census, OECD, and U. N. trade data ontotal maritime trade tonnages by category. In ad-dition, corrections were made to eliminate non-maritime trade flows and to shift coal tonnage fromfuels to bulk commodities. Thus, the final productis an overall projection to 2000 of world waterbornetrade flows broken into dry-bulk, liquid-bulk, andgeneral cargo sectors.

Economic Forecast

The economic outlook developed by Wharton ispresented in two parts: the near-term outlook, 1982to 1987, derived from Wharton’s December 1982World Economic Outlook, and the long-term out-look, derived from Wharton’ January Long-TermWor/d Economic Outlook 1987-92, with extrapola-tion of key indicators to 2000. Tables 6 and 7 sum-marize the assumptions and major trends predictedfor parameters relevant to this study.

Near- and long-term projections of growth ofGDP for selected countries and regions are shownin table 8. The basic economic outlook based onthis projection for the 5 years, 1982-87, is for con-

Table 6.—World Economic Outlook, 1982-87

Forecast:World economic growth will average 3.2 percent from 1983to 1987. U.S. economic growth will average 3.4 percent after-1.6 percent in 1982.Unemployment rates will fall slowly from their postwarhistorical highs.Inflation will moderate worldwide.Balance-af-payments problems of developing countries willpersist because of high real interests costs on their ac-cumulated debts and sluggish growth in the developedcountries.Economic growth in the oil- and nonoil-exporting LDCS willbe constrained by balance-of-payments problems andretarded demand for their exports. The major bright spotin the developing world will be the newly industrializingcountries of the Pacific Basin.a

Assumptions:●

●

●

●

Real “fuel- and nonfuel-commodity prices will decline in1982 through 1985 or 1986, respectively, reflecting slowworld growth.Monetary policies will be moderately restrictive, resultingin high real interest rates that will retard investment as wellas inflation.Fiscal policies will not be stimulative as governments at-tempt to bring large fiscal deficits under control.High unemployment and lack of flexibility to use monetaryand fiscal policies will encourage more protectionism inthe developed countries, slowing world trade growth, es-pecially manufactured goods.

what Is, the Phillipines, Taiwan, Singapore.

SOURCE: Office of Technology Assessment.

Ch. 2—World Trade and Shipping 4 3—

Table 7.—World Economic Outlook, 1987”2000

Forecast:World economic growth will average 3.0 percent with U.S.growth averaging 2.8 percent.Unemployment rates will decline slowly but will remain dis-couragingly high, encouraging protectionism. Mismatchesof jobs available in growth industries and skills of unem-ployed will persist, encouraging more artificial employ-ment-creating techniques.Lower growth of real and nominal wages will lower infla-tion.Labor force growth will moderate due to lower participa-tion rates (discouraged workers) and demographic factors.Regeneration of depleted capital stocks will promote rel.atively faster growth in Japan, but in Europe the existingcapital stock will not be quickly regenerated because oflow rates of return and low competitiveness with newly in-dustrializing countries.Real interest rates will tend to decline to historical averagesof 2 to 3 percent.Pacific Basin developing countries will continue their rel-ative rapid growth. Latin American countries will showmuch slower growth compared with the 1970’s.

Assumptions:. Real fuel- and nonfuel-commodity prices will rise relative

to manufactured goods prices.● Monetary policies will be moderate, permitting money

stocks to grow in line with nominal GDP growth.● Fiscal policies will continue to be nonstimulative as the

importance of Government spending declines because ofdemographics and public policy.

SOURCE: Office of Technology Assessment.

tinuing setbacks to sustained recovery in the UnitedStates, Europe, Japan, and Canada. The most sig-nificant feature is the projected weakness of growthin Europe and Japan compared with the 1960’s andearly 1970s. The delays in Japan and, particular-ly, Canada are related to the sluggish U.S. perform-ance, but more general causes are the effects of per-sistently high real interest rates, especially in Europeand Canada, and the continued pessimism amonginvestors and consumers, reinforced by higher un-

Table 8.–Growth of Real GDP

employment rates. Also, a significant part of thegrowth of the developed countries in the 1970’s wasdue to exports to the developing countries and tothe centrally planned economies (CPES). Importretardation or restriction by the LDCS and selectedCPES, as they seek to correct their external ac-counts, will diminish this impetus from abroad.

Forecast economic growth beyond 1987 actual-ly is slower overall than predicted for the previous4 years. In part, this is because the 1983-87 growthrates appear higher due to the trough-to-peak prob-lem of using 1983 as the initial year, when mostcountries are at a lower-than-trend rate of growth.However, the more fundamental causes include therelative changes in capital formation, labor forcedynamics, and labor productivity.

This extrapolation may be pessimistic given thelong period of sluggish growth in the 1980’s. By1992, a buildup of corrective forces could begenerated by a general recognition that inflationwas under control and structural adjustments in oldindustries generally were completed. Capital stockswould have to be replenished, and new industrieswould be burgeoning. However, for some purposes,a conservative outlook may be the most prudent,given the tendencies of the maritime industry tooveranticipate periods of recovery,

Outlook for Trade Flows, 1982-2000

Using the model, Wharton has forecast totaltrade flows (including nonmaritime trade) in threemajor commodity groups: fuels (including coal),nonfuel commodities, and manufactured goods.

(annual average compound growth rate)

Recovery Moderate growth1960-73 1973-83 1983-87 1987-2000

World. ... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 2.6 3.3 3.1Developed countries. . . . . . . . . . . . . . . . . . . . 5.0 2.1 3.1 2.7

United States . . . . . . . . . . . . . . . . . . . . . . . . 4.1 1.9 3.5 2.8Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 3.4 3.3 2.7Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 1.8 2.6 2.4West Germany . . . . . . . . , . . . . . . , ... , . . . 4.5 1.5 1,9 2.0

Developing countries . . . . . . . . . . . . . . . . . . . 6.3 3.6 4.6 4.6Oil-exporting . . . . . . . . . . . . . . . . . . . . . . . . 8.2 1.6 4.9 4.3Oil-importing . . . . . . . . . . . . . . . . . . . . . . . . 5.5 4.3 4.6 4.8

Centrally planned economies . . . . . . . . . . . . 7,2 4.0 2.9 3.0SOURCE: Off Ice of Technology Assessment.


Past and predicted average compound-growthrates for world exports are shown in table 9. Forcomparison, GDP growth rates for comparable pe-riods have been included. Following the trend ingrowth of world GDP, world trade is predicted toexpand faster after 1985 than during the currentperiod. For the world as a whole, trade in manufac-tured goods is expected to regain its traditional posi-tion as the fastest growing sector. Growth in tradein nonfuel commodities remains level. We shouldnote especially that growth in trade in fuels picksup after a ‘‘reconstruction’ period, when the move-ment to conserve fuel relative to GDP growth, dueto the dramatic upward shifts of energy prices inthe 1970’s, has run its course.

The trends and predictions for bilateral tradeflows include several shifts with ramifications forthe shipping industry. The changing pattern of fuelstrade among countries and regions has alreadycaused major dislocations in the bulk-shipping sec-tors. The first and second oil shocks, emanatinginitially from the Organization of Petroleum Ex-porting Countries (OPEC) members among the de-veloping countries, led to efforts by the developedcountries to reduce fuel imports and to increasetheir own exports of fuels. This was manifested inthe shipping industry by the well-known glut of oiltankers and the strenuous efforts to move coal bydry-bulk carriers across the oceans—the latter tradehad been declining steadily. The share of volumeof trade in fuels shifted dramatically from the de-veloping to the developed countries as relative pricesshifted.

The other major shift of note in the trade outlookis the change in the status ofJapan. Wharton’s pro-jection shows only average growth for Japan as herperiod of rapid industrialization fades and ahigh-technology, more consumer-oriented society

Table 9.—Average Compound Growth Rates for WorldTrade Exports and GDP

1975-80 1980-85 1985-90 1990-2000World trade (exports):

Total . . . . . . . . . . . . . 5.7 3.1 4.7 5.0Nonfuel , , . . . . . . . . 5.7 4.0 3.9 3.9Fuel . . . . . . . . . . . . . 1.6 -0.2 3.4 4.0Manufactured

goods . . . . . . . . . . 6.8 3.6 5.2 5.5World GDP. . . . . . . . . . 3.8 2.2 3.0 3.1SOURCE: Office of Technology Assessment.

emerges. Accordingly, after the export drives thatwere evident until 1981, import growth is expectedto overtake export growth in the 1985-90 period.Market forces and the threat of protectionism willopen Japan’s manufactured-goods marketplace tonew competition, especially from the newly indus-trializing nations of the Pacific Basin. Indeed, Japancould be an engine of growth for all southeast Asiaanalogous to the role played by the United Statesvis-a-vis all developing nations. The developingcountries of the Pacific Basin region thereby couldhave two sources of export growth—the UnitedStates and Japan —and thus grow faster than otherdeveloping areas.

A shift toward the Orient could mean a declinein the relative importance of trade with Europe—and what trade would remain could become region-al rather than intercontinental. European-basedsources of energy, including the U.S.S.R. alsocould lower the importance of oil shipping. Non-fuel-commodities growth would not take up theslack. This, coupled with the relative slowdown ofU.S. nonfuel-cornmodities-imports growth, wouldlower the relative importance of the dry- and liquid-bulk Atlantic trades between 1987 and 1992, com-pared with the fairly vigorous growth during the1973-79 period. The glut of shipping in Atlanticbulk trades today is a harbinger of these trends.

Outlook for Seaborne Trade

World Trade Patterns

This section summarizes Wharton’s projectionsof bilateral maritime trade flows between countriesor regions to 2000. The total tonnages shipped orprojected to be shipped from 1975 to 2000 in theliquid-bulk, dry-bulk, and general cargo categoriesare shown in figure 15. * Between 1985 and 2000,the fastest growth is projected to be in general cargotrade with the slowest growth in liquid-bulk ship-ments. As a result of these differing rates, liquid-bulk, which represented the largest share of totaltrade in 1975 and 1980 (45 and 40 percent, respec-tively), in this forecast would account for only 28percent in 2000. The volume of trade in both dry-

*In this section, data for liquid-bulk include only petroleum andpetroleum products. However, other liquid-bulk cargoes, such as chem-icals and liquefied natural gas, account for such a small fraction ofthe total that this approximation is appropriate for forecasting purposes.


Figure 15.—World Seaborne TradeLiquid-bulk Dry-bulk General cargo

n = -

8 . 0 0 0 ~

7,000

6,000

‘ 15,000,

4,000

3,000

2,000

1 ,(XM

M,?

o1975 1980

Year

900

800

700

600

30C

20(

10(

bulk and general cargo is projected to exceed thatin liquid-bulk by 1990.

In the dry-bulk sector (fig. 16)* expanding ex-ports of coal from the United States, and of subsi-dized agricultural products from Europe, are ex-pected to increase the shares of export trade fromthese regions. The shares of the traditional com-modity suppliers in the developing world, (i. e.,Africa and Latin America) correspondingly decline.

● For figs. 16 through 21, showing regional distribution of worldseaborne trade, Oceania and Asia includes Australia, New Zealand,Afghanistan, and Pakistan to Thailand and south, plus South Korea,Taiwan, and Hong Kong and the Asian CPES. Europe includes theBritish Is]es, Mediterranean, and Northern Europe, and the Euro-

pean CPES.

Figure 16.—World Seaborne Dry-Bulk Exports, Regional Distribution

(1975 1980 1985 I Y Y U 1 *ad

Year

SOURCE: Wharton Econometrics, Inc


These trends for the developing world are to be ex-pected as market forces, as well as public policy,shift these economies away from being traditionalagricultural- and mineral-commodities suppliersand toward industrialization with growing exportsof manufactured goods. This generalization is trueespecially of South Asia, whose share of generalcargo will be seen to grow even faster than its bulk-commodity share.

For shipborne imports of dry-bulk goods (fig.17), there are few surprises given the economic out-look for rapid growth in South Asia and the indus-trialization pace of developing countries in general.Thus, their own production of dry-bulk commod-ities is projected to become either less importantor more devoted to serving their own internal de-velopment. Hence, they will tend to import moreand export relatively less of this cargo. Shares of

dry-bulk imports in Europe and the United Statesare expected to decline.

In liquid-bulk exports (fig. 18), this outlook sug-gests that the Middle East share will decline to 1985due to generalized world recession, the oil glut’seffects on Persian Gulf suppliers’ shares, and theculmination of major non-OPEC oil and gas sub-stitution efforts involving Mexico, the U. S. S. R.,the United Kingdom, and the Alaskan slope. Inspite of this decline, however, the Middle East willcontinue to dominate world petroleum exports withover 50 percent of the trade. After 1985, the Mid-dle East share is expected to stabilize, as worldenergy conservation slows and Middle East petro-leum product shares grow based on the industrydevelopments in the early 1980’s. Latin Americaand Africa appear to remain the major secondarypetroleum exporting regions, with Latin America

Figure 17.-Worid Seaborne Dry-Bulk Imports, Regional Distribution

1975 1980 1985 1990 1995 2000Year

SOURCE: Wharton Econometrics, Inc.


Figure 18.—World Seaborne Liquid-Bulk Exports, Regional Distribution

1,400

1,200

1,oo0

400

200

n“ 1975 1980 1985 1990 1995 2000

YearSOURCE: Wharton Econometrics, inc.

overtaking Africa after 1985. This forecast assumes,of course, that the real price of energy falls until1985 and rises modestly thereafter. It also implicitlyassumes no significant Middle-East supply inter-ruptions and steady use of new supplies from thenon-OPEC world.

Imports of liquid-bulk (primarily petroleum) car-goes are more evenly distributed than exports, andsome shifts are expected over the next two decades,as seen in figure 19. South Asia’s share is likely to

grow very rapidly, shown here as doubling between1980 and 2000. U.S. and, particularly, Europeanshares decline. Japan, due to its large dependencyon oil with few alternatives that could be landborne,as is the case for the United States (coal, gaspipelines) and Europe (gas pipelines from the

U.S.S.R.), is expected to have an increasing shareof petroleum imports.

The pattern of relatively high growth of SouthAsian trade is repeated for exports of general cargo,as seen in figure 20. The newly industrializingcountries of South Asia are joined in growth by theindustrializing countries of Mediterranean Europe.The U.S. share declines. In this outlook, NorthernEurope’s share is level to 1990, and thereafter fallsswiftly. Such a projection is based on combinedassumptions of a more realistically valued U.S.dollar, tired European industries, growing intra-Europe trade with the Mediterranean and CPEcountries, and structural shifts toward service in-dustries that make Northern European countriesthe leading examples of postindustrial societies.


Figure 19.—Worid Seaborne Liquid-Buik imports, Regionai Distribution1

1

1

co. -=. -Z

“ 1975 1980 1985 1990 1995 2000Year


Imports of general cargo are more evenly dis-tributed than the other commodities (fig. 21). Whileno dramatic shifts are predicted in this growingtrade, the largest increases by 2000 are anticipatedin the shares going to Japan and South Asia.

In summary, for the particular Wharton base-case-economic outlook discussed at the beginningof this section, world seaborne-trade tonnages arepredicted to grow by compound rates of 3.9, 1.6,and 5.4 percent for dry-bulk, liquid-bulk, andgeneral cargo, respectively, from 1980 to 2000.Economic growth and industrialization in SouthAsia is reflected in rapidly growing shares of im-ports, especially in exports of general cargo, andin expansion of liquid-bulk imports. In the dry-bulktrades, U.S. and European shares of exports areexpected to increase while shares of imports decline.

U.S. Trade Patterns and Networks

The total tonnages of U.S. seaborne trade in thethree commodity sectors from 1975 projected to2000 are shown in figure 22, including both im-ports and exports. In 1980 the greatest tonnageswere in imports of petroleum and dry-bulk exports.Due to current and projected low growth rates forthe oil trade, it is far outstripped by exports of dry-bulk cargoes as the largest sector in this forecast.The trends in dry-bulk imports contrast with theother trades. Between 1975 and 1980 dry-bulk im-ports declined while the other sectors were expand-ing. While the outlook indicates that growth in allother trades is lower currently (1980-85) than dur-ing the previous 5 years or projected to 2000, dry-bulk imports are shown to have their best growthduring the current interval. The dry-bulk sector as


Figure 20.—World Seaborne Generai Cargo Exports, Regionai Distribution

1,600

1,400

1,200

1,000ma)c~~ 8000.-=.-2

600

400

200

0

409”

/“”0“”

0“”/“”

-“’#

Europe 0 “ ”

L

0 “ ’/ “

A “ ”

● ./’”e

1975 1980 1985


a whole would grow from 49 to 59 percent of thetotal U.S. maritime trade between 1980 and 2000,while liquid-bulk would decline from 40 to 28 per-cent.

Overall, the forecast predicts that from 1980 to2000 U.S. shipborne exports of dry-bulk, liquid-bulk, and general cargo will grow 4.4,6.4, and 3.9percent per annum, respectively. U.S. imports ofthe same cargo types are projected to grow at 2.4,0.9, and 3.7 percent, respectively.

Figures 23 through 25* show the current andforecast geographical distribution of seaborne tradeof the United States derived from the data createdby Wharton.

1990 1995 2000Year

In the dry-bulk category, exports to LDCS growsteadily as a share. Among the developing areas,South Asia’s share expands most rapidly. The coaltrade with Europe grows, but the grain trade ap-pears to decline, lowering the share of dry-bulktrade to that region overall. Almost no growth oc-curs in the volume of dry-bulk exports to Europeuntil after 1985.

For U.S. imports, this outlook shows Africa’sand Latin America’s dry-bulk shares progressive-ly declining as industrialization catches up withtheir interest in commodity exports. Europe’s shareof our dry-bulk imports appears to increase between1980 and 1985 due to the strong dollar problem aswell as their new strength in agricultural goods.

● For 23 through 25, showing the regional distribution of U.S.seabome trade, the regions are the same as for the world figures,except that Japan has been included in the Asian region.

In the small U.S. liquid-bulk (petroleum) exporttrade, the major projection is for a jump in the

50 ● An Assessment of Marjtjme Trade and Technology

Figure 21.— World Seaborne General-Cargo Imports, Regionai Distribution1

1

1

1

.— - ---- ---1975 IYWJ 1985


Figure 22.— U.S. Seaborne Trade

,—— -

1,4001- m

1al:10

c0.-=s

,Ooot

800t

600

400

200

0u1975 1980 1985 1990 1995 2000

Year

m General cargoLiquid-bulk

Dry-bulk

SOURCE: Wharton Econometric Forecaatlng Associates.

1990 1995 2000Year

shares going to Japan and South Asia showing upin 1985, associated with petroleum developmentsin Alaska.

In the fuels-import trade, it is anticipated thatLatin American, African, and Middle Easternsources decline significantly while imports fromEurope increase between 1980 and 1985. Beyond1985, growth is likely in imports from each of thoseregions. The rate of growth in European importsis projected to slow.

In the general cargo trade, exports in the cur-rent period remain level or decline slightly. There-after, there are significant projected increases in vol-ume to Europe, Asia, and Japan.

U.S. general cargo imports tend to follow worldexport share developments. The South Asia regionis expected to displace all others after 1990 toemerge by 2000 as the most important supplier,supplanting Japan and Europe.


Figure 23.—U.S. Seaborne Dry-Buik Trade, Regionai Distribution

400

350

300

250u):c: 2 0 00.-=.-x

150

100

50

0

- - . / .

I A M l

1975 1980 1985 1990 1995 2000

Year


Figure 24.—Seaborne Liquid-.Buik Trade, Regionai Distribution---

1975 1980 1985 1990 1995 2000

YearSOURCE: Wharton Econometrics, Inc.

52 . An Assessment Of Maritime Trade and Technology-—

Figure 25.—U.S. Seaborne General Cargo Trade, Regional Distribution

i975 1980 1985 1990 1995 2(

YearSOURCE: Wharton Econometrics, Inc.

)00

IMPLICATIONS OF THE TRADE OUTLOOKFOR U.S. SHIPPING

There are several risks inherent in attemptingto project from an economic forecast potential op-portunities for U.S.-flag shipping. First, the forecastitself may not have anticipated certain major events.Second, if it is accurate, while a demand for shipswill be created by an increase in trade, that doesnot necessarily mean an increase in U.S.-flag ship-ping. U.S. carriers must be competitive if they areto capture a meaningful share of U.S trade. Cur-rently they maintain such a share only in liner

trades; the U.S.-flag liquid- and dry-bulk fleetsalmost are nonexistent in foreign trade.

Assuming that U.S.-flag ships will carry a sub-stantial share of the projected trade, opportunitiesshould exist both in the general cargo and dry-bulksectors. U.S. dry-bulk trade will rise from 49 to 59percent of all U.S. seaborne trade. The current glutof tonnage on the world market should disappearwithin several years. U.S. trade with developing

Ch. 2—World Trade and Shipping . 53—

countries will rise, particularly in the South Asiaregion. Ships clearly will be required. However,the real question is whether U.S.-flag carriers willbegin to share in the carriage of our dry-bulk trade.It is unlikely that this will occur without major com-petitive or policy changes.

In the liquid-bulk sector, few opportunities willexist. Trade will rise only moderately through 2000,and the already overtonnaged market is expectedto continue for the foreseeable future. Here, as inthe dry-bulk markets, the U.S.-flag fleet has beenunsuccessful in capturing more than a tiny fractionof U.S. trade in the past.

Future trade growth in the general cargo areacould be significant. U.S. exports over the longterm are expected to increase to Europe, Asia, andJapan, while South Asia will predominate in theU.S. import trade. Replacements will be neededfor older, inefficient U.S.-flag liner vessels, and newcapacity will be needed. However, this may nottranslate into substantial additional numbers of newships because the newer generation of containerships are massive, suited for high-capacity service.

Liner operators will need to restructure their fleetsto accommodate the shifting trading patterns.

Finally, long-term trade projections only are use-ful in a policy sense if they are used as one of thetools in anticipating future needs and opportunities.When major policy changes are proposed, as theyhave been recently, it is important to determine ifthe policies are addressing future situations clear-ly. Forecasting is very difficult, but it is also verynecessary for informed action. The developmentof maritime policy would be enhanced by accessto current trade forecasts that take into account acoherent global view of trading relationships andthat are simple and flexible enough to be continuallymatched to changing conditions in the world andin the United States. At present, the Federal Gov-ernment does not maintain accurate and currentmaritime trade data and forecasts. The U.S. Gov-ernment collects and stores monumental quantitiesof commodity import and export data, but to ob-tain information relevant to world trade and ship-ping, we must rely on such countries as Norwayand the United Kingdom for timely, quality sta-tistics and analyses.

. .- ’.%

..’

Contents

Page

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 57

The U.S. Liner Industry(in International Trade) . . . . . . . . . . . . 59

Liner Trades . . . . . . . . . . . . . . . . . . . . . . . . . . 59The Liner Fleet . . . . . . . . . . . . . . . . . . . . . . . 61U.S. Liner Shares . . . . . . . . . . . . . . . . . . . . . 61Technological Developments . . . . . . . . . . . . . 61Cost, Productivity, and Competitiveness . . 65Influence of Cargo Preference . . . . . . . . . . . 67Conferences, Pooling, and Cooperatives. . . 68Pricing, Rates, and Shippers’ Councils . . . 71Future Competitiveness of U.S.

Liner Fleet . . . . . . . . . . . . . . . . . . . . . . . . . 72

TheU.S. Bulk Fleet in Foreign Trades . 73

The U.S. Domestic Fleet . . . . . . . . . . . . . 76The Domestic Tanker Trades . . . . . . . . . . . 77Regulation of Domestic Liner Trades . . . . . 79Use of Foreign-Built Ships in Domestic

Trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Technological Developments . . . . . . . . . . . . . 80

The Future U.S.-Flag Fleet . . . . . . . . . . . 81

TABLES

Table No. Page

lo.

11.

12.

13.14.

15.

U.S. -Flag Privately Owned MerchantFleet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.Age Distribution U.S.-FlagPrivately Owned Fleet . . . . . . . . . . . . . . 58The U.S. Effective-Control Fleetas of December 1982 . . . . . . . . . . . . . . . . 58U. S.-Flag Liner Fleet, July 1983 . . . . . 59U.S.-Flag Liner Shares, Total U.S.Trade Volumes, and LT. S.-FlagTon-Miles Carried . . . . . . . . . . . . . . . . . 60Major U.S.-Foreign Trade Routesfor Containerized Cargo, 1980 . . . . . . . 60

16.

17.

18

19.

20.

21.

22.

23.24.

25,

26.

Financial Data for U.S.-FlagLiner Companies Engaged inForeign Trade . . . . . . . . . . . . . . . . . . . . . 65U.S.-Flag Liner Companies inForeign Trades: Summary ofFinancial Results, 1980 -83 . . . . . . . . . . . 65Productivity Comparison of U.S.Privately Owned General Cargo Fleet,Annual Maximum Deadweight Ton-Mile Capacity per Year . . . . . . . . . . . . . 67Importance to Liner Vessels ofCarriage of GovernmentPreference Cargoes . . . . . . . . . . . . . . . . . 68Hypothetical Profit Impact ofU.S.-Flag Preference Cargo onContainership Operations . . . . . . . . . . . . 68Cooperation Forms Practiced byLiner Operators . . . . . . . . . . . . . . . . . . . . 70Typical U. S.- and Foreign-shipConstruction Costs-1982 . . . . . . . . . . . 74CDS-Built Tanker Fleet . . . . . . . . . . . . . 74U.S. Dry-Bulk Carriers inInternational Trade . . . . . . . . . . . . . . . . . 75U.S. Dry-Bulk Export andImport Trades . . . . . . . . . . . . . . . . . . . . . 76Active U.S. Flag Domestic Fleetas of May 1, 1983 . . . . . . . . . . . . . . . . . . 77

FIGURES

F’igure No. Page

26.

27.

28.

Relative Costs for Crew for aTypical Containership OperatingUnder Various Flags . . . . . . . . . . . . . . . . 66Gulf.-East Coast TankerMovements . . . . . . . . . . , . . . . . . . . . . . . . 77Industry Outlook for theAlaskan Tanker Trade . . . . . . . . . . . . . . 79

Chapter 3

The U.S. Shipping Industry

OVERVIEW

The U.S. shipping industry consists of at leasttwo clearly separate business sectors: liner and bulk.Liner companies operate containerships, roll-onroll-off (RO/RO) ships and other general cargoships in a regular scheduled service carrying diversecargoes from port to port at set rates, much likea railroad or trucking operation. The largest andmost prominent liner companies are engaged in-creasingly in cargo transportation between inlandlocations in which ships serve only as links in anoverall transport system. The bulk-shipping busi-ness usually handles large tonnages of single com-modities by operating one or a fleet of ships espe-c i all y designed for one cargo. Bulk companiesinclude shipping departments of major petroleumcorporations who operate tanker fleets, as well asindependent bulk ship operators, who may operatetankers, dry-bulk carriers (ore, coal, grain), andcombination ships (under various long- and short-term leases or charters) in the bulk and ‘‘neobulk’trades. (Neobulk is a term that describes move-ments of various cargoes in shipload lots—e. g.,lumber, cars, or steel). Bulk and liner businessesoften have very different problems and businessoutlooks, and the effectiveness of Government pol-icies may depend on how well they reflect thosedifferences. * This chapter is therefore divided intoseparate discussions of these two business sectors.

The U.S. shipping industry is also divided byflag of operation, as well as into international anddomestic trades. The U.S. merchant fleet is usuallyconsidered to consist of U. S. -flag privately owned,self-propelled vessels of over 1,000 gross tons. Thisdefinition excludes inland waterway barge systems,small ships, and most service craft such as fishingboats, pleasure boats, or crew boats. It includespractically all U.S. -flag ships engaged in interna-

● %mc anal)sts hay(’ d<s( ribrd these two business xc t{)r~ as ‘‘com-m(:n carriers and ‘‘c ont rac I c arrim’ rathrr than 1 incr and bulk.Such terms ma) more ( learly clcnotc the dlffcrcnces in (hc businessesrather than the kind of ( ar~() ( arried. It is also of interest to note rhediffcrcn( e in growth ratc~ of thcs[ two husincss sectors and [h< (llffcr-encc I n effect i~cncss of Federal pol ir ies on t hcm.

tional trade and the major ships in the domesticcoastal and offshore (i. e., Hawaii, Alaska, PuertoRico) trades.

One could extend a definition of the U.S. ship-ping industry to include the fleets owned by U.S.corporations but registered in other countries. Thatfleet-consisting principally of’ tankers and dry-bulkcarriers—is significant by any standards. About 36percent of the Liberian-flag fleet and 17 percent ofthe Panamanian-flag fleet is ‘ ‘beneficially owned’by U.S. companies. *

The term used to describe the merchant shipsregistered in Liberia and similar countries is ‘‘flag-of-convenience fleet. The term reflects the easeof registration and minimum taxes and regulationsprevalent in those countries. The shipowners havethe flexibility to use crews of any nationality, to con-struct the ships in any country, and to operate out-side the framework of their own national laws andregulations. The shipowners themselves, prefer touse the term ‘ ‘flags of necessity’ for these fleets,reflecting the view that economics dictates the useof such flags where businesses can operate at com-petitive costs.

The term often given the U.S. flag-of-conven-ience fleet is the ‘‘U.S. effective-control’ fleet. Themajor petroleum and other U.S. corporations thatown this fleet contend that because it is U. S.-owned, it is effectively under U.S. control and canbe considered as part of the U.S. fleet, especiallyin times of national emergency. Although pro-visions to make this fleet available under emergen-cies are in effect through agreements between in-dustry and Government and between U.S. and for-eign governments, we will not in this report definethe U.S. merchant marine to include this fleet. We

——— —. ———“Based on data compiled by A & P Appledore, Inc. for the Unit(’d

N a t i o n s C o n f e r e n c e o n Trade and De\clopment (UNCTAD)!Nx-retariat in 1981. ‘‘Benefrciall) owned’ is defined as designatingthe owner who recei~’es the benefits or profits from the operation.

57

25-417 0 - 83 - 5 QL 3

58 ● An Assessment of Maritime Trade and Technology———— —-— —.—. —

will, however, in this chapter present some data onthis fleet.

Table 10 lists vessels in the U.S.-flag merchantfleet by type of ships. Table 11 shows the age dis-tribution of these vessels. Of this total fleet, the U.S.liner fleet is the predominant sector in internationaltrade. Certain ships in international trade are eligi-ble for a variety of Government subsidies (discussedin ch. 6) intended to allow them to compete withlower cost foreign-flag ships. Most liner companiesbelong to steamship conferences (discussed later inthis chapter), which set rates and generally establishrules or cooperative operating agreements for theirmembers. The U.S.-flag tanker and dry-bulk fleetsdominate the domestic trades. Table 12 lists theships which are owned by U.S. companies and reg-istered under foreign flags (the U.S. effective-control fleet). The total tonnage is about twice theU.S.-flag fleet; 85 percent of the tonnage is intankers and most of the remainder is in dry-bulkand combination-bulk carriers.

The domestic trade U.S.-flag fleet operates underentirely different circumstances than the foreign-trade fleet. By law, all domestic waterborne trademust be carried by U.S.-built, U.S.-flag ships.

Table 10.—U.S.-Flag Privately Owned Merchant Fleet(oceangoing ships 1,000 gross tons and over

as of Jan. 1, 1983)

Number of Deadweightships tons

General cargo . . . . . . . . . . . . . . . . . 240 4,312,153Breakbulk/partial container. . . . 104 1,404,688Containership . . . . . . . . . . . . . . . 97 1,868,274RO/RO—vehicle carriers . . . . . . 18 274,043Barge carriers . . . . . . . . . . . . . . . 21 765,148

Bulk cargo . . . . . . . . . . . . . . . . . . . . 18 618,018Tankers . . . . . . . . . . . . . . . . . . . . . . 233 14,220,469Special products/liquefied

natural gas (LNG) . . . . . . . . . . . . 33 1,601,551Other (coastal, passenger) . . . . . . 17 110,396

Total . . . . . . . . . . . . . . . . . . . . . . . 541 20,862,587SOURCE: “Ship Register,” Military Sealift Command, Department of the Navy,

Washington, D. C., January 1983.

There is no foreign competition and no direct gov-ernment subsidy. However, the ships and bargesmust compete with other modes of transportation(unless they engage in offshore trades, i.e., Hawaii,Puerto Rico) —pipelines, truck, and rail predomi-nantly, and the domestic markets are open to poten-tial new competitors. The following discussions ofthe foreign and domestic U.S. -flag fleet will exam-ine the important aspects of each and note the domi-nant trends for both liner and bulk operations.

Table il.—Age Distribution U. S..Flag Privately Owned Fleet (Jan. 1, 1983)

Total Under 5 5-9 10-14 15-19 20-24 25 yearsships years “ years years years years and over

Total all ships . . . . . . . . . . . . . . . . . . . . . . . . . . 541 59 72 81 70 93 161General cargo . . . . . . . . . . . . . . . . . . . . . . . . . . 240 24 18 48 56 54 40

Breakbulk/partial container . . . . . . . . . . . . . 104 1 7 45 47 3Containership . . . . . . . . . . . . . . . . . . . . . . . . 97 19 ; 22 9 7 37RO/RO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2 8 6 2 0 0Barge carriers . . . . . . . . . . . . . . . . . . . . . . . . 21 2 6 13 0 0 0

Buik cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4 3 2 0 1 8Tankers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 17 44 28 11 37 96Special products/LNG . . . . . . . . . . . . . . . . . . . 33 11 7 3 1 2 9Other (coastai, passenger) . . . . . . . . . . . . . . . 17 3 0 0 2 4 8sOuRCE: ‘Ship Register,” Military Sealift Command, Department of the Navyj Washington, D. C., January 19S3.

Table 12.—The U.S. Effective=ControI Fleet as of December 1982

Number 000 dwt Average 000 dwt

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .General cargo . . . . . . . . . . . . . . . . . . . . . . . . . .

Breakbulidreefer. . . . . . . . . . . . . . . . . . . . . .Containership . . . . . . . . . . . . . . . . . . . . . . . .RO/RO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Barge carriers . . . . . . . . . . . . . . . . . . . . . . . .

Bulk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .General bulk . . . . . . . . . . . . . . . . . . . . . . . . .Combination, ore/bulk/oil . . . . . . . . . . . . . .

Tanker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Special product/LNG . . . . . . . . . . . . . . . . . . . .Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46673521065

1067630

25927

1

47,221.8525.7334.4

25.535

130.86,466,63,537.92,928.7

39,426.7793.3

9.9

101.337.206.432.555.83

26.1661.0146.5597.62

152.2329.38

9.90SOURCE: Federation of American Controlled Shipping, March 1983.

Ch. 3–The U.S. Shipping industry . 59—

THE U.S. LINER INDUSTRY(IN INTERNATIONAL TRADE)

The U.S.-flag liner industry engaged in inter-national trade consists of 8 major ship-operatingfirms with fleets ranging from 3 to 46 vessels (seetable 13). The three largest firms own and operateover half of the total tonnage. Seven of the majorfirms operate their foreign trade ships under theU.S. Maritime Administration’s (MarAd) Oper-ating Differential Subsidy (ODS) program wherebya portion (up to 20 percent) of each operator’s costdifferential with foreign-flag ships operating on thesame trade route is covered by direct subsidies (seech. 6). One of the largest firms, Sea-Land, doesnot receive direct subsidies. U.S. liner trades haveincreased about 30 percent in tonnage over the pastdecade, while the U.S.-flag industry has remainedrather constant in tonnage capacity. However, thefleet has changed in character, improved its pro-ductivity, and moved toward offering intermodalservices.

During 1982 and continuing into 1983, the U.S.liner industry suffered substantially from the world-

Table 13.—U.S.-Flag

wide recession, and the overall cargo volume in keytrades shrank markedly. Industrywide losses wereposted for the first quarter of 1983 even with sub-sidies. This has left some companies in a difficultfinancial position—especially the smaller operators,who are not well capitalized. On the other hand,a few of the larger companies are aggressively ex-panding their services and building new, large con-tainerships to modernize their fleets.

Liner Trades

In the past two decades, U.S. liner cargo growthrates have averaged 2 to 3 percent per year. U.S.trade growth with Southeast Asia, at over 5 per-cent per year, has been particularly dramatic. Atthe same time, the mix of commodities has changedto much lower density cargo and thus, demand forshipping space has grown at a faster rate than cargotonnage.

Liner Fleet, July 1983

Number Grossof tonnage Percent share

Company ships (000) tonnage

Engaged In International trades:● U.S. Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Sea-Land Service, Inc.b. . . . . . . . . . . . . . . . . . . . . . . . . . . .● Lykes Brothers Steamship Co.. . . . . . . . . . . . . . . . . . . .● American President Lines. . . . . . . . . . . . . . . . . . . . . . . .● Delta Steamship Lines . . . . . . . . . . . . . . . . . . . . . . . . . .● Waterman Steamship Corp. . . . . . . . . . . . . . . . . . . . . . .● Farrell Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .● Prudential Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Engaged in domestic (offshore) trades:Matson Navigation Co. . . . . . . . . . . . . . . . . . . . . . . . . . . .Navieras de Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . .

37a

3646C

Z l d

z 4 e

l o f89

3

6 h

8’

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

708a

672558C

472~

319e256f1409

79

135fl131’

2213,691

19181513

9742

44

“These companies operate with Federal operating differantlal subeidles, which totaled over S350 million in fiscal year 1982.alncludes seven breakbulk ships on time charter to the Military Sealift Command (MSC) and six Partial containerships, total-

ing 70,000 gross registered tons (grt), operated by Moore McCormack Lines.bSea.Land participates In the domestic trades as Well as the International tr~es.clncludes nine vessels, totaling 99,700 gd, chartered to MSC.djncludes one vessel, of 15,949 grt, chartered to MSC.elncludes S~X ships on charter from Prudential Lines.flncludeS one ~sl+ vessel, of 28,487 ~~, chartered to MSC. _fhree LASH vessels in the Waterman fleet are on long-term charter

from Central Gulf Lines.glncludes two vessels, totaling FJ2,W() grt, chartered to MSC.hMatson haS two additional vessels, presently in indefinite laWP, tOtalin9 3%311 gniNavieraS owns three of the ships in their fleet and Charters the remaining five.

SOURCE: Telephone conversations with liner companies; Seatrade, U.S. Yearbook 19S2; US. Maritime Administration.


As can be seen in table 14, more than half of thetrade by volume is with Europe (including the Med-iterranean region), Japan, and South Korea. Thereis also significant trade with Central and SouthAmerica, Southeast Asia, the Middle East, andAfrica. In 1981, 84 billion ton-miles of liner car-riage was provided to and from these regions. Table15 illustrates the containerized cargo-shippingroutes by percentage of volume transported. Morethan one-third of the total in 1980 went from theUnited States west coast to Japan and one-fourthfrom the United States east coast to Europe.

The world trade outlook in chapter 2 indicatesthat U.S. trade volume probably will continue togrow throughout the rest of the century, albeit atslower rates than for the last 10 to 15 years. Tradewith developing countries, particularly in the FarEast, could grow at a higher rate than total trade.One major possible negative development wouldbe aggressive protectionism in the United Statesand abroad, particularly in the short run, as a re-sponse to the worldwide recession and to the seriousbalance-of-payments problems of many countries,especially oil-importing less developed countries(LDCS).

If a more moderate trade-growth rate does oc-cur, U, S. carriers will be forced to compete withrapidly growing foreign-flag fleets for the limitedcargo available and will need to continually increaseservice efficiency and capability. For example, theLDCS are now developing the infrastructure re-quired for containerization, and may also improvethe capabilities and efficiency of their fleets. It islikely that intermodal services will continue to ex-

Table 15.—Major U. S. ”Foreign Trade Routesfor Containerized Cargo, 1980

Percent of totalcontainerscarried in

Trade route and out

U.S. Pacific coast to Far East and Australia 38U.S. Atlantic coast to Europe

including Mediterranean) . . . . . . . . . . . . 29U.S. Atlantic coast to Far East and Australia 11U.S. gulf coast to Europe . . . . . . . . . . . . . . 5U.S. Atlantic coast to Caribbean

and South America . . . . . . . . . . . . . . . . . 5U.S. Pacific coast to Europe . . . . . . . . . . . 4U.S. gulf coast to Far East . . . . . . . . . . . . . 2U.S. gulf coast to Caribbean . . . . . . . . . . . 1All others. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5SOURCE: US. Maritime Administration, Containerized Cargo Statistics— 1980.

pand in all trades. This could lead to increased com-petition among those liner conferences that servethe same trades; e.g., the U.S. Pacific coast-to-Europe trade is served by both direct all-water car-riers and by using a combination of truck or railto cross the United States and ships to and fromU.S. Atlantic coast ports. But it may also offer op-portunities for those U.S. operators that are in theforefront of intermodal technology and manage-ment systems.

U.S.-flag operators can also benefit from the in-creased trade volumes, particularly in the Far Easttrade. Operators in the less developed trades—par-ticularly South America and Africa—may face de-clining trade volumes outbound from the UnitedStates in the near future, since the LDCS are like-ly to restrict imports to protect their balance-of-payments positions.

Table 14.—U.S.-Flag Liner Shares, Total U.S. Trade Volumes, and U. S. ”Flag Ton-Miles Carried

Total U.S. trade volumesU.S.-flag shares (roil LT)

1981U.S.-flag carriage

1967 (“/0) 1981 (“lo) 1981/1967 1967 1981 1981/1967 (billions of ton-miles)Japan and South Korea . . . . . . 11.8 21.9 1.86 10.22 11.03 1,08 14.3North Europe . . . . . . . . . . . . . . . 13.7 27.9 2.04 13.97 13.44 0.96 15.4Australia. . . . . . . . . . . . . . . . . . . 19.4 24.5 1.26 1.38 2.37 1.71 4.7Mediterranean . . . . . . . . . . . . . . 25.3 30.2 1,19 3.71 5.18 1.40 7.5Southeast Asia . . . . . . . . . . . . . 30.4 28.0 0.92 4.11 8.93 2.17 19.2Mideast/South Asia . . . . . . . . . 30.7 29.3 0.95 3.35 3.66 1.09 7.9Americas . . . . . . . . . . . . . . . . . . 32.6 30.9 0.95 7.68 9.24 1.20 9.9Africa . . . . . . . . . . . . . . . . . . . . . 51.0 26.8 0.53 2.28 3.66 1.61 5.1

Total . . . . . . . . . . . . . . . . . . . . 22.1 27.2 1.23 46.79 57.54 1.23 84.0SOURCE: Manalytics, Inc., “Assessment of Maritime Trade and Technology—Task on U.S. Shippingl” prepared for the Office of Technology Assessment, U.S. Con-

gress, December 1982.

Ch. 3—The U.S. Shipping Industry ● 6 1

The Liner Fleet

During the last decade, there has been a substan-tial transformation of the U.S.-flag general cargofleet, of which the foreign trade liner segment nowaccounts for approximately 75 percent. The fleethas changed from mostly small multipurpose gen-eral cargo carriers to mostly large special-purposecontainerships. Between 1971 and 1981, the totalU.S.-flag general cargo fleet tonnage actually de-clined, largely as the result of scrapping oldmultipurpose ships. For the remaining compo-nent —the liner fleet of full containerships, partialcontainerships, and RO/ROs—the growth has beendramatic—from 1.5 million to 3.9 million dead-weight tons (dwt), or almost 10 percent per year.The growth rate in the U.S.-flag liner fleet in termsof capacity, from 1971 to 1981, was almost 5 per-cent per year.

Unlike the world fleet as a whole, the U.S.-flagfleet’s most important ship type is the container-ship. The average size of containerships in the U.S.fleet is about 19,000 dwt. U.S. companies have,however, operated some of the largest container-ships and at present have on order a group of supercontainerships. While some other major maritimenations operate fleets of large containerships, theygenerally are not in service in the U.S. trades.These containerships are in service in the Europe-Far East and other long route trades, usually as partof multiflag consortia.

Most of the U.S.-flag liner fleet is dedicated toU.S.-foreign trades. This is a result of a numberof laws, as well as the economics of this trade. Forexample, a large portion of the liner fleet operatesunder Federal operating differential subsidies(ODS) which, among other constraints, requiresoperators to serve specific assigned (i. e., essential)foreign trade routes. Those operators who receiveODS are prohibited from carrying cargo betweendomestic points except when authorized by MarAdunder Section 506 of the 1936 Merchant MarineAct. One unsubsidized liner operator carries somedomestic trade cargo when it fits their overall traderoute schedule. Others may also carry some foreign-to-foreign (cross trade) cargo along a specific route,but most of this cross trade is not dominated byU.S.-flag operators.

U.S. Liner Shares

Because of successful productivity improvementsby some major operators, the U.S.-flag liner fleethas maintained a healthy share of U.S. foreigntrade despite effective foreign-flag competition. TheU.S.-flag share was 27 percent in 1981, up from22 percent in 1967. It peaked in 1974-75 at approx-imately 30 percent. Some claim that Federal sub-sidies helped to maintain the U.S. liner fleet’s cargoshare position, while others claim that subsidieshave constrained growth because of inflexible re-quirements (see ch. 6).

There is a variation in U.S.-flag share and levelof ship sophistication by foreign area of service. Fif-teen years ago, U.S.-flag shares were much higherin LDC trades, where both the economies and ship-ping technology and infrastructure were less devel-oped than in developed countries’ trades. Recent-ly, however, U.S.-flag shares have declined in theLDC trades, as national-flag competitors have en-tered those trades and expanded rapidly from a verysmall base, often with substantial government sup-port. U.S.-flag shares have increased significantlyin the developed countries’ trades, mainly in theperiod 1972-74, due largely to conversion (by nowessentially complete) to containerization. Now, as

seen in table 14, U.S.-flag liner shares only varyby 10 to 20 percent, from region to region. Fur-thermore, large segments of the developed coun-tries trades formerly served by liner operators haveswitched to neobulk/contract/proprietary service(autos, iron and steel products, scrap, and forestproducts), which tend to move almost entirely inforeign-flag ships, leaving behind the common car-riage, high-service segment of the developed coun-tries’ trade for U.S. -flag carriers.

Technological Developments

As discussed in chapter 5, most recent techno-logical innovations in liner shipping have beenspurred by a need to reduce costs. The UnitedStates has been among the world’s leaders in theintroduction of major new technologies in the1960’s and 1970’s, such as containerships and otherintermodal concepts like lighter aboard ship(LASH) and integrated tug barges (ITBs). Coun-


tries other than the United States quickly adoptedthe most successful of these technologies into theirfleets, however, and have been much more activein the introduction of certain fuel- and cost-savingfeatures and automation to reduce crew size. Inthese respects, the United States has been con-strained by certain union agreements regardingcrew reduction and by some Government policieswhich, until waivers were granted very recently,prohibited the use of foreign-built main machineryin ships constructed with either title XI loan guar-antees (see ch. 6) or construction subsidies. Sincethere are no U.S. manufacturers of large, slow-speed diesels, this Federal policy, in effect, deniedU.S.-flag operators access to an advanced fuel-efficient technology common in other major mari-time nations. Because of this, it probably will besome time before U.S. liner operators catch up toother countries.

Chapter 5 also describes the recent emphasis onreducing energy costs. This has manifested itselfin the reduction of operating speeds for liner shipsand the introduction of new technologies and pro-cedures such as more efficient diesel engines, bet-ter controls to maximize the efficiency of the pow-erplant, fuel-treatment systems that allow use oflower grade fuels, and bottom scrubbing.

In the liner trades, there has also been a trendtoward specialized ships (particularly container, butalso LASH and RO/RO) over the past two decades.This trend is expected to continue but not to thepoint where the conventional multipurpose shipsare completely phased out of service. Ships withflexible capabilities will undoubtedly be necessaryfor certain trades where:

●

●

●

●

significant amounts of heavy-lift cargoes aremoved;a substantial container imbalance exists;there is a significant amount of cargo in bothdirections that is only marginally container-izable; andnational priorities and investment strategiesdo not favor the development of the domestictransportation infrastructure needed to sup-port container service.

New ship types such as auto carriers and wide-hatchforest products ships have been introduced duringthe 1970’s and are referred to as ‘‘neobulk’ ships,

These ships have specialized hulls and cargo-han-dling systems designed to significantly reduce costs.U.S.-flag operators have not developed these sys-tems to the same extent as foreign operators. Com-bination ships such as auto/bulk and container/bulkships also have been introduced, often sailing ontriangular voyages with foreign-to-foreign legs in-corporated into their itineraries. The developmentof these neobulk and combination vessels is ex-pected to continue,

There is also a clear trend toward larger shipsin the liner trades, brought about in large part bythe trend toward specialized ships. However, thelargest such ships currently on order (U.S. Lines’4,200-teu ships) are approaching the draft, beam,length, and shoreside crane constraints imposed bythe world’s harbors and channels. *

According to the 1982 yearbook published byContainerization International, of the approximate-ly 930 containerships over 500 teu, about 5 per-cent are in the super carrier size range of over 2,000teu. A sizable number of new buildings, however,are of these larger ships and in the more distantfuture, as intermodal activity concentrates on fewer,larger volume ports, with great economies of scale,there will be more incentive to deepen or widenchannels to accommodate even larger, more spe-cialized ships. Thus, liner shipping operations maybecome more focused around fewer major portcomplexes with feeder services to and from the“hub” ports.

The average crew size of the U.S.-flag liner shipshas been declining (but very slowly) as automatedengine rooms and other labor-saving devices havebeen introduced. The cost savings, however, arenot proportional to the reduction in crew size dueto expenses associated with the automated equip-ment and increases in shoreside contracts for main-tenance and repair formerly performed by ship-board personnel. Discussions with maritime unionsto decrease personnel requirements are likely tocontinue since the technology exists for furtherreductions in crew size. One possible change is— —

“Containershlp sizes are commonly stated in terms of teu (the num-ber of twenty-foot-equivalent units, or twenty-foot containers, the shipcould carry). The U.S. Lines’ 4,200-teu ship designs are reported tobe about 58,000 dwt. The recently completed 2,500-tcu containershipsfor American President Lines are each 49,000 dwt with a length of860 ft, a beam of 105 ft, and a draft of 35 ft.

modification in the seamen per billet ratio (the totalnumber of employees compared to the number re-quired onboard ship at any one time). Typicallyin the United States today, that ratio is 2 to 1, witheach crew member on board ship 6 months peryear, as per typical union contracts. Discussion ofa 3 to 2 ratio is taking place. Other possible trendsinclude multiskilled crew designations and elimina-tion of certain exclusive billets, such as radio oper-ator. These changes, while brought about by tech-nology and automation advances, will require laborpolicy changes by the unions and in Federal regula-tions. The U.S. seafaring unions, to date, havebeen reluctant to accept reductions in crew size ex-cept for certain new ships.

Terminals, particularly container terminals, havebeen increasingly automated to reduce labor costsand improve service levels. Automated terminalscan stack containers higher than nonautomated ter-minals, thereby reducing the amount of land re-quired for a given amount of cargo handled. Thistrend toward automation is likely to continue. Adevelopment that has not been apparent, at leastin the United States, is the introduction of large,multiberth, multiuser terminals. These can reduce

land requirements and thus may reduce costs (perunit of through capacity) significantly. If the ap-parent cost effectiveness of this type of terminal isproven, it could be introduced in the United States.

The U.S. maritime industry has developed morethan its share of advanced technology. However,it has not excelled in the economic use of new tech-nology or the adoption of technology from othercountries and other industries. U. S, -flag carriershave been slow to introduce shipboard automationand to convert to diesels. As noted above, foreign-built diesel engines were prohibited by law for ves-sels built with construction differential subsidies(CDS) until 1977, and U.S. Navy policies pro-moted the use of steam turbines as acceptable de-fense features for subsidized merchant ships becausethey could be more readily designed with large re-serve power. Some U.S.-flag carriers now are buy-ing management services regarding diesel opera-tion from divisions of European companies set upjust to provide these services.

Since the 1977 MarAd waiver which permitteda new class of American President Lines container-ships to be built with foreign-supplied diesel power-

Modern container-handling terminals, such as thisthe productivity of

plants, a major shift toward the use of medium-and low-speed diesel engines in the commercialshipping industry in the United States has beenunderway. This shift was also prompted by the oilembargo of 1973, which resulted in fuel costs be-coming the fastest growing operating expense. U.S.operators are also now constructing a number ofships in foreign yards and are not constrained byeither CDS ‘‘buy America’ policies or a need tomeet U.S. Navy requirements for generous ‘ ‘re-serve power.Recently, there also has been achange in U.S. naval vessel propulsion designs tomedium-speed diesel and lightweight gas turbineengines. Thus, the rationale for requiring the useof steam propulsion as a national defense feature

Photo credit: Matson Lines

one in Los Angeles, have markedly increasedliner shipping

has been eroded. The U.S. Navy and its logisticssupport arm, the Military Sealift Command, haveincorporated new technology medium-speed dieselengines into several new classes of logistic supportand amphibious ships.

Some observers believe that the ODS Program,with its downside protection and service constraints,is largely responsible for the rather poor record ofU.S.-flag operators in the adoption of new tech-nologies. Others contend that the high manning lev-els negotiated between the carriers and the unions(and paid for in part by the taxpayers throughODS) are to blame, since investment in innova-tion requires as a quid pro quo a reduction in labor

Ch. 3—The U.S. Shipping Industry ● 6 5— — — — — — —

costs. Whatever the cause, a valid goal for futurepolicies should be to eliminate such distortions andbarriers to more productive shipping, whether sub-sidized or not.

Among the most notable of U.S.-flag manage-ment successes has been the extensive implemen-tation of intermodal service, particularly in land-bridge* offerings in the U.S./Far East trade andthe U.S./Europe trade. Microbridge ” (point-to-point intermodal service with through ‘rates) isbecoming more important and the volume of theseactivities can be expected to grow significantly.

Containerization technology was an Americaninnovation and has provided opportunities forU.S..-flag carriers who took advantage of intermodal—

*‘ I.andbr]dst’ an(l ‘‘ mirrobridgc’ are terms describing a com-bination of land and scabornc intcrmoda] scmicc, In I.mdbridgc, ratesand [f)[al ser~i{ c at{. offered I]} a c arricr for cargo shipments froma foreign port to a U.S. port, arross U. S, land to another U, S. portand finally b}, sea to a fore i~n port cfcst inat ion. Nffcrobr;dq> refersto total ratm and scni( c offered by a carrier for cargo shipments froman} inland U S 1o( at ion [o a pol t, by sea to a foreign port and final-ly o~trl’ind to .tnothcr tn]and destination. It also refers to variationsof SU( h wr~ i( (. from point -tm port and port-to-point.

service opportunities to penetrate trades where theirall-water market shares were small. The ability tooffer intermodal service is considered a primereason for the large increase in the U.S.-flag sharebetween 1967 and 1981 in trade with Japan, SouthKorea, and Europe. An important example is theFar East-U. S. Atlantic and gulf coasts trade, wherethe U.S.-flag share in 1967 was approximately 15percent. Half of that trade has now been divertedto the Pacific coast, where the U.S.-flag share was30 percent in 1981, up from 23 percent in 1967.

Cost, Productivity, andCompetitiveness

Compared to other major U.S. industries, theliner industry as a whole has had a mediocre per-formance in terms of return on equity. Out of 10major industry groupings, in 1980 liner shippingranked eighth. It is interesting to note, however,that the 9th and 10th places were held by two othertransportation industries—railroads and air trans-port. Tables 16 and 17 summarize the financial sta-

Table 16.—Financial Data for U.S.-Flag Liner Companies Engaged in Foreign Trade

Aggregate total 1977 1978 1979 1980 1981

● Net profit (loss) ($000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,865tReturn on equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 ”/0tReturn on invested capital (total debt Plus equity). . . . . . . . . . . . . . . . . . 6.1°/0t“current assets to current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3● Long-term debt to owner’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.84

t Operating revenue per freight payable ton (subsidized operators). . . . . $81.95t Subsidy per freight payable ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.38t Operating expense per freight payable ton (subsidized operators) . . . . $76.15t Nonoperating expense per freight payable ton (subsidized operators)a $17.45t Operating margin per freight payable ton (subsidized operators)b. . . . . $1.73

$105,99810.4 ”/06.8”!0

1.11.60

$91.15$14.83$83.45$19.01

$3.52

$32,5123.2°\o3.90/0

1.02.03

$99.13$14.82$93.22$20.31

$0.42

$159,95610.6°\o

7.5 ”/01.3

2.67$110.03

$14.05$99.19$22.59$2.30

$99,3516.80/06.7°)o

1.11.65

$120.43$15.04

$108.03$22.55$2.89

KEY ● = Includes nonsubsidized companies; t . Weighted average,alnterest, overhead, vessel depreciation, and charter hire.bo peratin g revenue plus subsidy less operating and n0n0peratin9 exPense

SOURCE: U.S. Maritime Administration, Office of Financial Management.

Table 17.—U.S..Flag Liner Companies in Foreign Trades: Summary of Financial Results, 1980-83 (millions of dollars)

1983Category (first quarter only) 1982 1981 1980Gross revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,116 4,200 4,671 4,308Subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 307 312 299Gross operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,110 4,225 4,765 4,429Gross profit (water line) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 282 218 178Interest, taxes, and other expenses less other income , , , , , , ., ., , ., , , 121 95 122 20Net profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) 187 96 158NOTE: The above figures represent aggregate financial data from all subsidized and one unsubsidized liner operator(s) in the foreign trades. For the years 1980 and

1981, some small portion of the data includes the domestic operations of one operator; for the 1982 and 1983, the domestic trade portion has been extracted.The 1982 net profit total includes over $80 million of extraordinary income items such as the sale of ships.

SOURCE U S Maritime Administration, Office of Financial Management, personal communications, July 1983, with OTA additions from data furnished by Sea-LandIndustries


tus of U.S. liner companies. (Note that some datais not available for nonsubsidized operators, whodo not have to report to the Federal Governmentthe extensive financial data required from the sub-sidized operators. )

U.S.-flag ship costs are substantially higher thanforeign-flag costs for both ship acquisition andoperation. Data from MarAd for 1982 indicate thatnew construction costs for containerships are 2 to2 times higher in U.S. shipyards than in com-

parable foreign yards, such as Japan. Even this costratio of U. S.-to-foreign building, however, under-states the effective ratio from the buyer’s perspec-tive because the figures given represent shipyardcosts, and market prices now quoted are substan-tially lower than costs. Furthermore, those pricecomparisons refer to Japanese yards; prices at Ko-rean yards, where Sea-Land placed its recent ordersand where U.S. Lines is now planning to build itsnew ships, are lower still. *

While all operating expense categories are usuallyhigher for the U.S. operator than the foreign oper-ator, crew costs are a major item of difference, par-ticularly due to differentials in manning scalesrather than in per-man wages. Foreign crew costsfor containerships range from one-half to one-sixthof equivalent U.S.-flag crew costs (see fig. 26). Inmost cases, U.S. crew size exceeds foreign crewsize, which, for comparison with developed coun-tries, is much more significant than the wage rates.

The U.S. standard of living largely accounts formuch higher wage rates compared with those inLDCS, However, it should be noted that Europeanand Japaneseseamen wagesare no longer‘ ‘cheap, and that national crews of these nationsare also facing a competitive disadvantage withLDC crews. Many European and Japanese shipoperators have countered the wage rate problemwith smaller crews, use of foreign nationals in ship’screws, and more automation—an approach onlynow beginning to be applied by U.S. operators.

Subsistence, stores, and supplies are usually pro-portional to crew costs. U.S. maintenance and re-

“In May 1983, U.S. Lines announced signing a contract with Ko-rea’s Dae-Woo Shipbuilding Co. for 12 large (4,200teu and 58,000 dwt) at a price of $50 million each. Even this pricewas 10 percent lower than that announced a year earlier for the sameships.

Figure 26.—Relative Costs for Crew for a TypicaiContainership Operating Under Various Flags

Flag- Liberia Greece U.K. Norway U.K. Japan U.S.Crew- Chinese Greek UK/lnd Norw. U.K. Japan U.S.Number-28 30 51 26 34 25 38

SOURCE: “Comparative Operating Costs for U.S. and Foreign-Flag Ships,” byPaul Ackerman, presented at SNAME Ship Cost and Energy Sym-posium, October 1982.

pair costs are also higher than foreign counterparts,because it costs more to repair a ship in a U.S. yardand because a U.S. operator who repairs in a for-eign yard must now pay a 50-percent ad valoremtax on the value of the repair. U.S. insurance costsreflect the higher capital costs of U.S. ships andthe fact that settlements made to injured U.S. sea-men are considerably higher on the average thancomparable foreign settlements.

Another significant reason for high U.S. oper-ating costs is fuel. Most of the U.S.-flag liner fleetis still powered by steam turbine engines which aremuch less efficient than modern slow-speed dieselengines which predominate in foreign-flag ships.That portion of the differential, however, will disap-pear as new U.S. ships come into the fleet. In fact,it is the need to increase energy efficiency and re-duce crew size which justifies modernizing the U.S.fleet, rather than the age of the ships. When thesetwo goals are achieved, the U.S.-flag liner fleet willbecome more competitive with the rest of the world.

For a number of reasons, U.S. liner vessels—even with their higher capital cost, higher wage cost,and higher fuel cost—are able to compete in sometrades with their foreign-flag counterparts. In the

Ch. 3—The U.S. Shipping Industry 67

past, U.S. construction subsidies were available tomitigate higher construction costs. Operating sub-sidies also helped. In addition, three other majorfactors are important in explaining this success—factors that are not applicable to the same degreeto the bulk trades. They are:

1. U.S. preference cargoes are available to coversome added costs;

2. some U.S. operators have made substantialadvances in ship and cargo-handling produc-tivity; and

3. some U.S. operators excel in marketing.

Liner operations have a broad scope, covering car-go-handling and often intermodal movement aswell. The annual capital, crew, and fuel costs fora liner operation are only about one-quarter of thecarrier’s total costs (whereas, these costs can bemore than 75 percent of a bulk ship operator’scosts). A liner operator incurs higher cargo-han-dling, sales, documentation, and administrativecosts than does a bulk ship operator. Further, a lineroperator incurs other costs—e. g., such as containerstuffing/stripping, pick up/delivery, inland trans-portation, and container leasing—which have noequivalent in bulk operations, U. S, -flag lineroperators have no inherent advantages or disad-vantages with respect to their foreign-flag compet-itors on these nonvessel costs. The advantage could,however, depend on effective and efficient manage-ment and marketing practices.

U.S. liner productivity is, in some cases, com-parable with foreign competition, and productivi-ty improvements have helped mitigate significantU.S. cost disadvantages. During the 1970’s, theU.S.-flag merchant fleet underwent major produc-

tivity improvements. Table 18 shows that in theliner sector, the fleet went from 403 ships in 1971to 303 ships in 1976 (a 25-percent reduction), withan 11 -percent increase in deadweight ton-mile ca-pacity. Modern technology and management in-novations are important to maintaining these im-provements. However, as discussed in chapter 6,the availability of regulatory advantages is also amajor consideration in meeting foreign competi-tion.

Influence of Cargo Preference

Many of the major liner trades are heavy in-bound—i. e., more loaded containers are importedthan exported. U.S.-flag liner operators have his-torically reduced the economic impact of this im-balance by carrying Government cargoes out-bound. The United States has long had a policyof granting preference to U.S. carriers on its owncargoes. (Cargo preference is discussed in ch. 7.)The primary components are Agency for Interna-tional Development (AID) and Export-ImportBank cargoes and military cargoes.

Table 19 gives an indication of the importanceof preference cargoes to U.S.-flag liner operators.The impact of these cargoes on individual carriersvaries widely. In some cases, up to 30 to 40 per-cent of total revenue is derived from such carriage.But it is difficult to determine the fraction of linercompany profits produced from preference cargoes.In some cases, the addition of preference cargoesis significant enough to a U.S.-flag operator thatthe resulting higher utilization of his ships will bringdown unit costs by a sizable amount.

Table 18.—Productivity Comparison of U.S. Privately Owned General Cargo Fleet, Annual Maximum DeadweightTon-Mile Capacity per Year

1971 fleet 1973 fleet 1976 fleet

30 knot intermodal ships. . — 4 ships = 13,304 MTM 8 ships = 26,608 MTM20 knot intermodal ships. . 35 ships = 73,920 MTM 68 ships = 145,044 MTM 87 ships = 214,542 MTM20 knot conventional ships 98 ships = 108,682 MTM 86 ships = 95,288 MTM 86 ships = 95,288 MTM15 knot intermodal ships. . 80 ships = 77,600 MTM 61 ships = 58,743 MTM 49 ships = 48,956 MTM15 knot conventional ships 190 ships = 138,890 MTM 94 ships = 74,072 MTM 73 ships . 61,574 MTM

Total . . . . . . . . . . . . . . . . . 403 ships = 399,092 MTM 313 ships = 388,451 MTM 303 ships = 446,968 MTM(5,389,000 dwt) (4,651 ,680 dwt) (5,058,185 dwt)

NOTE: Intermodal catego~ Includes containerships, roll-on/roll-off ships, and barge carriers.MTM = miliion deadweight ton-nautical-miies.Deadweight ton-nautical-mile capacity (DTMC) = S x T x K x CSt = Seadays (165 per year per conventional ship); S, = Seadays (220 per year per containership); T = Time, 24 hours; K = Maximum nautical-miles per hour;C - Capacity, average dwt capacity for ship category.

SOURCE: Maritime Transpotiation Research Board, NAS, Toward An Improved Mercfranf Marine: A Recommended Pro6rrmn of Stud/es, Washington, D. C.: January 1976,p. 17.

—


Table 19.—lmportance to Liner Vessels of Carriageof Government Preference Cargoes

1978 1979 1980

($ millions) percent ($ millions) Percent ($ millions) PercentTotal U.S. operator revenue. . $3,105 – $3,707 – $4,308 –

Preference revenue—civilian cargo . . . . . . . . . . . . 283 9 266 7 294 7

Preference revenue—military cargo. . . . . . . . . . . . 201 7 376 10 401 9

Total preference revenue . . 484 16 642 17 695 16SOURCE: U.S. Maritime Administration, Office of Policy and Plans, November 1982,

It is interesting to note that during 1982 a newcarrier submitted bids for a Military Sealift Com-mand (MSC) contract to carry military cargoes toEurope and underbid the other carriers who hadhistorically won these contracts. When MSC an-nounced the next round of bidding in 1983, twoof the operators which had been underbid on theprevious contract lowered their bids by about one-half from the earlier round, It therefore appears thatthis Government cargo is important to operatorseven at very low rates.

To demonstrate the importance of preferencecargo to a U.S.-flag operator, an illustrative exam-ple was presented in a recent paper. It showed (seetable 20) that some U.S. operators who take ad-vantage of military or other preference cargoeswhich are reserved for U.S. flags, can increase theirprofits to exceed foreign-flag competitors. Govern-ment policy has probably played a key role in com-petitiveness in this case without direct or complexsubsidy arrangements.

Most experts agree that U.S.-flag liner operatorscan be productive and competitive in the worldmarket despite some cost disadvantages. Govern-ment policy can mitigate important cost disadvan-tages, in some cases, without direct subsidy. Therecord of Sea-Land, the largest U.S.-flag operator(without direct subsidy), seems to illustrate this con-tention. On the other hand, a number of subsidizedU.S.-flag operators appear to depend heavily ondirect subsidy payments for their financial survival.These companies would require major productivityimprovements or substantial future cost reductionsto meet foreign competition. If future subsidies areeliminated, attention to productivity improvementsfor these operators must receive high priority.

Table 20.—Hypothetical Profit Impact of U. S..FlagPreference Cargo on Containership Operationsa

Given:● Vessels of 1,200 teu● Vessel operating cost per voyage of $270,000 excluding

labor● Foreign crew cost of $30,000 per voyage● U.S. crew cost of $60,000 per voyage● Average load is 900 teu @ $725 revenue per teu● Container and other variable costs are $333 per teu

Financiai resuits based on commerciallycompetitive cargo oniy:

Foreign flag U.S. flagRevenue. . . . . . . . . . . . . . . . . . $652,500 $652,000cost . . . . . . . . . . . . . . . . . . . . . 600,000 630,000

Profit . . . . . . . . . . . . . . . . . . . . $52,000 $ 22,000Financiai resuits with 15% extra cargo (miiitaryand coastwise-generated) to U.S. carrier

Foreign flag U.S. flagRevenue. . . . . . . . . . . . . . . . . . $625,500 $749,800cost . . . . . . . . . . . . . . . . . . . . . 600,000 659,970

Profit . . . . . . . . . . . . . . . . . . . . $ 52.000 $89,830aAll data for illustrative purposes only.

SOURCE: John Blnkley, “Impacts of the U, S.-Flag on Shipping Cost and Produc-tivity, ” presented at SNAME Symposium on Ship Costs and Energy,October 1982.

Conferences, Pooling, andCooperatives

Liner operators employ a wide variety of com-mercial agreements in world trade whereby cargoshares, revenues, prices, and other factors are setbetween two or more parties in order to restrictcompetition and reduce overcapacity. The degreeof cooperation and kinds of restrictions that are fol-lowed range from a simple allocation of sailings be-tween regions to complex agreements allocatingshares of specific commodities among parties.

Shipping is a very old industry, and problemsstemming from aggressive competition and highly


variable rates were of even greater concern whenships were the only feasible means of long-distancetransportation. After the opening of the Suez Canalin 1869, fierce shipping competition resulted, inparticular on the profitable Indian trade. This ledto the first successful liner conference, the Calcut-ta Shipping Conference of 1875, in which all linesin the trade agreed to apply the same rates betweenCalcutta and British ports. The conference systemof establishing common rates and agreements toregularize service quickly became well establishedin many trades. It also was partially a response toexcess capacity resulting from a technology change(larger, more reliable steamships were replacingsmaller, slower sailing ships).

The liner conference is now a very common sys-tem employed by operators in most developedtrades. Typically, a conference is an agreementamong a group of shipping companies serving thesame trade route, and includes some form of priceor rate fixing. Thus, members of a conferencewould charge the same prices for similar services.In many trades outside the United States, the con-ferences are closed (new members are not admittedwithout consent of existing members) and the agree-ments are confidential. In all U.S. trades, the con-ferences are open to any new member who meetsthe terms of the agreement. The agreements mustbe approved by the Federal Maritime Commission(FMC), and the terms are public.

U.S. liner operators are members of several ofthe major conferences governing the key tradingroutes for U.S. exports and imports. Some opera-tors join and leave conferences frequently whenbusiness opportunities make it worthwhile. In sometrades—particularly with South American countrieswhere the United States has bilateral agreements—the U.S. operators have longstanding and static ar-rangements for cargo-pooling and other practices.

For most of the past two decades, conferencesserving U.S. trades have been relatively weak duelargely to the historical U.S. free-trade philosophy.U.S. conferences are open, and all agreements be-tween carriers, including cargo and revenue pool-ing and service rationalization, must be approved

‘See Edgar Gold, Maritime Transport, The Evolution of Interna -tional Marine Polic)’ and Shipping Law (Toronto: Lexington Books,1981), pp. 114-118.

by FMC. Rebating is prohibited, independent ac-tion by conference members is encouraged andthere are strong limitations on service rationaliza-tion. Independent operators have thus been ableto enter U.S. liner trades easily and compete againstthe conferences. But many routes suffer fromchronic overcapacity.

Beyond conference agreements, other arrange-ments seek to further control the market, A com-mon arrangement is pooling, whereby parties toan agreement fix the shares of specific cargoes eachmay carry and thus limit service competition. Poolsare a natural conference adjunct but in U.S. tradesare subject to FMC review and approval and thuscover only a small fraction of U. S. liner trades. Ingeneral, FMC has approved pools where they haveresulted from foreign government unilateral actionson cargo reservation. At present, a number of pool-ing agreements are in effect in U.S. trades withBrazil, Argentina, and Peru.

A cargo pool usually controls the carriage of acertain commodity or group of commodities. In arevenue pool, each member is entitled to receivea specified percentage of the total freight revenueearned by all the pool members. The pooling agree-ments filed with FMC pursuant to Section 15 ofthe Shipping Act of 1916 as amended, are all rev-enue-pooling rather than cargo-pooling agreements.

In return for a share of the revenue pool, eachparty must agree to a minimum number of sail-ings imposed by the agreement. A few of the agree-ments also require a minimum number of port calls.Some of the agreements require that the parties pro-vide a certain amount of cargo space per sailing.If a specific amount is not required, then the par-ties must agree to provide cargo space sufficient tocarry all the cargo covered by the agreement.

If a party fails to meet a sailing, port call, or cargorequirement, its share of the pool revenue is re-duced. Some agreements provide a formula for cal-culating the loss. Others simply say that the revenueshare is reduced in proportion to the deficiency insailings, port calls, or cargo space.

The U.S./South American pooling agreementsreserve certain cargo exclusively for pool members.Since pools guarantee each member a share of rev-enues, there is usually no incentive to increase sail-


ings above the minimum required by the agreementor to attract more cargo. Thus, pools appear to im-prove the carrier’s capacity utilization since poolmembers tend to limit their capacity to that re-quired by the terms of the agreement. z Many be-lieve, however, that the final results can be and havebeen—particularly in the Brazil and Argentinatrades—very detrimental to competition and goodservice.

Pools represent a form of carrier cooperationshort of a joint service, a consortium, or joint ven-ture. Many lines outside of the United Statescommonly operate under one of these types ofcooperative arrangements. The following descrip-tion of such commercial operating agreements isexcerpted from a 1981 Review of Existing Agree-ments and Potential Cargo Sharing Arrangements:3

Joint Service (Cartel or Syndicate). In this typeof arrangement, some or all of the activities are pro-vided as an integrated operation. Usually vesselsand offices retain the separate identities of the twolines. A financial agreement between the parties

2See Changes in Federal Maritime Regulation Can Increase Efi-ciency and Reduce Costs in the Ocean Liner Shipping Industry(Washington, D. C.: U.S. General Accounting Office, Report No.(GAO)/PAD-82-l 1, July 1982).

‘See ‘‘Impact of Cargo Sharing on U.S. Liner Trade With Coun-tries in the Far East and South East Asia’ for the Federal MaritimeCommission by E. G. Frankel, Inc., September 1981.

outlines terms for splitting revenues and certaincosts.

Consortium. A form of cooperative intercom-pany agreement in which most capital assets arejointly owned (sometimes only the ships remainunder separate ownership) and the operating com-pany is jointly owned. Consortia have been dis-couraged in U.S. trades for U.S. -flag carriers bythe U.S. Government as allegedly anticompetitive.

Joint Venture. The closest form of cooperationbetween independent liner companies in which theparticipants jointly own (or lease) vessels, equip-ment, and terminals, and the venture has its ownmanagement. Tax considerations dictate that mostjoint ventures are among companies from a singlecountry.

Table 21 illustrates typical areas of cooperationfor the above forms and gives some examples ofjoint operations.4

Conference agreements and pools, while havingthe basic effect of limiting competition among par-ties to the agreements, also seek to reduce malprac-tice, stabilize rates, and improve efficiency by sodoing. If competition is also assured among coop-erating groups or with nonmembers, then the twin

4For a more detailed discussion of joint operations, see VonSchirach-Szmigiel, Liner Shipping and General Cargo Transport (Stockholm:Stockholm School of Economics, 1979).

Table 21 .—Cooperation Forms Practiced by Liner Operators

Cooperation areas Cartel Syndicate Consortium Joint venture

Service scheduling . . . . . . . . . . . . . . . commonOperation of:

Vessels . . . . . . . . . . . . . . . . . . . . . . . commonTerminals . . . . . . . . . . . . . . . . . . . . . common

Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . commonRevenues . . . . . . . . . . . . . . . . . . . . . . . commonName . . . . . . . . . . . . . . . . . . . . . . . . . . . commonMarketing . . . . . . . . . . . . . . . . . . . . . . . individualInland container operations . . . . . . . . individualManagement. . . . . . . . . . . . . . . . . . . . . individualInvestment plans . . . . . . . . . . . . . . . . . individualOwnership:

Vessels . . . . . . . . . . . . . . . . . . . . . . . individualTerminals . . . . . . . . . . . . . . . . . . . . . individual

Examples of joint operations. . . . . . . Trio GroupAsia ContainerEurope (ACE)Scan AustraliaCaribbean OverseasLine (CAROL)

common

commoncommoncommoncommoncommoncommoncommonpartly commonpartly common

individualindividualScan-DutchAustralia/EuropeContainer Service(AECS)South Africa Group

common

commoncommoncommoncommoncommoncommoncommoncommoncommon

individualcommonAtlantic ContainerLine (ACL)Associated Con-tainer Transporta-tion (ACT)Dart Container LineAtlantica SD. A.

common

commoncommoncommoncommoncommoncommoncommoncommoncommon

commoncommonOverseas ContainerLtd. (OCL)

SOURCE: C. VonSchirach-Szmigiel, Liner Shlpplng and General Cargo Transporl, Stockholm School of Economics, 1979.

Ch. 3–The U.S. Shipping lndustfy 71

goals of efficiency and best rates could be compati-ble. However, there continues to be concern overwhether allowing certain restrictions on competi-tion will be beneficial to shippers and the generalpublic as well as to ship operators. Many believethat the anticompetitive features of revenue poolsshould be of much greater concern than simple con-ference agreements on rates.

Chapter 6 discusses the U.S. Government’s reg-ulatory policy toward conferences. The U.S. ship-ping industry is anxiously awaiting congressionalaction on the Shipping Act regulatory reform whichwould permit liner operators to engage more free-ly in cooperative business practices and thus in-crease utilization and lower costs,

Pricing, Rates, and Shippers’Councils

Those who purchase the transportation servicesto move their cargo are called shippers. Those whooperate ships and provide transportation servicesare called carriers (though some confuse theseterms). Even though this chapter primarily ad-dresses the industries that operate ships, those in-dustries only exist to serve shippers. In the linerbusiness it is important to understand how ratesand pricing structures are derived and how ship-pers are both involved in and affected by the proc-ess before policies are developed. Actions which aredetrimental to shippers will quickly influence thedemand for shipping services. One should also un-derstand the benefits that high utilization and car-rier cooperation can bring to shippers.

Individual carriers or conferences follow one oftwo basic theories of ratemaking: cost-of-servicepricing and value-of-service pricing.

Simply put, in cost-of-service pricing the carriercomputes its total costs for each voyage, adds adesired rate of return, and divides by the averagenumber of containers it carries. Thus, it arrives ata rate which covers the cost of moving the contain-er, regardless of what the container carries.

However, as reasonable as cost-of-service pric-ing appears, it is not the method generally in use.The method that is most widely used is value-of-service pricing, also known euphemistically as‘ ‘charging what the traffic will bear. The theory

underlying this method is that rates should be setat a level which makes transportation charges aminimum percentage of a commodity’s landed cost.Under this theory, a containerful of electronicequipment can bear a much higher transportationcharge than a containerful of rags, and still move.If equal rates covering all costs were charged forrags and electronics, the price for rags would beso high that the rags probably would not move. Un-der value-of-service pricing, both commodities canmove. Underlying this method is a system of cross-subsidization. By charging high-value commodi-ties more than their fair share of costs, and the lowervalued commodities less than their fair share, thehigher valued commodities actually subsidize thelower valued commodities. However, since lowervalued commodities probably would not move ifcharged their fair share for space, the entire costof the voyage would otherwise be borne by the high-va.lued commodities. Any contribution to overheadby the low-valued cargo actually brings the cost ofthe movement down for the high-rated cargo.

Container shipping is a capital-intensive busi-ness, with very high fixed costs. The break-evenpoint is usually cited at about 85 percent capacity;i.e. , the carrier has to be 85 percent full to coverits fixed costs. In an overtonnaged trade, with lotsof unused capacity, carriers may be tempted to car-ry cargo at anything over their variable costs, solong as some contribution is made to fixed costs,Since case law requires that rates be fully compen-satory, that temptation is sometimes expressed inthe form of rebates, whereby a carrier returns partof the tariffed rate (usually secretly) to the shipperin order to get his cargo. However, rebating andsimilar malpractice are strictly illegal under theShipping Act, because they result in differential(i.e., discriminatory) treatment among shippers.Under the principles of common carriage, all ship-pers are entitled to the same rate for the same serv-ice. To enforce this principle, FMC requires strictadherence to the tariffed rates by both carrier andshipper. Any deviation is considered a violation ofthe Shipping Act and can result in penalties for boththe carrier and the shipper.

The high break-even costs of liner operations andthe above regulations tend to distort traditionalsupply/price relationships. For example, general-ly the greater the supply of cargo space available,

72 ● An Assessment of Maritime Trade and Technology— . — — — —

the higher the price, since a great supply of cargospace (i. e., overtonnaging) results in underutilizedships, which must spread their high fixed costs overa fewer number of containers. Thus, the rate gen-erally rises.

The converse of this is that the lower the supplyof cargo space available—i. e., ships running fullto capacity—the lower the price can be, since thehigh fixed costs can be spread over a greater num-ber of containers. This relationship of high supplyhigh price and low supply low price is used as thebest argument for close cooperation among carriers,for when carriers can limit their supply of cargospace and rationalize their sailing schedules, theyare in a position to offer lower prices to shippers.

Under present U.S. policy and practices, a ship-per has the following recourse if he feels that ratesare too high: first, he can go to the conference andappeal for a lower commodity rate on the basis thathis landed price is uncompetitive and he may losethe business. If the conference is not responsive,he can ship on an independent carrier—usually ata lower rate. Sometimes, when faced with the lossof the cargo, carriers may take some rate action tomeet a shipper’s needs. If the shipper suspects thathe may be a victim of discrimination vis-a-vis therates charged other domestic shippers or foreignshippers, he can file a protest with FMC, whichwill investigate the claim under section 16 and/or17 of the Shipping Act.

In practice, however, shippers have not had verymuch interaction with FMC. They rarely becomeinvolved and they rarely protest agreements.5

In many trading countries outside the UnitedStates, shippers’ councils are a counterpart to car-rier conferences and other cooperative agreements.These councils are organizations of shippers formedto collectively negotiate rates and service with theconferences. In the United States, shippers’ coun-cils have not been granted antitrust immunity andshippers fear they would be in violation of the anti-trust laws.

‘The foregoing discussion was excerpted from a speech by Dr. LeslieKanuk, former Chairman of the Federal Maritime Commission, beforethe Georgia World Congress Institute and International Trade Associa-tion. SeDtember 1980.

Shippers appear to be divided on the questionof whether shippers’ councils should be grantedantitrust immunity. A survey of shippers taken bythe General Accounting Office in 1980-81 indicatedthat shippers strongly supported the council con-cept and believed they would have a beneficial ef-fect on rates and service quality.c However, somelarge shippers have recently argued against antitrustimmunity for shippers’ councils as a counterbalanceto carrier antitrust immunity.7 The general beliefis that large shippers have enough economic ‘‘pow-er” to deal effectively with carriers individually,and do not need councils to protect their interests.

The debate about shippers councils continueswith congressional consideration of the ShippingAct of 1983; the Senate and House versions of mid-1983 have different shippers’ provisions.

The question of industry (shipper and carrier)support for alternative policies, such as shippers’councils, is only one consideration. Another is howto develop a system that will encourage growth inoverall trade through fair and equitable treatmentof shippers combined with competitive rates andservice. For example, U.S. exporters compete withexporters from other countries in many marketsaround the world, and transportation is an integralpart of that competitive equation. In the future,U.S. shares of that trade may depend on how ef-fective and efficient our ocean carriers can transportU.S. goods abroad.

Future Competitiveness ofU.S. Liner Fleet

Already the most successful sector of the U.S.fleet, the U.S.-flag liner fleet operating in foreigntrades, will become even more cost competitive asit is replaced and upgraded with modern, auto-mated, large, diesel-propelled ships.

However, if the trend toward specialized neobulkships for certain trades continues, it may result inthe diversion of cargo from the liner to the nonlin-er sectors. This may reduce the opportunity for

‘Changes in Federal Maritime Regulation Can Increase Eilicien -cy and Reduce Costs in the Ocean Liner Shipping Industry, op. cit.

7See American Shitmer. IUIV 1983. D. 11.,1 “ ,U . ,.


U.S.-flag ships since few U.S.-flag ships are beingbuilt for the neobulk trade (carrying contract car-goes). The introduction of combination vessels,such as container-bulkers can be expected to havea negative impact on U.S.-flag liner operators inthe same way. These trends are therefore impor-tant to monitor and to consider when Federal pol-icies are developed.

There is a trend in the U.S.-flag fleet to signifi-cantly increase containership size. American Presi-dent Lines’ new ships, and U.S. Lines’ plannedships, point in that direction. Major constraints arethe substantial risk of not being able to fill the shipsand the difficulty of achieving high service frequen-cy. Both these problems have been significantlyreduced in the foreign-to-foreign trades as carriershave combined into consortia to reduce the risk of

individual carriers. Whether such an avenue willbe available to the U.S.-flag carriers will dependon U.S. regulatory and antitrust policies.

Labor unions can be expected to resist the reduc-tions in crew size to the 18- to 24-men levels oftenemployed by foreign competition. If economic pres-sures force reductions in manning levels, at leastto the high end of that range, the ability of U. S.-flag liner ships to compete will be enhanced.

Ancillary ship-related, container, and terminaltechnologies should not significantly increase ordecrease the ability of U.S.-flag liner ships to com-pete with foreign-flag ships as these technologies,once proven, are easily transferred from U.S. -flagoperators to foreign-flag operators and vice versa.

THE U.S. BULK FLEET IN FOREIGN TRADESAs is the case worldwide, the U.S. bulk trades

greatly exceed its liner trades in tonnage. In 1980,U.S. bulk trade (both liquid and dry) totaled 736million metric tons (tonnes), while general cargotrade totaled 78 million tonnes. However, the U. S.-flag foreign trade dry-bulk and tanker fleets carryonly a small percentage of this trade.

Worldwide, trade in the major dry-bulk com-modities (iron ore, coal, and grain) increased by50 percent between 1972 and 1982. At the sametime, the world fleet of bulk and combined carriersincreased by 119 percent, from 91.5 million dwtin 1972 to 200 million dwt in 1982. The world dry-bulk fleet continued to grow between 1982 and 1983to a current level of 211.3 million dwt.8

An oversupply situation also exists in the worldtanker fleet, although at the present time the sizeof the fleet is decreasing, along with demand. Worldtrade in oil and oil products has dropped sharply,from 1,748 million tonnes in 1977 to an estimated1,287 million tonnes in 1982, for a decline of 26percent. In 1982, the world tanker fleet was essen-tially the same size as in 1977, 320 million dwt. A6-percent reduction in the fleet occurred in 1983,to 301 million dwt. g

8Fearn1eys, Review 1982, Oslo, Norway, 1983.‘Ibid.

The magnitude of the surplus in the world bulkfleet is reflected in the market value of the ships.A number of dry-bulk ships with useful life remain-ing sold for under $1 million each in the secondhalf of 1982. Prices for tankers were nearly as low.In some cases, ships have been abandoned becausethe scrap value of the vessel is less than theof the scrapping process.

In the best of times, U.S. bulk operators

costs

havehad difficulty competing in the world market be-cause U.S. costs far exceed those of foreign com-petitors. The major difference in operating expensesbetween U. S.- and foreign-flag ships lies with crewcosts. U.S. Department of Transportation (DOT)data show a ratio of U.S. daily costs v. comparableaverage costs for Organisation for Economic Coop-eration and Development (OECD) countries for a26-man dry-bulk ship crew of about 3 to 1. Ex-penses for crew and fuel account for a significant-ly higher proportion of overall operating costs forbulk ships than for liners, limiting the opportuni-ties to reduce the cost differential through efficien-cy improvements in other operating cost compo-nents.

Construction costs for tankers and dry-bulk car-riers in U.S. yards are two to three times the costs

25-417 0 - 83 - 6 QL 3


—

.

in foreign yards (see table 22). The final cost dif-ferential to buyers is even greater because:

1.

2.

3.

4.

in recent years, prices at foreign yards haveusually been lower than construction costs, theamount of difference varying according to thedegree of excess capacity at shipyards;delivery times at foreign yards are 1 to 2 yearsquicker, which reduces net present value costs;foreign cost schedules often do not include costescalation factors during the constructionphase; andfinancial terms (downpayment required, prog-ress payments, etc. ) at foreign yards are morefavorable, further reducing the effective price.

The 1970 Merchant Marine Act allowed pay-ment of CDS for bulk ships in hopes of enlargingthe U.S.-flag bulk fleet. Thirty tankers and a fewdry-bulk ships were built under the program, butno funds have been appropriated since 1980. Evenwhen CDS was available, it was limited to 50 per-cent of the U.S. cost. Since foreign prices in 1983tend to be less than half of U.S. costs, it would stillbe cheaper to buy ships abroad than from U.S.yards even with CDS.

The U.S.-flag foreign trade tanker fleet is smalland is attracting little business in the severely over-tonnaged international markets. Since 1976, U. S.-flag tankers have never carried more than 4.5 per-cent of the very large U.S. petroleum import trades.Of the 30 tankers built with CDS since 1970 (seetable 23), only 3 have been delivered since 1977.Due to the lack of opportunities in the world mar-ket, much of the U.S. subsidized fleet took advan-tage of a provision allowing such vessels to enter

Table 22.–Typicai U.S.- and Foreign-”ShipConstruction Costs-1982 (miiiions of doiiars)

25,000 70,000 120,000 265,000dwt dwt dwt dwt

TankerUnited States . . . . . . . . 59.0 85.0 109.0 189.0Foreign . . . . . . . . . . . . . 23.0 35.2 44.3 75.7

25,000 60,000 120,000 150,000dwt dwt dwt dwt

Dry-bulkUnited States . . . . . . . . 52.0 83,0 107.0 119.0Foreign . . . . . . . . . . . . . 19.6 33.0 42.6 47.0SOURCE: U.S. Maritime Administration, Office of Shipbuilding Costs, “’Construc-

tion Cost Estimates for United States and Foreign-Flag Vessels.”

Tabie 23.—CDS-Buiit Tanker Fieet

Vessei Deadweight tons Year buiitCoronado. . . . . . . . . . . . . . . . .Brookiyn . . . . . . . . . . . . . . . . .Wiiliamsburgh . . . . . . . . . . . .Cherry Vailey . . . . . . . . . . . . .Golden Endeavor . . . . . . . . . .Chelsea . . . . . . . . . . . . . . . . . .Massachusetts . . . . . . . . . . . .Golden Monarch . . . . . . . . . .Mormacstar. . . . . . . . . . . . . . .Worth . . . . . . . . . . . . . . . . . . . .Patriot ... , . . . . . . . . . . . . . . .Beaver State . . . . . . . . . . . . . .New York. . . . . . . . . . . . . . . . .Mormacsun . . . . . . . . . . . . . . .Rose City . . . . . . . . . . . . . . . .Ranger . . . . . . . . . . . . . . . . . . .Chestnut Hill. . . . . . . . . . . . .American Heritage. . . . . . . . .Courier. . . . . . . . . . . . . . . . . . .Rover . . . . . . . . . . . . . . . . . . . .Mormacsky . . . . . . . . . . . . . . .Kittanning . . . . . . . . . . . . . . . .Arco Spirit. . . . . . . . . . . . . . . .Arco independence . . . . . . . .Stuyvesant a. ... , . . . . . . . . . .Bay Ridge . . . . . . . . . . . . . . . .UST Atiantic . . . . . . . . . . . . . .UST Pacific . . . . . . . . . . . . . . .

39,712225,281225,281

39,67589,70039,740

264,07391,38838,30091,84935,10091,849

264,07339,23291,84935,10091,29591,84935,00035,00038,30091,344

262,376262,376225,281225,000398,143398,141

1973197319741974197419751975197519751976197619761976197619761976197619761977197719771977197719771977197919791979

NOTE: In addition, two CDS tankers are currently under construction, FalconLeader and Falcon Champion, both 34,000 dwt. An additional ship, theGolden Dolphin, was built in 1974 with CDS but was lost.

%DS haa been repaid.

SOURCE: U.S. Maritime Administration, Office of Trade Studies and Statistics;“Ship Register,” Military Seallft Command, Department of the Navy,Washington, D. C., January 19S3.

the domestic trade on a 6-month-per-year basis,with a pro rata payback of subsidy.

The very large tankers (known as very largecrude carriers—VLCCS) have had a difficult timein international trade. In the late 1970’s, twoVLCC owners requested and were granted permis-sion by MarAd to refund to the Government allCDS which had been paid and to enter the domestictrade permanently. Protracted court cases ensued,with the Supreme Court finally ruling for one vesselthat MarAd had acted within its power. The caseinvolving the second ship is still subject to litigation.

Following this precedent, a number of subsidizedtanker owners are now interested in paying backsubsidies in order to enter domestic operations,primarily in the Alaskan trade. Current domesticoperators oppose such a policy as unfair, and holdthat it will result in overtonnaging in these trades.Further complicating the issue is the question of


exporting Alaskan oil, which is currently prohib-ited. Allowing such exports would significantly re-duce the markets reserved for domestic tankers.

The entire U.S. dry-bulk fleet operating in in-ternational trade consists of 23 vessels, many ofwhich are over 20 years old (see table 24). Mostof the ships continue to operate because they carryGovernment preference cargoes, primarily AIDshipments, where they do not have to compete withforeign ships.

A major characteristic of the U.S. dry-bulk tradesis the intense price competition. The shippers/con-signees are large, sophisticated enterprises, manygenerating substantial volumes with access to pro-prietary carriage of their cargoes as well as to long-term contracts with independent carriers. Low-costoperators have essentially driven the higher costoperators (most significantly, the U.S.-flag opera-tors) out of the market. Lower costs have beenachieved through increasingly large, specialized

ships with small crews paid low wages (relative toU.S.-flag crews).

Thus, it is likely that the U.S. dry-bulk fleet willcontinue to depend heavily on whatever preferencecargo is available. The existing cargo preferencelaws which are significant to the bulk trades arethose requiring 50 percent U.S.-flag shipping forGovernment-aid cargoes, primarily grain. Two newlarge grain carriers just entered this trade. Theyare former liquefied natural gas tankers which wereconverted in Korea and fitted with coal-fueled pro-pulsion plants. These ships—large, modern, andfuel-efficient— have reduced grain export costs bya substantial amount—although not to the foreign-flag level.

Proposals to reserve some percentage of commer-cial bulk cargoes for U.S. -flag have been debatedfor several years. Studies have indicated that suchcargo preference could encourage building a moremodern, efficient U. S, bulk fleet, which would, in

Table 24.—U.S. Dry-Bulk Carriers in International Trade (as of Mar. 1, 1983)

Name of vessel Type Deadweight-tons Year built

Inger . . . . . . . . . . . . . . . . . Bulk 23,510 1945Jade Phoenix . . . . . . . . . BO (Bulk/Oil) 63,200 1982Kopaa . . . . . . . . . . . . . . . . Bulk 24,233 1944Marine Princess . . . . . . . Bulk 52,565 1967Merrimac . . . . . . . . . . . . . Bulk 25,002 1944Overseas Harriette . . . . . Bulk 25,541 1978Overseas Marilyn . . . . . . Bulk 25,541 1978Point Manatee. . . . . . . . . Bulk 15,316 1944Point Susan. . . . . . . . . . . Collier (Coal) 24,345 1945

tPride of Texasa . . . . . . . . Bulk 35,389 1981Seadrift . . . . . . . . . . . . . . Bulk/Oil 15,155 1942

tSpirit of Texasa. . . . . . . . Bulk 32,100 1982tStar of Texasa . . . . . . . . . Bulk 36,614 1982Sugar Islander. . . . . . . . . Bulk 29,648 1973Tamara Guilden . . . . . . . Bulk 23,800 1961Traveler . . . . . . . . . . . . . . Bulk 25,130 1945

tUltramaF . . . . . . . . . . . . . OBO (Ore/Bulk/Oil) 82,199 1973tUltrasea a . . . . . . . . . . . . . OBO (Ore/Bulk/Oil) 82,199 1974Walter Rice . . . . . . . . . . . Bulk 23,510 1945Betty Wood . . . . . . . . . . . Bulk (Tug/Barge) 23,751 1973Calrice Transport . . . . . . Bulk (Tug/Barge) 25,000 1976Jamie A. Baxter . . . . . . . Bulk (Tug/Barge) 24,372 1977Moko Pahu . . . . . . . . . . . Bulk (Tug/Barge) 25,931 1982

Total (operating) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764,051tGolden Phoenixb . . . . . . BO (Bulk/Oil) 129,000 1983Ogden Paranac . . . . . . . . Bulk 45,000 1983Ogden Trentc. . . . . . . . . . Bulk 45,000 1983

tvessel built with CDS.%rrently operating in preference trades under Sec. 614 of Merchant Marine Act.bunder reconstruction, Former LNG carrierscUnder construction.

SOURCE: U.S. Depafiment of Transportation, Maritime Administration, Office of Trade Studies and Subsidy Contracts, Divi-sion of Statistics, Mar. 8, 1963.

76 ● An Assessment———.—.— of Maritime Trade and Technology— ———.— —

turn, reduce the cost disadvantages of U.S.-flagbulk shipping. IO No. test of this hypothesis is avail-able, however, and the opposition, principally fromthe farmers who would bear the burden of increasedcosts for exporting, is very strong. It is significant,however, that efforts to modernize the fleet andmake some segment cost competitive could bringsizable benefits to this industry because of themagnitude of present and future U.S. bulk trades.(Existing and proposed cargo-preference policies arediscussed further in ch. 7.)

U.S.-bulk cargo reservation schemes and theauthority for U.S. carriers to operate foreign-built,foreign-crewed ships under the U.S. flag are theonly proposals now under consideration, whichwould bring a significant U.S.-flag bulk fleet intoexistence. While the ability to buy foreign-builtships would eliminate the capital cost disadvantage,there would remain a large differential betweenU.S. and foreign crew costs. As previously men-tioned, the aggregate crew cost differential (in-cluding effects of higher U.S. manning scales andindirect costs) is perhaps more important thanmerely wage rate differentials.

The foreign-flag tanker and dry-bulk fleet under‘ ‘effective’ U.S. control is cost competitive on aworldwide basis. In the past, this fleet (and the fleeton long-term charter to U.S. companies) has grownsubstantially and serves a large portion of U. S. in-ternational trade and many other foreign-to-foreigntrade routes. The cost and technology advantagesavailable anywhere in the world generally have beenadopted by this fleet.

‘“See “Development of a Standardized United States-Flag Dry-BulkCarrier, a report prepared for the Maritime Administration by M.Rosenblatt & Son, January 1979.

If U.S. dry-bulk export trade growth follows theWharton Econometric forecast of over 4 percentper year between 1980 and 2000, such growth clear-ly will require additions to the fleet serving thattrade. Table 25 illustrates trade-growth projectionsfor several major bulk commodities. Without Gov-ernment policy changes, the future fleet makeupwill depend largely on the business strategies oflarge bulk shippers (the multinational natural re-source companies) and the ship owners and oper-ators who carry that cargo. Those business strate-gies clearly pointtrolled fleet under

toward expanding the U.S. con-foreign flags rather than the U. S.-

flag bulk fleet.

Table 25.—U.S. Dry-Bulk Export and Import Trades(million tonnes)

1980 1990Commodity (actual) (projected)

Coal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.8Iron ore. . . . . . . . . . . . . . . . . . . . . . . . . . . 25.5Grain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.2Alumina/bauxite . . . . . . . . . . . . . . . . . . . 20.2Phosphate rock . . . . . . . . . . . . . . . . . . . . 14.8Rice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8Sorghum. . . . . . . . . . . . . . . . . . . . . . . . . . 5.4Soybeans/Meal . . . . . . . . . . . . . . . . . . . . 28.8Forest products . . . . . . . . . . . . . . . . . . . 27.6Fertilizers . . . . . . . . . . . . . . . . . . . . . . . . . 13.4Potash . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2Sulfur . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,7Chrome ore . . . . . . . . . . . . . . . . . . . . . . . 1.2Gypsum . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8Manganese ore . . . . . . . . . . . . . . . . . . . . 1.2Iron/steel scrap . . . . . . . . . . . . . . . . . . . . 10.7Petroleum coke. . . . . . . . . . . . . . . . . . . . 8.0Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9

133.057.7

143.622.619.62.65.16.3

30.035.717.8

,2.8.9

9.5.9

11.413.04.8

SOURCE: U.S. Maritime Administration, 1979 and FACS, 1982.

THE U.S. DOMESTIC FLEET

Under the Jones Act, all vessels in the domestic though it is a very significant U.S. transportationtrade must be constructed in the United States and sector on the inland waterways and on some coastalbe of U.S. registry. The domestic trades include trades.coastwise, intercostal, noncontiguous, and inlandwaterway trades. Since this report focuses on sea- Table 26 summarizes the domestic fleet. As theborne trade, we have not included information or table shows, the vast majority of domestic tradestatistics on tug and barge transportation even ships are tankers. As of May 1983, of a total ac-


Table 26.—Active U.S. Flag Domestic Fleetas of May 1,1983

Number of vessels Deadweight-tons

General cargo. . . . . . 34 484,000Bulk cargo . . . . . . . . 7 202,000Tankers a . . . . . . . . . . 175 9,139,500

Total. . . . . . . . . . . . 216 9,825,500NOTE: Includes vessels of 1000~ gross tons and over.

Excludes vessels operating exclusively on the Great Lakes and inland wa-terways, those owned by the U.S. Army and Navy, and special types suchas cable ships, tugs, etc.

~hera are an additional 6 tankers, totaling 1,427,500 dwt, built with CDS, presentlyoperating in the domestic trades.

SOURCE: U.S. Maritime Admlnistration, Off Ice of Trade Studies and Subsidy Con-tracts, Dlvlsion of Statistics, July 1963.

tive fleet of 216 ships, totaling 9,825,500 dwt, 175vessels of 9,139,500 dwt were tankers (93 percent).

The major domestic liner trades—Hawaii, Puer-to Rico, and Alaska-have shown very little changesince 1970. Trade volumes are mostly dependenton domestic economic growth, with some negativeimpact coming from the increase in foreign sourcesof goods for domestic consumption. For example,between 1970 and 1981, U.S. real economic growthwas a rather modest 3 percent per year. Since muchof this growth was in the service sector, the growthin the goods component was probably less than halfthat amount. This slow economic growth in goodscorrelates with very low annual growth rates in do-mestic commodity movements—5 percent per yearfor total U.S. intercostal movements and 2 per-cent per year for the domestic noncontiguoustrades.

Most dry-bulk domestic cargo is carried onbarges. Eight major bulk commodities accountedfor 80 percent of total barge carriage. Barge serv-ice is generally lower cost than equivalent ship serv-ice because of the low manning levels which havebeen negotiated for tug and barge operations ascompared with ships. Even if operators had accessto foreign-built bulk ships, high U.S. crew costsprobably still would favor barge service in the U.S.domestic trades unless major technological advancesallow significant manning reductions. The shorterdistances in the domestic trades also help to makebarging more economical. While most of the bargecarriage is of bulk commodities, some U.S. oper-ators (notably the Crowley Maritime Corp. ) havebeen successful with short-haul liner-type serviceon barges, especially in the west coast-to-Alaskatrade and the east coast-to-Puerto Rico trade.

The Domestic Tanker Trades

Domestic oil movements have undergone signifi-cant geographical shifts over the past 20 years, andthis change has affected the demand for tankers.Twenty years ago the major oil trade was from thegulf coast to the east coast. Crude and producttanker movements totaled 2 million barrels per daythen. These movements remained essentially con-stant until the early 1970’s. In 1971 domestic crudeproduction along the gulf coast began to decline andwith it the demand for tankers to move this oil. To-day, this crude trade—once accounting for over 25percent of tanker movements—has essentially dis-appeared.

With the decline in crude production, productmovements also began to fall in the late 1970’s. Inaddition to less production, this also reflected adecrease in overall product demand and an increasein pipeline capacity. Product movements from thegulf to the east coast are expected to remain staticfor the foreseeable future.

Figure 27 illustrates the decline in tanker tradeand the current increase in pipeline carriage fromthe gulf to east coast from 1960 to 1982. The tankerdemand—for both crude and product movementsgulf to east coast—is now less than 50 percent ofwhat it was 20 years ago as pipeline systems haveproven more cost effective than ships.

While tanker demand was declining on the othercoasts, the west coast emerged as an area of crudesurplus. Huge oilfields on the North Slope in Alaskawere brought into production in the mid-1970’s.

Figure 27. —Gulf-East Coast Tanker Movements3.0 Y

2.5 - Product pipelinesi?u Crude tankersh 20a . -mz&

1.5 -- - - S .q - 0 0 02

co 1.0 -===

/ / Product tankers0.5 “

o ’I 1 I I

1960 1965 1970 1975 1980

SOURCE: Exxon Shipping Co., 1963.


By 1978, production from the North Slope, whichis pipelined to a tanker terminal at Valdez insouthern Alaska, reached 1.1 million barrels perday and exceeded the capacity of west coast mar-kets. Substantial tanker tonnage was needed tomove this crude to the gulf and east coasts. Nine-teen Jones Act tankers with deadweights in excessof 100,000 tons each were built during the 1970’sto serve the Valdez, Alaska, trade. Currently, anaverage of 1.6 million barrels per day is transported.

Today, more than half of the domestic tankertonnage is associated with the crude oil trade fromAlaska, and many experts believe that the futureof the U.S. tanker fleet rests primarily with thepetroleum industry’s search for oil reserves off thecoasts of California and Alaska. Not only will newdiscoveries lead to new demand for tanker services,but much of the future potential is in Arctic or otherhostile environments where improved transporta-tion methods and technology will be the key to eco-nomic petroleum production. 11 However, futureproduction off the coast of California and in theArctic is extremely uncertain. By 1988, AlaskanNorth Slope production is expected to peak andthen decline through 2000. The deficit in domestictanker tonnage in the recent past has become a sur-plus in 1983 and will probably continue in the nearfuture. Without new discoveries, a significant sur-plus of tankers could exist by 1995. However, off-shore Alaska and California are the most promisingregions in the United States for future oil and gasdiscoveries.

Recent estimates for California put the offshoreoil resource potential of the region at 3.7 billion bar-rels, with two-thirds of this off southern Califor-nia. New discoveries have already been announcedin the Santa Barbara Channel and the Santa Mariabasin.

The disposition of future offshore Californiaproduction —estimated at 300,000 barrels per dayby 1990—is uncertain. It could be transported viapipeline to Texas or alternately by tanker to thesame area. A third possibility is displacement ofAlaskan crude in west coast markets. This wouldincrease tanker demand for the Alaska trade be-

cause that oil would be transported to more dis-tant locations.

The largest potential source of undiscovered pe-troleum reserves lies in and off the coast of Alaska.Estimates have placed this total as high as 25.5 bil-lion barrels. Lease sales, followed by explorationdrilling scheduled for the next few years, could de-termine actual levels.

The areas where industry is most likely to dis-cover producible oil and gas in the near future arethe Beaufort Sea near-shore area (9.5 billion bar-rels possible) and the North Slope area adjacent toPrudhoe Bay (6.5 billion barrels possible). Assum-ing these fields are commercially viable, about 10years can be expected to elapse between lease saleand production. Thus, the Prudhoe Bay produc-tion decline could begin before new fields start, anddemand for new tanker tonnage to serve Alaskawould not be significant until after 1995. Figure28 is a projection by Exxon of the demand for tank-ers serving Alaskan petroleum production with awide range of possibilities by the year 2000.

As shown, in the more distant future, major newfinds in the Alaskan Arctic could result in signifi-cant demand for tankers. However, this area rep-resents formidable technological challenges because

I“’Future Requirements for Tank Vessels” by F. J. Iarossi, Ex-xon Shipping Co., presented at the SNAME Spring Meeting, April1983.


Figure 28.—industy Outlook for the AlaskanTanker Trade

0 i I J J i L - J - J1980 1982 1984 19s8 19s8 1990 1995 2000

SOURCE: Exxon Sh{pplng Co., 19S3.

of the physical conditions there. The costs of ex-tracting and transporting such reserves would beenormous. Potentially, a large market could resultfor domestic tankers, but major challenges wouldhave to be met by ship designers, builders, andoperators.

Regulation of Domestic Liner Trades

The coastwise, intercoastal, and noncontiguoustrades are subject to regulation by the InterstateCommerce Commission (ICC), which in recentyears has reduced or eliminated rate regulation ofdomestic rail and truck carriers, effectively freeingthe carriers to set rates at market levels, The non-contiguous trades are also subject to regulation byFMC. FMC and ICC require carriers in thosetrades to justify requests for rate increases to FMC.The currently accepted level of reasonableness forsuch rates in the Hawaiian trade provides carrierswith a 13-percent return on assets. A recent requestfrom FMC—under Docket No. 82-14—for recom-mendations for changes in regulation of the non-contiguous trades received a unanimous responsefrom the carriers asking that the test of reasonable-ness for rates be dropped. FMC is still consider-ing the issue.

Continuing the test of reasonableness by FM(3should not prove a hardship on the carriers or theservice provided during times of low inflation. Intimes of high inflation, however, the profits gen-erated by rates limited by the current Ievel of rea-

sonableness are inadequate to encourage either newinvestment by existing carriers or to attract newcarriers to the trades because the rate base on whichthe 13-percent return is calculated is depreciatedbook value rather than current market value,

Use of Foreign-Built Ships inDomestic Trades

Some in the U.S. shipping industry, as well asconsumer interests, have proposed that foreign-bufitships be allowed to enter the domestic trades. Inthe noncontiguous domestic liner trades—Alaska,Hawaii, Puerto Rico, and Guam—use of foreign-built ships could result in lower freight rates andthus somewhat lower cost goods. Combined withthe trend toward attempts at Government “buy-outs’ of ODS for U.S.-flag liner carriers, use offoreign-built ships could permit a number of U. S.-flag carriers to begin serving these trades en routeto or from their foreign-trade destinations. Thereis considerable debate on the overall costs andbenefits of allowing foreign-built or previously sub-sidized vessels to participate in domestic trades, asdiscussed further in chapter 6.

In the coastwise and intercoastal trades, whereocean shipping is in competition with truck and rail,access to foreign-built ships by itself would beunlikel y to lead to new transportation services. Theavailability of lower cost foreign-built ships com-bined with mixed proprietary and common carriageand flexible union manning requirements, how-ever, might well lead to new, more competitive in-tercoasta. services.

Significant opposition to these proposals forforeign-built domestic ships has been voiced byU.S. shipbuilders. Chapter 6 discusses that issuein more detail.

In some domestic offshore trades, the U.S. linerfleet is limited in size and capabilities, and ship-pers have had difficulty when there was a need forspecial handling or equipment. Under present law,a U.S.-flag, U.S.-built ship must be used fordomestic offshore carriage, even in cases where itis marginally able to carry the shipment comparedto a foreign-flag ship of much more suitable design,

It has also been proposed to increase the limiton foreign ownership of U.S. carriers (from 25 to

80 ● An Assessment of Maritime Trade and Technology— —

—

75 percent in the domestic trades and from 49 to75 percent in the U.S.-foreign trades). The ra-tionale used is that, historically, foreigners havebeen more willing than U.S. citizens to invest inshipping—even though it is a low-return industry.Thus, the argument runs, as owners they wouldbe more likely to invest in new ships and facilities,thereby enhancing the efficiency and productivityof the fleet. However, the countervailing argumentthat increased foreign presence in U.S. shippingcould have a detrimental impact on national securi-ty should also be considered. Of particular concernwould be any investment by the U.S.S.R. or citi-zens of other controlled economies.

There is no reason to think that a good foreignoperator would make business decisions in the U.S.environment any differently than would a goodU.S. operator, except that, being less involved withU.S. shipping traditions, they might be expectedto phase out marginally profitable or unprofitablebusinesses more quickly. Yet the current trend inthe U.S.-flag liner fleet toward takeover of mar-ginally profitable U.S. companies by financiallystronger U.S. companies is already causing someindustry restructuring and revitalizing. It is notclear that a change in the limitations on foreignownership is in the best interests of the U.S. in-dustry at present.

Opening U.S. carriers to majority ownership byforeigners could, however, increase the availabilityof capital and management to U.S. carriers, andit could open the way to joint ventures, and enhancethe viability of the U.S. carriers.

Technological Developments

The domestic trades are served by various andspecialized tanker, liner, and neobulk vessels (con-tainer, RO/RO, railcar, and lumber carriers) aswell as barges. The need for special product car-riers and flexible services will undoubtedly con-tinue. The size of domestic noncontiguous liner

ships should also increase as new ships are intro-duced into these trades. The size of the crews onU.S.-flag liner ships operating in the domestic non-contiguous trades could be reduced as crew size con-cessions are won by U.S. operators in the foreigntrades. However, such reductions may be depend-ent on replacement of existing vessels.

The ancillary ship-related, container, and ter-minal technologies will probably be incorporatedinto the domestic noncontiguous fleet in essential-ly the same time frame as they are for the U. S.-flag ships operating in the foreign trades.

Liner service in the domestic inter- and intra-coastal trades has declined markedly in the last twodecades. AMPAC, a recent U.S.-flag intra-westcoast service, did not survive. Because of the eco-nomic advantages of highway and rail transporta-tion systems, it is unlikely that liner service in thedomestic intercostal and intracoasta.1 trades willbe introduced or provided in the near future ex-cept as an adjunct to other trades (e. g., U.S. Lines’east coast-to-west coast service). There are certainconstraints now affecting the domestic maritime in-dustry which, if lifted, could improve its com-petitiveness. One is MarAd’s requirement undertitle XI regulations that prohibits the use of foreign-manufactured main machinery or major hull com-ponents. 12 There is, at present, discussion withinMarAd of eliminating that requirement. If this weredone, the construction cost of Jones Act ships withtitle XI guarantees may be reduced substantially.

Significant opportunities for the U.S. domesticfleet in the long run may lie in the need to moveall cargo by the most fuel-efficient means. Ifunreasonable cost disadvantages of shipping ver-sus other transport modes could be eliminated, itseems most likely that many trades would favorshipping because of its inherent energy efficiency.

1246 CFR 298.11 specifies no foreign source materialS or componentsshall be included in the vessel cost figures submitted for a loanguarantee except if the Secretary issues a waiver.

Ch. 3—The U.S. Shipping Industry . 81—

THE FUTURE U.S.-FLAG FLEET

In the past, the U.S. Maritime Administrationpublished annual forecasts of the makeup of theU.S.-flag fleet. ’3 This is no longer done. The 1981forecast showed less than 10-percent decline in thetotal number of ships in the privately owned fleetfrom 1981 to 1991 (from 569 to 528 ships). Itassumed no major policy changes and no majoreconomic factors affecting trade flows. It alsoshowed replacement in the tanker fleet and substan-tial (percentage) growth in the now very small bulkfleet (from 18 to 63 ships).

Whether or not this forecast was accurate, manyrecent conditions have affected the assumptionsmade about both policy and trade growth. The fore-cast base is very uncertain in 1983. The liner fleethas growth potential but is very dependent on policyactions which are yet to be clarified. The bulk andtanker fleet faces a much more uncertain economicpicture in the near term. Pressures to shift subsi-dized tankers to the domestic trades and to reduceboth subsidies and preference cargoes will affect thebulk carrier and tanker numbers drastically. Someexperts believe that without policy changes, all seg-ments of the U.S. fleet will decline markedly overthe next 10 years.

The potential future U.S. liner fleet has been amatter of discussion recently by industry spokes-men. One view was offered by C. 1. Hiltzheimer,Chairman of Sea-Land Industries at the Joint Mar-itime Congress in June 1982.14 Hiltzheimer pointedout that, in order to be competitive, large portionsof the U.S. liner fleet will need to be replaced bymodern, efficient vessels. Assuming that a cost-competitive, unsubsidized fleet carrying a 40-per-ent share of U.S. liner trade by 1990 is a feasible. —

‘3 The last one was “Forecast of the Privately Owned U.S. Ftag Fleet,1981-1991, ‘ ‘ by the Maritime Administration, Office of Policy andPlans, December 1981.

14c, H i]tzhelmer, Improk,ing the operating Efficiency of the LT.s.Flag Aferchan( Marine (No\ato, Calif.: TRANSPORT 2000, 1982).

goal, he believes it can be achieved by a massivecapital improvement program. (Building 100 to 150new ships and investing $8 billion to $9 billion).He also states that significant Federal policy changeswould be required before industry would or couldmake such investments. Among these policychanges are: assured fair access to cargo, regulatorychanges to allow rationalization and improve uti-lization, and promotional taxation incentives. Ifsuch changes were made and if industry investedin fleet modernization, it is claimed that the U.S.liner industry could compete in the world market,capture a reasonable share of U.S. trade, and of-fer good service to shippers. Such a scenario wouldshow at least a doubling in capacity of the U.S. linerfleet and a transformation from mainly subsidizedto mainly unsubsidized operations.

The potential for a U.S.-flag bulk fleet is con-sidered by most to depend more on cargo-reserva-tion policies than on ‘‘fair cargo access’ policies.While growth in that fleet could be postulated inthe same way as that for the liner fleet, U.S. costdisadvantages are considered much more signifi-cant in bulk trades. It appears, however, that someconsistency in existing cargo-reservation policies,combined with tax and other similar incentives pro-vided to liner operators, could spur some rejuvena-tion of the U.S. bulk fleet.

Therefore, it seems clear that Federal policy inthe 1980’s will determine the vitality of the U.S.shipping industry in the decades to come. If thereare no changes in policy, there probably will be adecline in most segments of the industry, while cer-tain positive policy changes could lead to rejuvena-tion and growth.

Those policies, which would have a positive ef-fect on certain sectors of the U.S. shipping industry,are reviewed in chapters 6 and 7 of this report. Pol-icies to promote growth in U.S. trade and assure

—


fair access to all international trade for U.S. car-riers would naturally benefit all sectors of the ship-ping industry. However, such policies would bemost useful for continued success of those com-panies which have already attained high produc-tivity and are now reasonably competitive in worldshipping. Such qualities apply to certain of theU.S.-flag liner companies and to the U.S.-con-trolled, foreign-flag bulk fleet.

Several other Federal policy initiatives are alsoof major importance to the U.S.-flag liner opera-tors. These include: maintenance of existing Gov-ernment-impelled cargo preference, modificationto the Shipping Act granting wider antitrust im-munity in order to achieve benefits of high utiliza-tion and economies of scale, and modifications totaxation policies and/or financial incentives whichwould allow future capitalization on a cost-compet-itive basis with other shipping nations. Policies topromote cost-competitive industry capitalization arealso critical to the U.S. effective control fleet.

For the U.S.-flag bulk fleet (tankers and dry-bulk) in foreign trades, future viability is uncer-tain unless major Federal support is applied. Sincethe world bulk business is so poor right now, and

U.S. costs are significantly higher, U.S.-flag bulkoperators are not competitive with other major ship-ping nations (nor are they competitive with the for-eign-flag U.S.-controlled fleet). Federal support forthe dry-bulk fleet to date has taken the form of car-go-preference policies, and current proposals areto expand these to the commercial U.S. bulk trades.Construction and operational subsidies (combinedwith taxation, loan guarantees, and other incen-tives) were successful in the 1970’s in promotingan expanded U.S.-flag tanker fleet. However, itdoes not appear that such incentives would providesufficient support if they were reinstated at the samelevel today. If it is considered in the national in-terest to promote through Federal support an ex-panded U.S.-flag bulk fleet, a thorough analysisof alternative approaches would probably be useful.For the U.S. domestic fleet, continuation of existingJones Act provisions would probably lead to con-tinued viability of those sectors which are successfultoday. Pressures to change those provisions will,however, continue from shippers and consumersserved by the domestic fleet, who believe that in-creased competition would lead to more efficientand less expensive service.

Photo credit: Avonda/e Shipyards, Inc.

Contents

Page

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Characteristics of the ShipbuildingIndustry . . . . . . . . . . . . . . . . . . . . . . . . . 87

General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Definition of the U.S. Shipbuilding

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87The Markets of the U.S. Shipbuilding

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89U.S. Shipbuilding Industry Orders . . . . . . . 91The Capabilities of U.S, Shipyards . . . . . . . 94The Technology Level of the U.S.

Shipbuilding Industry . . . . . . . . . . . . . . . . 96The Labor Force of the U.S. Shipbuilding

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Demographic Characteristics of the

Shipyard Work Force . . . . . . . . . . . . . . . . 102Shipyard Workers’ Hours and Earnings. . . 102Organization of Shipyard Labor . . . . . . . . . 104

Shipbuilding Productivity . . . . . . . . . . . . 106The Determinants of Productivity . . . . . . . . 106Productivity Trends in the U.S.

Shipbuilding Industry . . . . . . . . . . . . . . . . 108Improving U.S. Shipbuilding

Productivity . . . . . . . . . . . . . . . . . . . . . . . . . 110

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 112TheTheThe

Physical Facilities Problem . . . . . . . . . . 112Management Problem . . . . . . . . . . . . . . 113Labor Force Problem . . . . . . . . . . . . . . 113

TABLES

Tabl t ’N’o . Page

27.

28.

29.30.31.

U.S. Shipyards Comprising theActive Shipbuilding Industrial Base . . . 88Proposed 5-Year Navy ShipbuildingProgram . . . . . . 4 . . . . . . . . . . . . . . . . . . . 90Orderbook in Major U.S. Shipyards . . 93U.S. Shipyard Work Experience . . . . . . 95Examples of Projects ThatTransferred Technologies toKorean Shipyards, 1971-82 . . . . . . . . . . 100

Table No. Page

32.33.

34.35.36.

37.

Method of Wage Payment . . . . . . . . . . . 103Estimated Hourly Compensationof Shipbuilding Production Workersin 16 Countries . . . . . . . . . . . . . . . . . . . . 104Shipbuilding Cost Increases, 1975-80. . 105Unions in U.S. Shipbuilding Yards . . . 106CGRT Measure of Productivity Gainsin Private U.S. ASIB Shipyards . . . . . . 108Value-Added Measure of ProductivityGains in U.S. Shipyards . . . . . . . . . . . . 109

FIGURES

Figure No. Page

29.

30.

31,

32.

33.

34.

35.

36.

37.

38.

Shipbuilding and Repair, Trendsin Value of Work Done . . . . . . . . . . . . . 89Merchant Ship Construction inU.S. Yards 5-Year Average,1930-80 . . . . . . . . . . . . . . . . . . . . . . . . . . . 91Merchant Ship Construction inU.S. Yards, 1973-82 . . . . . . . . . . . . . . . . 92Historical Trends in Ship DeliveriesFrom U.S. Shipyards . . . . . . . . . . . . . . . 92Major Private Shipyards andNavy Programs . . . . . . . . . . . . . . . . . . . . 94Value of Shipyard Work onOrder, U.S. Private Shipyards . . . . . . . 95Private and U.S. Naval ShipyardEmployment Levels, 1960-80,and Projected Through 1990 . . . . . . . . . 100Shipbuilding and RepairingEmployment in Private U.S.Shipyards, 1978-82 . . . . . . . . . . . . . . . . . 101Mobilization and OptimumEmployment Estimates andCurrent Employment Levels inthe Major Private Shipyards . . . . . . . . . 102Shipbuilding Industry WorkloadForecast . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Chapter 4

The U.S. Shipbuilding Industry: Status andTrends in Technology and Productivity

OVERVIEW

This chapter examines the productive capacityof U.S. shipbuilding. It traces the historic develop-ment of the industry and describes its present situa-tion. It analyzes the status of technology employedand the level of competitiveness for constructionof today’s major merchant ships. Finally, it presentspossible approaches to maintaining and improvingthe health of the industry,

Over the past two decades, the United States hasonly built major merchant ships when Federal sub-sidies were used to pay a large portion of the costor when laws, such as the Merchant Marine Actof 1920 (’Jones Act), required that the ship be builtin a U.S. yard. The United States has, therefore,been isolated from international competition forthese types of vessels.

In many other major maritime countries, ship-building is viewed on a global perspective. This isnot the same in the United States, where only 1to 2 percent of the world merchant fleet is now built.The U.S. shipbuilding industry is basically quitedifferent from that of Europe, Japan, and Korea.Those countries have built most of today’s modern

shipping fleets and compete for orders in a worldmarket. The United States does not.

However, the United States does have a largeand diversified shipbuilding industry. Its totalemployment (175,000 in 1982) is even larger thanJapan’s. The U.S. industry has some very produc-tive and technologically innovative segments, in-cluding those who build barges, tugs, supply boats,and offshore drilling rigs. Moreover, U.S. ship-yards are foremost in construction of large, com-plex, and sophisticated naval warships.

In commercial shipbuilding, the Japanese, andmore recently the Koreans, have based their recentsuccess on responsiveness to developments in theinternational shipping arena. They did this by:

●

●

●

obtaining the best combination of inputs, in-cluding skilled but low-cost labor, a strongwork ethic, advanced technological capabilities(universities, technical institutes, etc.), finan-cial means, qualified management, and manynew facilities;tenaciously pursuing the largest volume shipmarkets in recent decades, particularly liquid-and dry-bulk vessels. This has allowed themto ‘ ‘go up the learning curve, making per-sonnel and technical improvements, enablingthem to build ships much more cheaply thantheir rivals. A key aspect of their improvementprogram has been standardization and integra-tion of processes, to achieve efficiency; andintegrating ownership of major yards withlarge industrial groups operating allied busi-nesses such as steel, machinery, electrical ma-chinery, and trading.

Part of the reason for Japan’s success in ship-building is that a large base of demand has comefrom Japanese ship operators who purchase theirships from Japanese shipyards. Thus, the yardshave had consistent, long-term contracts and haveoften been able to offer incremental prices to buyersfrom the rest of the world.

While there is no Japanese law that requires shipoperators to build in Japan, a review of world shipson order in 1983 shows that all those under con-struction for Japanese owners are being built in Jap-anese yards.

Volume is the prime factor in a highly produc-tive shipbuilding industry. Without large numbersof ships to build, it is not possible to hone the pro-ductive process to a sufficient degree to reduce costs.—.—————

‘See ‘‘Fairplay Shipping W’cckly-World Ships on Order, April1983—Japan has under construction for Japanese owners 4,7 milliondeadweight tons (dwt), which is more than for an}’ other flag exceptLiberia, and represents about 9 percent of world orders

85


This is why the Japanese and Korean strategies ofconcentrating on building large numbers of relative-ly simple bulk vessels were so important to theirsuccess.

Many other factors have played a role in the highproductivity of Japanese and more recently Koreanshipbuilding. These yards have developed theirtechnology to an advanced degree, beyond thatfound elsewhere in the world. The investment-per-worker in Japanese and Korean yards surpasses thatof almost all other nations, Their technology isbroad-based, and they have adopted technologiesthat complement each other; i.e., they have pur-chased machinery and adopted production proc-esses that are carefully interrelated to achieve asmooth and highly efficient work flow.

In comparison to many other major shipbuildingnations, the United States has not installed the levelof modern shipbuilding technology necessary forhigh productivity in the construction of today’s ma-jor merchant ships.

In contrast to the Japanese and Korean model,some major problems with U.S. shipbuilding tech-nology have been:

●

●

●

●

It

long delays in introducing new technologies;a reluctance to adopt foreign technology, anda reluctance to enter into-joint ventures, licens-ing, purchasing, or other arrangements for thespeedy, effective transfer of technology;a minimal exchange of technology among U.S.shipyards; andminimal evaluation of technologies in otherareas (aerospace, electronics, etc. ) that havepotential applications to shipbuilding.

is noteworthy that the problem of low output

chant ships, primarily caused by the eliminationof Federal funds for construction subsidy programs.While the U.S. Navy has embarked on an ex-panded building progam, it will not require muchadditional shipyard capacity until the mid-1980’s,and only the few yards that specialize in warshipswill benefit substantially. The trends in the industryare thus toward more U.S. Navy work, more con-centration in fewer large firms, and hard times forthose firms that have, in the past, depended oncommercial shipbuilding subsidies. Although U.S.yards have made recent strides in improving pro-ductivity in the construction of merchant vessels,the primary focus of the industry is still on U.S.Navy work where high-technology, custom workis the rule.

Two different approaches to improving U.S.shipbuilding productivity appear possible. Onewould concentrate primarily on Federal support orassistance to the industry combined with incentivesto enhance productivity. Several other maritimecountries appear to be adopting such an approach.

Another approach would focus on developingother emerging markets for U.S. shipyards, assum-ing that there is little chance that the U.S. industrycan reduce costs of conventional merchant shipsbelow the level of the low-wage countries. The U.S.shipbuilding industry is geared to custom work andthe integration of highly technical with conventionalsystems. Markets for such skills may develop infields like Arctic- or deepwater-resource extraction.A challenge for industry and the Federal Govern-ment would be to cooperate to identify and developthe most promising markets.

of labor from U.S. yards cannot be traced in anypart to worker skill. U.S. shipyard workers are asskilled as their Japanese or Korean counterparts.Rather, the problem is related to work organiza-tion and the production tools available. Brieflystated, U.S. yards have never had sufficient volumeof merchant ship orders to specialize, to becometruly expert, or to develop high efficiency. Flex-ibility to build many different varieties of ships andother marine equipment has been maintained inU.S. shipyards. Thus, the economies of mass pro-duction have seldom been adopted.

The U.S. shipbuilding industry is facing a severedecline in potential new buildings of major mer-

Photo credt: Lockheed Shlpbulldlng Co.

Construction of U.S. Navy warships such as the aboveis expected to dominate the U.S. shipyard orders over

the next several years

Ch. 4—The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity ● 8 7— ——— . —

CHARACTERISTICS OF THESHIPBUILDING INDUSTRY

General

World shipbuilding is a cyclical industry withfluctuating demand. It has experienced over ninemajor cycles, each with more than a 40-percentreduction in demand, since 1896. Three of thesecycles have occurred since World War II alone.

From 1930 to 1933, for example, there was a de-cline of 84 percent in shipbuilding output. Again,at the end of World War II, between 1944 and 1947a decline of 85 percent was experienced because ofthe glut of ships built for the war. More recently,a worldwide decline of 60 percent occurred from1975 to 1979. In addition, smaller fluctuations of10 to 20 percent every 7 to 10 years have becomequite common.

The shipbuilding industry is an assembly indus-try that is both capital- and labor-intensive. Largecapital facilities are required, and major compo-nents usually are purchased from man y sources.The assembly process itself, using a mixture of largeand small, and single and complex components, isvery labor-intensive. As an assembly industry, ship-building has major and significant linkages to manyother industries, such as iron and steel, machinery,electrical, and electronic manufacturing. Its assem-bly process can be expanded to include component,and even machinery, manufacture or contractedto include only ship assembly processes. As a result,integrated shipbuilders with close relations to link-age industries can often more effectively weatherlarge cyclical fluctuations than shipbuilders wholack integration with their major supplier industries.The latter is the case with most U.S. shipbuilders.

Investment in shipbuilding equipment on a per-employee basis has mushroomed in recent years.Although many foreign shipbuilders have recent-ly cut back and consolidated facilities, certainforeign shipbuilders are gearing up for a revival ofthe industry by the introduction of more automa-tion, robotics, modern measurement and controltechniques, computerized management methods,and facilities that provide for greater product flex-ibility. Because shipbuilding is considered an im-

portant economic and defense asset, and also be-cause it affects many related or interrelated indus-tries and employment, many governments supporttheir shipbuilding industries directly or indirectly.Furthermore, governments in many countries nowtake an active part in the ownership of commer-cial shipyards (i. e., the United Kingdom, Sweden,Italy Spain, Portugal, Netherlands, Taiwan, Ma-laysia, India, Israel, and the Communist bloc na-tions). Other types of government shipbuilding sup-port, include:2

●

●

●

●

export credits (’Japan, Korea, Brazil);shipbuilding subsidies (United Kingdom,United States, Brazil);new orders financed by the government for ex-pansion of the domestic fleet or investment(’Japan, Taiwan, Korea); andexemption of import and other duties (Spain,Korea, India).

These government interventions have made it in-creasingly difficult to compare shipbuilding produc-tivity between various countries.

Definition of theU.S. Shipbuilding Industry

The majority of the approximately 500 U.S.shipbuilding and repair firms have fewer than 100employees and correspondingly limited buildingand repair facilities. Over 200 of the U.S. ship-building or ship repair facilities are surveyed an-nually by the U.S. Maritime Administration(MarAd). Of these, 30 are “major” (i.e., have atleast one large building berth) and 26 (as of March1983) are considered to comprise the ‘‘Active Ship-building Industrial Base” (ASIB).

The ASIB list changes (although only slightly inrecent years) as yards open, close, or turn to otherbusiness. Criteria for inclusion in ASIB include not

‘See “Maritime Subsidies” (Washington, D. C.: U.S. Departmentof Transportation, Maritime Administration, February 1983); and‘ ‘Financing and Subsidizing the Marine Industries” (Copenhagen,Denmark: MAN-B&W Diesel, November 1982).

. .


only facilities but also active conduct or pursuit ofshipbuilding work. ASIB yards must be ‘‘engagedin seeking contracts for construction of naval shipsor major oceangoing or Great Lakes merchantships. *

Table 27 is the list, as of March 26, 1983, of theASIB. Defense planners consider these ASIB yardsto be the core of the Nation’s shipbuilding capabilityand a principal measure of the United States’ abilityto respond to a national emergency. The U.S. Navykeeps a current tabulation of these yards and notestheir capability of building major combatant, am-phibious, auxiliary, and merchant ships. At pres-ent, 7 of the 26 yards are considered capable of U.S.Navy combatant construction. The U.S. Navy alsoperiodically develops shipbuilding mobilizationplans (one is under development in mid-1983) andsurveys about 100 other shipyards to determinewhich could be considered as extensions of the ASIBin a national emergency.

● NlarAd definition, used consistently in publications concerningshipbuilding, e.g., “Relative Cost of Shipbuilding. ”

Table 27.—U.S. Shipyards Comprising the ActiveShipbuilding industrial Base (ASiB)

Alabama Dry Dook & Sh@buiidh?g 00., Mobile, AiaThe Ameriw Ship Sqiidin@ O@W-Lorain, OhioAvondaia shim Imw New &@kn$, laSath imdhlorks OorP., @ath, MaOWB a y ShipBtilMlng Ca., SturgewI E@&, Wta. -

Bethiehem Steel Oorp,, Sparrows P@nt Yard, Baltltnora, Md.General Dynami~c S@ Oivteion, Groton, Corm.~e~e~w DynamiodQuincy Shlpbuiiding Division, Quincy,

Halter Marine, New &kans, Laingd~ashipbuiiding Ohdeion of Litton industries, f%wagoui~

Leving8ton Shi@ui@i,~~le,~aLookheed $hipbuildlno

Murinette Marine Oorp,, MMnetW, Wlu.Maryland Sh@buMdiaf# ~ @’ydQ@ w., @@timuM4 M-National St@ & w~’tildi ~.,~ ~, ~if.

k“-tvaNewport Newe $hi@bt#@n~”Norfolk Shipbulldin&& !Mydoak ~, -k, VaPennsylvania SMpbuiidlw 00., Chestw, i%Peteraon Bull= jno., St- @ay, W@. .Taooma wilding W., inet, l?Qom!# Wm.Tampa Shipy~ lno., Tam~ FW (subsidiary of Amertcan

s. B., 00.)Todd $h{pyards ~rp., GalveetOn, ~OX.Todd Shipyu’da OorP., Hou@?n, TQX~Todd Paoifio Shipyerd$ Corp., W ‘Angeid$e, OaWTodd Paoific $hiPYMiS ~rp,, $@l Franokoo, ~if.Todd Pacific Shipyards Oorp., Sedtie, Wash.SOURCE: Naval Sea Systems Command, March 19S3.

The 26 shipyards comprising the ASIB representover one-half of the total U.S. shipyard employ-ment and an even larger proportion of total valueof work done. The so-called ‘ ‘second-tier’ ship-yards also represent a viable U.S. industrial sec-tor. These shipyards mainly build and repairbarges, tugboats, towboats, supply boats, crew-boats, and offshore drill rigs. The industry group,American Waterways Shipyard Conference, peri-odically surveys this sector of over 300 shipyards.In 1981, about 75 of these yards reported a totalemployment of 22,000 and gross revenues of almost$2 billion, 95 percent of which was from the private(nongovernment) sector.

The second-tier shipyards have been hit severe-ly by the recent recession resulting in many yardclosings and a significant reduction in the laborforce (about 50 percent from 1981 to 1983). Evenso, some of these U.S. yards still build for and com-pete in foreign markets.

The shipbuilding supplier base has never beencompiled. The Shipbuilders Council of America(SCA) has distributed a questionnaire to its mem-bers, asking them to identify all subcontractors orfirms supplying at least $300,000 worth of goodsor services annually. The resultant tabulation ofthe supplier base will not be available until late1983.3

The supplier base has a key role in the improve-ment of U.S. shipbuilding productivity. Shipyards,particularly in the building of sophisticated navalvessels, may funnel up to 60 percent of the totalvessel cost to equipment suppliers and program sup-port functions. For some suppliers, the yard is akey customer whose needs take priority; for othersthe yard is almost a nuisance customer in terms ofvolume and dollar value of order and technologyrequired. Leadtimes may pose a scheduling con-straint, and problems in supporting industries maygovern ship delivery schedules.4

‘Telephone conversation with Shipbuilders Council of America,March 1983.

4, {Building a 600.Ship Navy: Costs, Timing, and ~ternative Ap-

proaches” (Washington, D. C.: Congressional Budget Office, 1982),p. 37.

Ch. 4—The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity ● 8 9

The Markets of the U.S.Shipbuilding Industry

The U.S. shipbuilding industry builds or hasbuilt for many markets, including U.S.-flag shipoperators in both foreign and domestic offshoretrades, the offshore oil industry, the U.S. inlandwater transport industry, fishing and tugboat oper-ators, and the U.S. Government—Navy, CoastGuard, and other seagoing agencies.

The recent cessation of construction subsidies hasprobably ended the prospect of orders from U. S.-flag ship operators active in the foreign trades, whilethe so-called ‘‘captive market’ of Jones Act andGovernment vessels, at present, is inadequate tosustain the U.S. shipbuilding industry at 1982 worklevels. U.S. shipbuilders’ share of world commer-cial orders also has averaged less than 5 percent overthe past decade.

It is naval building and repair that presently sup-ports the U.S. shipbuilding industry. The navalshare of ASIB shipbuilding output has hoveredaround 60 percent in recent years and is projected

Figure 29.—Shipbuilding and Repair,

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

to exceed 80 percent by 1987.5 In the past decade,40 percent of new contracts and 45 percent of an-nual deliveries have consisted of naval vessels. Thecommercial workload also reflected Governmentsupport. Of the 229 merchant ships contracted forby U.S. shipyards during 1972-82, 37 percent werebuilt with construction differential subsidy (CDS),and virtually all of the remainder were constructedfor the domestic fleet which, by law (’Jones Act),must be built in U.S. shipyards. G

Self-propelled new military ships in recent yearshave comprised between 33 and 40 percent of ship-yards’ revenues. When the repair of military shipsis included, the percentage rises to an average of47 percent. Approximately 33 percent of all navalrepairs, alterations, and conversions are performedin private yards—a proportion that has been steadyand probably will continue. Figure 29 illustratesthe trends in the value of work performed in allprivate shipyards between 1972 and 1982, divided

5Defense Economic Research Report, Data Resources Inc., June1982, p. 3.

%Shipbuilders Council of America, Washington, D. C., 1982.

Trends in Value of Work Done

-

New military ships=

1972 1974 1976 1978 1980 1982 1984

Year

SOURCE. SCA annual report 1982.

25-417 0 - 83 - 7 QL 3


. ● ✎

into major military and nonmilitary categories. Itshould be noted that military (U.S. Navy) construc-tion and nonpropelled (barge and rig) constructionhave shown the most significant growth over thisperiod. The 5-year naval shipbuilding program (fis-cal years 1984-88), involving 124 new vessels (51of which are major combatants), and 21 conver-sions, promises to increase the significance of navalwork for private yards (see table 28).

In contrast to the 124 new naval warships to becontracted for over the next 5 years, the MaritimeAdministration projects that about 25 new mer-chant ships (20 tankers, 3 bulk ships, and 2 cargoships) will be contracted—mostly to replace oldervessels in the domestic fleet. In terms of value, theU.S. Navy orders are expected to represent about90 percent of shipyard revenues.7

Naval work is unevenly distributed among theASIB yards: seven yards are considered “combat-ant capable’ (i. e., capable of building at least con-ventionally powered combatant vessels), six areconsidered capable of building ‘ ‘amphibious/aux-iliary vessels, and the rest are classified as ‘ ‘ca-pable of building seagoing merchant ships. ” Basedon the latest 5-year naval shipbuilding plans, it ap-pears that the large concentration of major com-

7Data Resources, Inc., The Economic Impact of the U.S. Ship-building Industry, August 1982.

batants will place even greater emphasis on thoseyards capable of complex warship construction.

One effect of the present high proportion of navalwork and repair is to focus U.S. yard attention oncustomized rather than serial design and produc-tion. While this disadvantaged the U.S. shipbuild-ing industry in the 1970’s, when series production>of large merchant vessels was at its height, its futureimpact may not be the same. Economic conditionsmay bring a return to low-unit demand for morecomplex ships, with a corollary tendency to main-tain labor-intensive production methods in ship-yards. Cargo reservation/sharing, on the other hand(if adopted on a broader scale), could produce agrowth of conversion or upgrading orders, or evennew building contracts.

An outgrowth of U.S. yards’ naval experiencecould be an ability to capture orders for foreignnaval vessels. An increasing number of U.S. ship-yards are eyeing the international warship market,which has grown rapidly in the last decade. Manycountries have begun to replace their aging fleets,and several countries (in ‘ ‘strategically activeareas’ have begun to build new navies. New gen-erations of weapon systems have caused technicalchanges that mandate design and constructionchanges. The development of advanced weaponsystems has changed naval tactics and resultant shipdesign and construction.

Table 28.—Proposed 5-Year Navy Shipbuilding Program (as of April 1933)

Number of ships planned in each fiscal yearType of ship 1984 1985 1986 1987 1988Trident missile submarines . . . . . . . . . . . . . . . . 1 1 1 1Nuclear attack submarines . . . . . . . . . . . . . . . . 3 4 4 : 5Nuclear aircraft carrier . . . . . . . . . . . . . . . . . . . . — — — — 1Guided missile cruisers . . . . . . . . . . . . . . . . . . . 3 3 3 3 2Guided missile destroyers . . . . . . . . . . . . . . . . . — l – 3 5Destroyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 1Landing ship dock. . . . . . . . . . . . . . . . . . . . . . . . 1 2 2 2 2Amphibious assault ship . . . . . . . . . . . . . . . . . . 1 — 1 — 1Landing platform dock . . . . . . . . . . . . . . . . . . . . — — — — 1Mine countermeasures ship . . . . . . . . . . . . . . . 4 4 4 — —Mine hunter-sweeper. . . . . . . . . . . . . . . . . . . . . . 1 — 4 4 4Stores and ammo ships and tenders . . . . . . . . — — 2 4 3Oilers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 4 4 4Cable ship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – l – –Ocean surveillance ships . . . . . . . . . . . . . . . . . . – 2 2 2 –Total of new construction . . . . . . . . . . . . . . . . . 17 21 28 28 30Conversions and reactivation . . . . . . . . . . . . . 6 5 3 4 3SOURCE: Admiral Fowler, Commander, Naval Sea Systema Command, testimony before the House Armed Servicea Commit-

tee, Apr. 5, 1983.

Ch, 4—The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity 91

In the 1970’s, worldwide naval shipbuilding ex-port orders totaled about 460 combatant units, plussome 40 auxiliaries (logistics ships, landing ships,patrol craft). Compared to the 1960’s, when ex-port orders totaled only 17 vessels, this is a signifi-cant growth market. a

Prices of naval vessels have risen sharply to reflectthe increased complexity of electronic ship systems,particularly weaponry. While the United States hasgarnered the majority of worldwide orders for mil-itary aircraft, it lags in ship construction. In recentyears, European yards have built 80 percent of na-val ship export orders, sometimes with heavy gov-ernment support. The United States may be dis-advantaged by lack of suitable designs for exportnaval vessels. However, in 1982, the orders of 4U.S. shipyards included 10 foreign military shipswith a total value of almost $1 billion. g

‘Man”time Reporter, Nov. 15, 1982.‘U.S. Navy, Annual Report on the Status of the Shipbuilding and

Ship Repair Industqy of the United States, 1980.

U.S. Shipbuilding Industry Orders

Both the long- and short-term variation in U.S.merchant shipbuilding over the previous 50- and10-year periods are indicated by figures 30 and 31.Since 1980, a steady decline in orders, particular-ly for deep-sea vessels, has occurred with only threenew merchant ship contracts awarded in 1982.Since 1960, the trend shown in figure 32 confirmsthat the U.S. shipbuilding industry shared onlybriefly in the profitability of the worldwide buildingboom of the 1970’s and reverted, in the mid-1970’s,to a level of output insignificant in world terms.This is clear from an analysis of the total numbersof merchant ship contracts awarded since the Mer-chant Shipping Act of 1970. A study by SCA foundthat the volume of tonnage of commercial buildingclosely correlated with the availability of construc-tion subsidy funds each year and fell far short ofthe goals of the 1970 Act.

From 1957 through 1982, only 8 to 10 of theASIB yards shared in naval shipbuilding orders ona regular basis. IO Thee indication is that those yards

‘“Ibid.

Figure 30.–Merchant Ship Construction in U.S. Yards 5-Year Average, 1930-80

co.-=.-Z

6

5 - ,

4 -

3 -.’.

2 -

1 -

01930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980

5-year midpoint

SOURCE: Marine Engieerlng/Log, 1982 annual.


Figure 31.— Merchant Ship Construction in U.S. Yards, 1973=821.3 ‘

1.2 m .,

1.1 : ,‘ .

1.0 -“ ,

0.9 -

0.8 “

0.7 “

0.6 “

0.5 - ’

0.4

0.3

0.2

0.1

0.0 I

.!.

—

—1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Ina..- 30c0z 255z2 20

15

10

SOURCE:

SOURCE: Marine Englneerlng/Log, 19S2 annual.

Figure 32.—Historical Trends in Ship DeliveriesFrom U.S. Shipyards

1960 1965 1970 1975 1980 1985

Year

Office of Technology Assessment with data from Shipbuilder’sCouncil of America.

Year

will continue to receive the overwhelming share ofnew naval ship orders and that, of these, four ma-jor private shipbuilders will continue to receiveabout three-quarters of the total value of navalorders. *

Recent employment trends also indicate a grow-ing concentration of ship construction in the fewlarge yards building complex warships. Table 35shows production employment of about 79,000 at14 ASIB yards at the end of 1982. Compared withjust 1 year earlier, total production employment in-creased by 2,000; several of the smaller yards lost

“According to U.S. Navy Annual Report, 75 percent of fiscal year1983 naval shipbuilding funding of over $18 billion will go to GeneralDynamics/Electric Boat, Newport News, Bath, and Ingalls.

Ch. 4—The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity 93

up to two-thirds of their work force while the largerones added more than enough to keep the totalgrowing.

The current orders of U.S. yards for naval ships,commercial ships, and drilling rigs is given in table29. Figure 33 illustrates the locations and ordersfor the private shipyards engaged in U.S. Navyshipbuilding. Figure 34 illustrates the historicalchanges in value of commercial and naval ship-building work from 1970 to 1982.

Yards not capable of winning U.S. Navy con-tracts will have to diversify or rely on repair workfor their near-term survival. Repair work is present-ly highly concentrated, with 15 percent of the yardsperforming 80 percent of the dollar volume of bus-iness. This is further confirmation of the existenceof an underutilized capacity in the industry.

Table 29.—Orderbook (Vessels Under Contract) inMajor U.S. Shipyards (as of March/April 1983)

Numberof ships

U.S. Navy new construction:Trident fleet ballistic missile submarines . . . . . . .Nuclear attack submarines . . . . . . . . . . . . . . . . . . .Nuclear aircraft carriers . . . . . . . . . . . . . . . . . . . . . .Guided missile cruisers . . . . . . . . . . . . . . . . . . . . . .Patrol frigates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Destroyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dock landing ships . . . . . . . . . . . . . . . . . . . . . . . . . .Ocean surveillance ships . . . . . . . . . . . . . . . . . . . . .Other auxiliaries and support ships . . . . . . . . . . . .Landing craft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cable ship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Mine countermeasure ships. . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial merchant ships:Containerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Roll-on/roll-off ships . . . . . . . . . . . . . . . . . . . . . . . . .Product tankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Bulk carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tug/barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other vesse/s:U.S. Army dredge. . . . . . . . . . . . . . . . . . . . . . . . . . . .Geophysical research vessel . . . . . . . . . . . . . . . . . .Incinerator vessels . . . . . . . . . . . . . . . . . . . . . . . . . .U.S. Coast Guard cutters . . . . . . . . . . . . . . . . . . . . .Offshore drilling rigs. . . . . . . . . . . . . . . . . . . . . . . . .

Total. , , , , , , , , . . . ., , , . . . . . . . . . . . . . . . . . . . . .

820

36

2413

1217612

103

13814

17

1

:9

12

25NOTE: In addition to the above. U.S. Navv reDair and overhaul contracts on over

40 warships total almost $1.7 bil~ion” in value as of March 1983

SOURCE: Marine Engineering/Log, March 19S3. U.S. Navy, April 1983.

In addition to the recent concentration in U.S.Navy markets, another problem for U.S. shipyardshas been the fluctuating size and diverse characterof the orders. First, the fluctuating orders forcemanagement to seek maximum flexibility in theirmix of capital and labor. This results in labor-intensive methods, restrictions on the levels andtype of capital investment, a high turnover in thelabor force, and an adversarial climate of laborrelations.

Second, the diverse character of the output ofU.S. yards forces frequent changes in workload andresultant labor requirements, which are superim-posed on the normal variations in labor require-ments during the building cycle. Even yards heavilyinvolved in naval work are subject to these pres-sures. Changes in naval procurement methods andcycles add further uncertainty. The labor turnoverin the shipbuilding industry has been estimated at40 to 50 percent per year, and up to 95 percent after5 years. Since shipbuilding processes are assumedby the industry itself to continue to be relativelylabor-intensive, 11 the problem of managing thelabor force obviously is acute.

These problems are reflected in Pugh-RobertsAssociates’ findings regarding the factors perceivedby the industry to determine competitiveness .12 Thesurvey respondents felt that U.S. shipyard produc-tivity was determined more by its external environ-ment than by its investment and marketing pro-gram. A 1980 report by the National Academy ofSciences summarized the problems vividly:

In summary, the indefinite nature of the marketinhibits prudent capital investment, with few ex-ceptions. This ties shipbuilders to a job-shop tradeenvironment that is whipsawed between demandsof military programs and those of alternative com-mercial programs. As shipyard management seesit, this further inhibits capital investment and

11 [nstitute for ReSearCh arsd Engineering Automation and prOclUC-tivity in Shipbuilding, 5-Year National Shipbuilding Productivity Im-provement Plan, Report of the Second Task Group Sessions.

lzKenneth G, Coopr and Henry Birdseye Wei], ‘‘Ocean Shipping

System Dynamics, December 1981 (for MarAd Office of Researchand Development) hereafter referred to as Pugh-Roberts Associates’report.

I sMaritime Transportation Research Board, ‘ ‘personnel Re-

quirements for an Advanced Shipyard Technology’ (Washington,D. C.: National Academy of Sciences, 1980), p. 106.


Figure 33.—Major Private Shipyards and Navy Programs (Apr. 1, 1933)

SOURCE: U.S. Navy, April 19S3, updated by the Office of Technology Assessment.

creates hiring and training problems; and that fur-ther limits the availability of capital and brings intoquestion the wisdom of investment.

The Capabilities of U.S. Shipyards

Table 30 summarizes the past experience andcurrent work of the ASIB yards by vessel type. Itis immediately apparent that U.S. yards have builta wide variety of ship types in the past, and in manycases are presently making a serious effort to buildother types of industrial structures. Diversificationis necessary for all yards if they are to keep theirwork forces intact and their facilities fully occupied.The naval building programs will take some time

to gear up and will not help ail ASIB yards .14 Thepush toward diversification also reflects the yards’belief that naval work is much less profitable thansubsidized commercial work and that naval pro-curement policies may work to the disadvantageof commercial yards. *

It is also important to recognize that not only didthe United States pioneer series production in

associated with the construction ‘f

sophisticated warships, the impact on shipbuilders of the expectedU.S. Navy program is at least 3 years away, and ultimately less thantwo-thirds of the present production base will be potentially utilized.SCA Annual Report, 1981, p. 1.

“This was cited in many articles in the general and trade press.See, for example, the Forbes article of 9/28/81, p. 114. ofTodd, is quoted as saying: (after Vietnam) “the military was viewedso adversely that we lost a decade of shipbuilding.

Ch. 4—The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity ● . 95

Figure 34.—Value of Shipyard Work on Order, U.S. Private Shipyards

Naval Commercial

0 0

-

—

-

—

-

—

-

—

-

—

-

—

—

—

-

—

=-

—1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 198

Year

SOURCE. Seatrade (U.S. Yearbook, 1982).

Table 30.-U.S. Shipyard Work Experience—

Past Current

Alabama Dry Dock &Shipbuilding Co., Mobile, Ala. ... ... ... ... ... ... AE EAmerican Shipbuilding Co., Lorain, Ohio . . . . . . . . . . . . . . . . . . . . . . . ... .ABC RepairAvondale Shipyard, Inc., New Orleans, La. . . . . . . . . . . . . . . . . . . . . . . . . . . A B D A B CBath Iron Works Corp., Bath, Maine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A B D B D FBay Shipbuilding Co., Sturgeon Bay, Wis. . . . . . . . . . . . . . . . . . . . . . . . . . . . B ABethlehem Steel Corp.—Beaumont, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . E E

Sparrows Point, Md. . . . . . . . . . . . . . . . . . . . . . . . . A C A C EEquitable Equipment, New Orleans, La. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C A CGeneral Dynamics/Quincy Shipbuilding Division, Quincy, Mass. . . . . . . . . B C A B FGeneral Dynamics/Electric Boat Division, Groton, Corm. . . . . . . . . . . . . . . D DHalter Marine, New Orleans, La. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A A CIngalls Shipbuilding Division of Litton Industries, Pascagoula, Miss. . . . B D D E FLivingston Shipbuilding Co., Orange, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . A B A B E FLockheed Shipbuilding & Construction Co., Seattle, Wash. . . . . . . . . . . . . A B C C FMarinette Marine Corp., Marinette, Wis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A B A BMaryland Shipbuilding & Dry Dock Co., Baltimore, Md. . . . . . . . . . . . . . . . A B RepairNational Steel & Shipbuilding Co., San Diego, Calif. . . . . . . . . . . . . . . . . . . A B C B CNewport News Shipbuilding, Newport News, Va. . . . . . . . . . . . . . . . . . . . . . A B D A B D FNorfolk Shipbuilding & Drydock Corp., Norfolk, Va.. . . . . . . . . . . . . . . . . . . B D APennsylvania Shipbuilding Co., Chester, Pa. . . . . . . . . . . . . . . . . . . . . . . . . . A B Repair, FPeterson Builders, Inc., Sturgeon Bay, Wis. . . . . . . . . . . . . . . . . . . . . . . . . . A A CTacoma Boatbuilding Co., Tacoma, Wash. . . . . . . . . . . . . . . . . . . . . . . . . . . . A B B CTampa Shipyards, Inc., Tampa, Fla.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repair ConversionTodd Shipyards Corp., Galveston, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A B A F

Houston, Tex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A A FTodd Pacific Shipyards Corp., Los Angeles, Calif. . . . . . . . . . . . . . . . . . . . . A D D

San Francisco, Calif. . . . . . . . . . . . . . . . . . . A C ASeattle, Wash. . . . . . . . . . . . . . . . . . . . . . . . . A B D D

Legerid: A–simple commercial vessels; B–complex vessels; C–simple naval vessels; D–naval combatant vessels; E–rigs;F—other industrial fabrications.

SOURCE: E, G, Frankel Report to the Office of Technology Assessment, 1983.


World War II, but that there has also been recentU.S. experience with merchant and naval seriesproduction. Some merchant series (e. g., barge car-riers such as LASH) predate the 1970 Act, whichwas intended to stimulate a major new construc-tion program; others (liquefied gas carriers andtankers) were a response to its provisions.

Some of the major U.S. ship series have beendivided among several shipyards, and programshave not necessarily run continuously. Swedish ex-perience, by contrast, typically included continuousruns of 10 to 20 ships of one design. Series pro-duction in the United States has tended to focuson tanker construction. Apart from the expectedduration of tanker overcapacity, it may be thatspecialized foreign yards have a strong advantagethat may be very difficult to overcome, diminishingthe value of some of this U.S. experience.

In merchant vessel construction, U.S. shipyardshave the capability of building almost any type ofship in the world today and have built at least afew of each principal type, including supertankersup to 390,000 dwt. For example, the ASIB yardshave collective and concurrent shipway capacity forover 60 large containerships 610 ft by 90 ft ortwenty-three 100,000-dwt bulk carriers. U.S. ship-yards possess 17 shipway equivalents capable ofbuilding 1,000 ft and longer vessels and over 60shipways capable of constructing vessels between500 and 1,000 ft in length. At present, six of theASIB yards are capable of building tankers or bulkships over 100,000 dwt or of building super con-tainerships of up to 1,000 ft in length. Twenty ofthese yards can build cargo ships up to 475 ft inlength.

It should be noted that modern shipbuildingmethods minimize time on a building dock. Manyof the world’s most competitive yards use only onebuilding position. The physical capacity of U.S.yards, therefore, does not pose a constraint on theproductivity of the industry, although the age andlayout of the yards most certainly do.

The Technology Level of theU.S. Shipbuilding Industry

Three or more decades ago, the major yards con-structed the entire ship themselves, with minimaluse of purchased components. Where ship compo-

nents were brought in, the supplier tended to bevirtually an extension of the shipbuilding industry.This has changed markedly since World War II.Shipbuilders have attempted to reduce the laborcosts of their manufacturing technology throughstandardization and automation. The use of pur-chased equipment and subassemblies has increasedexponentially, with shipbuilding increasingly be-coming an assembly and erection industry.

Modern shipbuilding technology is characterizedby modular construction techniques, a high degreeof preoutfitting, and integration of design and pro-duction considerations. * The technology is basedon carefully designed materials-handling systems,and is frequently accompanied by a high degree ofspecialization of output. Edwin Hood, past Presi-dent of SCA, remarked recently that there is amarked ‘‘correlation between shipbuilding marketopportunities and incremental progress in ship-building technology. The rapid advance in ship-building of the early 1970’s was based on the ex-plosive growth in demand for tanker and container-ship fleets and has declined markedly in recentyears. U.S. shipyards did not capture very muchof the huge market for merchant ships in the 1970’sand, as a result, did not match the technologicaladvances made by European and Japanese yards,which built for the world market.

A review of the technology of U.S. shipyards in-cluding comparisons with high-technology foreignyards was completed in 1978 by Marine EquipmentLeasing, Inc. (MEL) for MarAd. MEL used A &P Appledore’s methodology for this study, assign-ing each of several technology elements to one offour levels of sophistication. The study gave rank-ings to U.S. and foreign shipyards in eight majorareas of technological development. MEL’s findingswere as follows:

*A ship is di~-ided into convenient sections (or modules), and eachsection is completely ‘ ‘outfitted’ with machinery, piping, wiring, andother equipment and components that make it a finished section (in-cluding painting). The modules are then fitted together into largerassemblies that are themselves joined together to build the ship. Inthis way, work can be accomplished on each module inside a buildingthat has materials-handling gear, easy access, good lighting and ven-tilation, and a host of automated tools at fixed workstations, ratherthan aboard a partially finished ship. This work process has been shownto improve shipbuilding productivity markedly.

‘5’’ Technology Survey of Major U.S. Shipyards, ” Department ofCommerce, Maritime Administration, contract No. DO-ADI-78-OO-3037, prepared by Marine Equipment Leasing, Inc., 1978.


Modular construction of a 90,000-dwt tanker

● U.S. shipyards generally employed lowerlevels of technology than foreign shipyards;

● low technology was found in some critical areasin U.S. shipyards; these were primarily man-agement- and systems-oriented; and

● U.S. shipyards were found to be excellent insome areas, particularly those related to steelwork and production control.

Between 1978 and 1981, a further $851 millionwas invested by U.S. shipyards to enlarge their fa-cilities to handle supertankers, to complete specificbuilding programs, and to extend subassembly fab-rication capabilities. l6 This has not necessarilyreduced the labor intensity of the shipbuilding proc-

lbAnnu~ Sumey of Manufactures, 1978-1980; MarAd 1981 figures.

ess. To do that, further investment would probablybe required.

.At present, the technological status of U.S. ship-

yards is generally lower than that of comparableJapanese and Korean shipyards in terms of tech-nological investment, research and development(R&D) investment, use of labor, tooling, degreeof automation and use of robotics, and applicationof modern automated management and controltechniques, as well as in the methods of processing,joining, and assembly.

The curious fact is that many of the technologiesused in Japanese and Korean shipyards are the re-sult of basic research performed in the UnitedStates. The United States lags in the applicationof its own research and the effective introductionof innovations based on scientific and technologicaldiscoveries. In the Orient, basic scientific and tech-nological developments are often reviewed for ap-plicability to improving shipbuilding technology,productivity, and cost, yet no such process is evi-dent in the United States. When it occurs, it ap-pears to be more through chance than by design.Thus, U.S. technological shortcomings are usual-ly not due to a lack of basic scientific or tech-nological development but to a lack of effectiveorganization of or commitment to applications re-search. One reason may be that in the United Statesno effective mechanisms exist for collaboration inboth basic and applications research or for dissem-ination of the results of such research.

Many believe that U.S. shipyards made a stra-tegic error, following the example of modern foreignyards in the 1970’s and investing primarily in ad-vance steel preparation, fabrication, and assemblymethods. These areas are traditionally labor-inten-sive, and the payoff is most pronounced in the serialconstruction of large, simple ships such as tankersand bulk carriers. However, this has never beena significant market for U.S. shipbuilders. Anothermore practical reason for such investments was thatmany U.S. yards have serious space limitations inexisting facilities and could not justify the muchlarger capital requirements to move to a new site.

The U.S. shipbuilding industry’s market, prod-uct mix, labor costs, and labor-management envi-ronment are quite different from those of other ma-jor shipbuilding countries such as Japan, Korea,

98 An Assessment of Maritime Trade and Technology— — — . . .

and Spain, most of whom introduced these modernsteel-fabrication and building facilities in time foruse in the massive tanker/bulk carrier-building pro-grams of the early 1970’s. U.S. shipyards intro-duced many of these technological advances onlyduring the last 8 to 10 years, at a time when largetanker/bulk carrier orders started to decline, whenU.S. shipbuilding participation in the world marketwas negligible, and when U.S. Government sup-port for upgrading and rebuilding the domestic fleetstarted to wane. At the same time, U.S. shipbuild-ing labor productivity continued to decline. It wasnot recognized that the decision by foreign yardsto invest in steel fabrication and related technologywas primarily driven not by a desire for improvedlabor productivity—the main U.S. objective—butby the goal to speed the shipbuilding process. Theythereby achieved a greater utilization of capital-intensive facilities, such as building docks andheavy-lift cranes, as well as a decrease in produc-tion times and the associated costs of holding con-struction materials.

It should be noted that the difference in the costof interest charges on material and work in prog-ess for a ship built in 2 years instead of 6 months,is 4 to 1. With interest charges for constructionloans at 12 percent, the difference in final cost ofinterest would be at least 9 percent. Even consider-ing only simple interest and constant dollars, a shipbuilt in 6 months at a cost of $100 million, including$3 million in carrying charges, would cost $109 mil-lion to $110 million if built in 2 years, excludingthe additional cost of use (or lost opportunity) ofshipyard facilities.

Large Japanese and Korean shipyards also as-sume that opportunity costs of major shipyard fa-cilities add to the actual differential costs for timeextensions in the construction of ships. Such costshave been estimated to add about 25 percent to costsof ships built in 2 years v. 6 months, assuming thatabout 50 percent of the building time is spent inthe building dock or on a building way/platform.Therefore, introduction of modern steel fabricationand assembly technology is advantageous in Japanprimarily when it leads to a substantial reductionin construction time. Of course, without substan-tial orders, opportunity costs are of little concernto most U.S. shipyards.

The technology level in major U.S. shipyards insteel fabrication is nearly on par with that of modernshipyards in Europe, but lags behind those in theOrient. This is due in part to a difference in tech-nological approach to subassembly, such as flat-panel v. curved-panel fabrication. The U.S. (andEuropean) approach was to use largely automatedflat-stiffened panel-fabrication lines; while Japaneseand Korean shipyards use a so-called eggcrate ap-proach, which is more flexible, less automated, andcombines the use of several parallel semiautomatedfabrication lines. Welding robots are extensivelyused now in the Orient, while U.S. yards use lessfully automatic processes in assembly fitting anderection. Other differences can be seen in the sizeof blocks and modules and the degree of block andmodule outfitting, both of which are appreciablygreater in the Orient.

U.S. shipyards lag in subassembly and assemblyfabrication, and in the installation of preassembledoutfit systems in modules. Automated pipeshops,large block-machinery module-assembly plants,etc.; are in common use in modern shipyards inJapan and Korea. U.S. yards have, with some ex-ceptions, made few modifications to the traditionallabor-intensive approach to ship outfitting. Onereason may be that until recently few ships designedfor construction in U.S. yards were configured forefficient, large-scale preoutfitting or system outfit-ting. In part this may be due to the fact that manyships constructed in U.S. yards were designed withmore attention to Government specification thanto cost-effective commercial production techniques.

Most foreign yards build mainly from their owndesigns, which obviously permits consideration of-the most efficient fabrication, assembly, and out-fitting approach in the design of the ships. It alsopermits design for more balanced utilization of thedifferent facilities and other resources of the yard.

Another area of U.S. technological lag is in ma-terials handling. While many large U.S. yards haveinvested in large erection-crane capacity, rarely isconsideration given to improvements in methodsand capacities for subassembly and assembly han-dling and manipulation. This is due often to thefact that many U.S. yards use old converted build-ings with limited headroom, support capacity, andother constraints,

Ch. 4–The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity ● 9 9— — — —— . - — .

Materials handling is only one operational aspectof shipbuilding which is constrained by the layoutand various other physical characteristics of U.S.shipyards. The age of all but one major shipyardexceeds 65 years, and more than a third are wellover 100 years old. They have reached their pres-ent configuration, layout, and facilities as the resultof many changes and additions over the years. Mostof those were compromises to permit the neededaddition or expansion to be accommodated in theold yard.

Unfortunately, the area, water depth, access,flow, and other shipbuilding requirements havechanged radically with ship size, type, and tech-nology, as well as with developments in ship-building techniques. A modified 65-year-old yardcan never achieve the efficiency of a modern yardconfigured and designed to build modern shipsusing modern shipbuilding techniques.

With a few exceptions, U.S. yards generally donot use modern, integrated computer-aided design/manufacturing systems (CAD/CAM) in which de-sign and manufacturing processes are integrated(i.e., manufacturing inputs and controls, includingmaterials and tooling specifications, are developedas an integral part of the design process). In weld-ing, U.S. use of automatic numerically controlledcutting has lagged behind foreign applications byseveral years. Except for one experimental ma-chine, welding robotics are not used in U.S. yardsat present, nor is laser cutting. Lasers are used inmany foreign yards for alignment, forming and cut-ting control. marking, and interference control. Itis interesting to note that most foreign shipbuildingapplications of laser techniques are based on U.S.scientific developments.

In summary, major drawbacks in U.S. ship-building technology development include:

● the time lag between identification of a tech-nological need and its development;

● the reluctance (and consequent time loss) toadopt foreign technology, including joint ven-turing, licensing, purchasing, or other ar-rangements used for the speedy, effectivetransfer of technology;

● lack of effective exchange of technology amongU.S. shipyards;

●

●

It is

lack of transfer of technology from other areas(aerospace, electronics) for use in ship designand construction; andlack of recognition of technological voids inU.S. shipbuilding.

interesting to note that the most advanced andmost competitive shipbuilding industries devote atremendous effort to inter- and intra-industry tech-nology exchange as well as to the identification oftechnological voids and the acquisition of new tech-nology. All major Korean and Japanese shipyardshave large numbers of licensing, technology trans-fer, and similar agreements and continuously ex-change information with their own competitorswithin and without their country. Table 31 illus-trates the range of projects and sources of technol-ogy transferred to four major Korean shipyardsfrom 1971 to 1982.

It should be noted that in the past 2 years, severalU.S. shipyards have made substantial efforts tolearn from and adopt some of the Japanese ship-building techniques that have led to high produc-tivity. These yards have surveyed the Japaneseshipbuilding industry, employed Japanese consult-ants, and participated in MarAd shipbuilding re-search programs that covered such subjects as ac-curacy control, block construction, and zone out-fitting. Several yards have begun to integrate thesetechniques into their building programs and prac-tices with an apparent improvement in productivi-ty. It also appears that the U.S. Navy building pro-gram, in turn, may benefit from these advance-ments. *

● Ch. 5 describes the MarAd shipbuilding R&D program status andplans. For a review of recent advancements in adopting productivity-improving technologies see, “Shipbuilding Productivity-Somethingis Being Done, ” by L. Chirillo, January 1983. For a private industryanatysis of foreign shipbuilding technology that could offer benefitsto U.S. shipyards, see Lockheed Shipbuilding and Construction Co.Reports—(a) “A Survey of Modular Construction and PreoutfittingPractices in the United States and Europe, ” 1982; and (b) “A Surveyin Japan and Korea, 1982. For an overview of shipbuilding pro-ductivity improvements that could benefit the U.S. Navy buildingprogram, see the National Academy of Sciences, Marine Board report“Productivity Improvement in U.S. Navat Shipbuilding, ” January1983.

1oo An Assessment of Maritime Trade and Technology

Table 31.-Examples of Projects That Transferred Technologies to Korean Shipyards, 1971=82

Project type and year Transferee country and company Transferee (Korean shipyard)

Tanker design-1971 . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom-A &P AppledoreTanker design-1971/72 . . . . . . . . . . . . . . . . . .. .. .. West Germany-KDWTanker design-1975/77 . . . . . . . . . . . . . . . . . . . . . . . Norway-DNVTanker design-1979 . . . . . . . . . . . . . . . . . .. .. .. .. .Switzerland-MaierformTanker design-1979 . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark-B&WTanker design-1981 . . . . . . . . . . . . . . . . .. .. .. .. .. Japan-HitachiTanker design-1981 . . . . . . . . . . . . . . . . . . . . . . . . . . Norway-SRSCargo ship design 1974 . . . . . . . . . . . . . . . . . .. .. .United Kingdom-GovanCargo ship design 1975 . . . . . . . . . . . . . . . . . .. .. .Canada-GAMAT

HyundaiKorea S.B.Korea S.B.HyundaiSore-SungDaeWooDaeWooHyundaiHyundai &Korea S.B.

Cargo sh(p design 1977 . . . . . . . . . . . . . . . . . .. .. .West GermanY-Eurolo~ HyundaiOre/bulk design 1977 . . . . . . . . . . . . . . . . . . . . . . . .Ore/bulk design 1981/82 . . . . . . . . . . . . . . . . . . . . . .Ore/bulk design 1981 . . . . . . . . . . . . . . . . . . . . . . . .Ore/bulk design 1981 . . . . . . . . . . . . . . . . . . . . . . . .Ore/bulk design 1976/77 . . . . . . . . . . . . . . . . . . . . . .Containership design 1977 . . . . . . . . . . . . . . . . . . .Containership design 1978 . . . . . . . . . . . . . . . . . . .LNG/LPG design 1975/77/78/82 . . . . . . . . . . . . . . . .LNG/LPG design 1974. . . . . . . . . . . . . . . . . . . . . . . .Drilirigdesign 1979 . . . . . . . . . . . . . . . . . . . . . . . . .Drill rigdesign 1981 . . . . . . . . . . . . . . . . . . . . . . . . .Drill rig design 1981 . . . . . . . . . . . . . . . . . . . . . . . . .Derrick/platform 1978 . . . . . . . . . . . . . . . . . . . . . . . .Derrick/platform 1979 . . . . . . . . . . . . . . . . . .. .. .. . Japan-McGregor HyundaiDerrick/platform 1980 . . . . . . . . . . . . . . . . . .. .. .. .United States-FOS HyundaiDerrick/platform 1981 . . . . . . . . . . . . . . . . . .. .. .. .United States-FOS HyundaiComputer programs 1973/76/81 . . . . . . . .. .. .. .. .Sweden-Swedeish Korea S.B.Computer programs 1975. . . . . . . . . . . . .. .. .. ... Sweden-VOC HyundaiComputer programs 1976/81 . . . . . . . . . . . . . . . . . . Norway-SRS Korea S.B.Computer programs 1977 . . . . . . . . . . . . .. .. .. ... Spain-SENER HyundaiComputer programs 1977 . . . . . . . . . . . . .. .. .. .. . Japan-Hitachi HyundaiComputer programs 1980/81 . . . . . . . . . . . . . . . . . . Norway-SRS Hyundai/Dae Woo/Sore-SungComputer programs 1980 . . . . . . . . . . . . . . . . . . . . . United Kingdom-A &P Appledore DaeWooComputer programs 1980 . . . . . . . . . . . . .. .. .. .. .Japan-lKENAl Sore-SungSOURCE: ’’Status of the Korean Shlpbuildlng industry;’ChungMong Joon, lntwnational Forum onlndustrial Plannlng and Trade Policies, June 1902.

West Germany-CR Cu~hingDenmark-B&WUnited Kingdom-Y-ARDNorway-SRSNorway-SRSUnited Kingdom-Y-ARDSwitzerland-MaierformFrance-Gas-TransportUnited States-MMCUnited StatesNorway-AKERUnited States-Carrel/lngails/Santa FeSweden-Ventel

HyundaiSore-SungDaeWooDaeWooKorea S.B.HyundaiHyundaiHyundai &Korea S.B.Korea S.B.HyundaiHyundaiDaeWooHyundai

The Labor Force of theU.S. Shipbuilding Industry

Figure 35.—Private and U.S. Navai ShipyardEmployment Leveis, 1960-80, and Projected

Through 1990

Total private shipyard employment increasedfrom about 120,000 in 1960 to almost 180,000 in1980 as shown in figure 35. During the same peri-od, employment in naval shipyards decreased fromalmost 100,000 to about 75,000. Annual fluctua-tions of 20 to 30 percent in the totals mask evenlarger fluctuations in the skilled labor force of theASIB yards. Up to 75 percent of the work forcehas been laid off in the period since 1960 inmostof the major ASIB yards. Since these account forover 75 percent of total private shipyard employ-merit, we can conclude that the majority of the workforce has first-hand experience- of the cyclical

1960 1965 1970 1975 1980 1985 1990

YearSOURCE:U.S. Navy.


‘‘casualized’ nature of shipbuilding employment(i.e., workers with little or no previous experienceare regularly hired for only short periods of time).

Figure 36 illustrates employment levels in privateU.S. shipyards over the past 5 years. It can be seenthat employment in the ASIB yards (new construc-tion only) decreased from about 100,000 in 1978to about 70,000 in 1982. It is, therefore, this seg-ment of the total industry that has experienced themost significant recent decline, and it is this samesegment that represents the U.S. potential for par-ticipation in the construction of major merchantships. It should also be noted that over the same5-year period, the <‘other marine construction’shipyard segment experienced a compensatinggrowth in employment so that total employmentfrom 1978 to 1982 remained about level. This‘‘other’ group includes the builders of tugs, barges,service vessels, drilling rigs, and numerous other

small craft. Some of this group have substantialcapabilities and could be future candidates for in-clusion in a listing of ASIB-capable facilities, es-pecially as technology changes are made.

The proportion of production employees in thetotal work force in the ASIB yards—a commonlyused capacity measure—has been reasonably con-stant—75 to 80 percent in the last decade. The 2-to 5-percent fluctuations that have been experienceddo not appear to be systematically related to trendsin production techniques, although technologicaladvances increase the requirement for planners,quality assurance personnel, and other specialists.It is much more likely that the fluctuation reflectscyclical layoff of production workers.

Current employment may be compared to an op-timum employment to assess the utilization ofhuman resources of an industry with some accu-

Figure 36.—Shipbuiiding and Repairing Employment in Private U.S.Shipyards, 1978-82

NOTE: Total employment is based on Bureau of Labor Statistics (SIC 3731).

180

160 All other marineconstruction

1978 1979 1980 1981 1982

SOURCE: Shipbuilders Council of America.

American shipbuildingindustrial base (ASIB)26 shipyards

I1983


racy, depending on how well optimum employmentcan be estimated. Figure 37 shows the 1981 employ-ment levels plotted against optimum levels cited inthe Lowry study .17 Utilization for the variousgroups ranges from 83 percent (for the three largestbuilding yards, Newport News, Litton, ElectricBoat), to 68 percent (for other major building yards)to 49 percent (selected major repair shipyards).These levels are not changed significantly from1979. It should be noted that the data are onlyreliable enough to form ‘ ‘very approximate esti-mates of industry utilization . . . ‘‘ls

Projections of the shipyard work force are nec-essarily uncertain; however, a recent U.S. Navyprojection for private shipyards through 1990 isshown in figure 38. The expectation is that overallemployment will be sustained at approximatelypresent levels for the near term with some modestgrowth past 1986 if the present building programproceeds as scheduled.

“’’U.S. Shipyard Program Planning” (Washington, D. C.: Lowry& Hoffmann Associates, Inc., September 1980).

‘“Ibid.

Figure 37.—Mobilization and Optimum EmploymentEstimates and Current Employment Leveis in the

Major Private Shipyards

+Qn‘“”1 3 largest yards120 -

110 ‘

100 “

90 -

80 “

70 -

80 -

50 “

40 -

30 -

20 —

10 “

o —

lx J-

LittonEB[3 yards)

75,000

Selected majoirepair yards(32 yards)

Other majorprivateshipyards[10 yards)

* 63,000

= Mobilizationt = Optimumc = Current (6/81)

SOURCE: “U.S. Shipyard Program Plennlno,” a atudy by Lowry and Hoffmenn,A8aoelates, Inc., for Navel Sea Systems Command, Septembr 1980.

Demographic Characteristics of theShipyard Work Force

The shipyard labor force is fairly mobile, partlyas a result of the known instability of employmentin the industry. The turnover rate has been higherthan in most other basic industries, but has declinedrecently to roughly the same level as durable-goodsmanufacturing. The decrease in turnover undoubt-edly reflects many factors, including lower levelsof hiring in recent years, lack of employment op-portunities outside the industry, and a reversal inthe aging trend of the work force. Like the marineoperating industries, shipbuilding has a high turn-over among new (less than 1 year’s service) en-trants, who seldom reenter the industry. Manyfirms have used high turnover rates as a reason tominimize worker training. However, such actionscould be an additional factor in employee turnover.

The shipbuilding labor force is overwhelminglymale,19 and there are distinct groups in private andnaval shipyards. Civil service naval shipyardworkers are older and generally have a higher ed-ucational level than private shipyard employees, orindeed than employees in most comparable indus-tries. * Although a high proportion (40 percent) ofnaval shipyard workers are over 45-years-old, theeducational distinction is likely to be perpetuatedby Civil Service entry requirements and craft orien-tation of U.S. naval yards. Entry-level educationalrequirements in private yards have never been de-manding and are unlikely to become so, given theshift toward a fabrication-and-erection technologyand the availability of specialized vendor personnel.

Shipyard Workers’ Hoursand Earnings

The earnings of shipyard workers compare fa-vorably with those of operatives in durable-goodsmanufacturing. They compare less well (on anhourly basis) with construction workers, a compar-able group in many significant respects. Conver-sations with the Offices of Maritime Labor and

lgMaritime Tr~5portation Research Board, op. cit., p. 56.

“Forty percent of apprentices have at least 2 years of college. Har-tigan, Director of Shipyard Training, Naval Sea Systems Command—cited in GafYney, ‘‘Worker Participation and Organizational Changein Shipbuilding: An International Review, September 1982, p.6.

Ch. 4—The U.S. Shipbuilding industry: Status and Trends in Technology and Productivity ● 103

200

150

100

50

0

Figure 38.—Shipbuilding Industry Workload Forecast

Private shipyard total

I Commercial new construction (under contract)

82 83 84 85 86 87 88 89 90Year

afrrcludgs aWarded/UrraWarijgd “T-Ships” TAKRX, TAKX, TAKX(C), T-s, TAl+, TAGs, TAGM.NOTE: The above portrays the U.S. Navy’s forecast of employment in the private sector shipyards through 1990. Included In the workload curve Is the current firm work

and projected work of commercial, Navy, and other nonshlp work. The projected new construction work Is derived from the unawarded Fiscal Year S3, the U.S.Navy’s Fiscal Year & 5-Year Shipbuilding Program, and MarAd estimates of commercial new construction requirements.

SOURCE: U.S. Navy, ASN (S&L) RPE 19S3.

Training (MarAd) and Maritime Affairs and Ship-building Technology (NAVSEA) indicate that theshipyard workers consider that their pay is lowerthan that obtained in comparable skilled jobs andinvolve far more risk and discomfort. Despite atrend toward covered worksites, the level of amen-ities in many shipyards remains low.

The 10-year growth in earnings for shipbuildingworkers v. durable-goods workers is 8.4 and 8.1percent, respectively, v. 7.2 percent in the totalprivate sector. Average hours have fluctuated, butU.S. shipbuilding as a whole has been characterizedtraditionally by a comparatively short (less than40-hour) week. The 8.4-percent growth in shipyardworkers’ earnings can be contrasted with the 8.2-percent growth of the Consumer Price Index (CPI)over the same period.

Wages are almost universally time-rated in ship-building, and, as table 32 shows, only a minorityof yards have a range of pay rates for various jobs.

Table 32.—Method of Wage Payment

PercentTime-rated pay systems. . . . . . . . . . . . . . . . . . . . . . .

Formal plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %Single rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Range of rates. . . . . . . . . . . . . . . . . . . . . . . . . . . 28Individual rates . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Incentive pay systems . . . . . . . . . . . . . . . . . . . . . . . . 2Individual piecework . . . . . . . . . . . . . . . . . . . . . . . 1Group piecework. . . . . . . . . . . . . . . . . . . . . . . . . . . 1Individual bonuses . . . . . . . . . . . . . . . . . . . . . . . . . —Group bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

100Note: Scheduled weekly hours:

40.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9444.0 . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . 445.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

100SOURCE: /ndustry Wage Survey, U.S. Bureau of Labor Statlstlcs, 1977.

These pay ranges, even where they exist, general-ly are considered by workers to be too narrow toreflect the range of skill levels, resulting in a

104 ● An Assessment of Marine Trade and Technology

disincentive effect. The use of an individual, time-rated pay system, rather than a group result-oriented incentive system, may perpetuate currentproblems; i.e., the ‘‘greatest complaint of produc-tion workers about working conditions (involves)inadequate scheduling, planning coordination, andcommunications among crafts, shifts, and workinggroups in the shipyard. Improvement of incen-tive systems or a complete change in the basis ofadministration and payment may focus workers’concerns on productivity and ease the transitionalcharacter of the labor force.

Comparisons of international wage levels aremade difficult by the variety of payment systemsand the limitations of statistical reports. The Bureauof Labor Statistics (BLS) data in table 33, althoughbiased by the strengthening of the dollar vis-a-visnational currencies in major shipbuilding countriessuch as Japan, is interesting in that it shows theU.S. “percentage of additional compensation tohourly earnings’ to be the average of the 16 coun-tries’ figures but growing at a rate of 6.9 percent

——.—..—● “The second greatest source of complaints involved inadequate

machines, equipment, and materials. Unsatisfactory aspects of thephysical working environment proved the next major source of workerirritation. Work safety was the physical factor most often mentioned.Maritime Transportation Research Board, op. cit., p. 96, citing G.A. Muench, Scudy for the Improvement of Motivation in the Ship-building Zndustry, Phase I, San Jose, Calif., June 1976.

per year, six times faster than the Japanese rate.Greek, Korean, and Taiwanese benefits have notincreased at all in the last 4 years; Italian andSpanish benefits have declined by about 3 percentper year; and the Association of Western EuropeanShipbuilders (AWES) countries’ benefits havegrown by only 1 percent per year on average.

—Table 33 also shows absolute U.S. wage rates to

be among the highest. The United States ranks fifthamong the 16 shipbuilding countries listed, withestimated hourly compensation 32 percent higherthan the average and growing at over 10 percentper year. The indexed comparison makes U.S.wage rates even more striking—and highlights onesource of the Korean competitive advantage. Table34 removes the upward bias in foreign rates bycalculating labor and material components of ship-building cost increases in national currencies. Whilethe percentage increase in labor prices, expressedin dollars, was higher abroad, the same increases,calculated in national currencies, show the U.S. rateof increase to be higher than that in any countryexcept the United Kingdom.

Organization of Shipyard Labor

The U.S. shipyard industry is over 90 percentunionized. Avondale Shipyard is the one exceptionamong the ASIB yards. The shipbuilding unions

Table 33.—Estimated Hourly Compensation of Shipbuilding Production Workers in 16 Countries

Percent of additional Estimated compensationcompensation to per hour worked Estimated compensationhourly earnings in U.S. dollars index U.S. = 100

1977 1978 1979 1980 1977 1978 1979 1980 1977 1978 1979 1980

West Germany ., . . . . . . . 69,1 73.2 73.5 76.8Sweden . . . . . . . . . . . . . . . 54.2 56.9 62.4 63.0Netherlands . . . . . . . . . . . 71.1 73.0 75.8 75.2Norway . . . . . . . . . . . . . . . 38.2 40.2 40.0 40.0United States . . . . . . . . . . 34.9 37.5 38.8 45.6Denmark . . . . . . . . . . . . . . 18.7 19.1 19.1 20.1Canada . . . . . . . . . . . . . . . 20.3 24.7 26.8 27.8France . . . . . . . . . . . . . . . . 65.6 65.9 68.5 69.9Italy . . . . . . . . . . . . . . . . . . 101.9 90.7 91.2 89.7Finland . . . . . . . . . . . . . . . 51.5 57.5 52.5 54,6United Kingdom . . . . . . . . 25.6 28.9 30,4 33.0Spain . . . . . . . . . . . . . . . . . 45.0 40.0 40.0 40.0Japan . . . . . . . . . . . . . . . . . 14.9 17.9 18.5 15.6Greece . . . . . . . . . . . . . . . . 30.0 30.0 30.0 30.0Taiwan ... , . . . . . . . . . . . . 17.5 17.5 17.5 17.5South Korea . . . . . . . . . . . 17.5 17.5 17.5 17.5

8.889.768.639.208.088.018.486.445,556.423.644.415.112.58

.911.40

11.1610.4710.5010.279.039.458.898.706.616.894.605.056.703.331.161.83

12.8312.2112.0210.9110.0610.689.819.357.778.175.766.616.463.841.441.87

14.2513.2212.6911.9711.9411.3310.7610.739.108.757.587.136.774.291.661.72

110 124 128 119121 116 121 111107 116 119 106114 114 108 100100 100 100 10099 105 106 95

— — — —63 74 64 57— — — —11 14 1617 4; 19 14

NOTE: Hourly compensation is converted to U.S. dollars using the average daily exchange rate for the reference period. Changes In hourty compensation In U.S. dollarsare, therefore, affected by changes in currency exchange rates as well as by changes in compensation.

SOURCE: US. Department of Labor, Bureau of Labor Statistics, Office of Productivity and Technology, Divlslon of Foreign Labor Statistics and Trade.

Ch. 4–The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity . 105

Table 34.–Shipbuilding Cost Increases, 1975-80

Percent change from 1975-80U.S. dollars—hourly labor cost national currencies

1975 1980 Percent of change Labor Material

United States ... ... .. .$5.47 $8.59 57% 57 ”/0 52%Japan. . . . . . . . . . . . . . . . 3.57 5.76 61 26 29West Germany . . . . . . . . 4.34 8.26 90 38 23Netherlands . . . . . . . . . . 4.21 7.43 76 37 89Sweden . . . . . . . . . . . . . . 5.62 7.81 39 41 55United Kingdom . . . . . . 3.12 5.86 88 81 48SOURCE: BLS/SEA 017.

are characteristically craft unions, and, consequent-ly, multiunion yards are the industry norm. Theirinfluence has been considered largely prejudicialto maximizing productivity: the craft orientationhas produced numerous demarcation disputes.More important, it prevents flexible use of labor,complicates planning and scheduling, and discour-ages career changes.

It is notable that technological development in“Organization and Operating Systems, ” whereU.S. yards otherwise compare well with foreignyards, has lagged substantially in a subset entitled“Organization of Work. ” This pertains to flexibili-ty in assigning and supervising craftsmen’s work,and the gap was the second largest found by theMEL study .20

There have been several attempts to upgradepractice in this area, While the first programs weretried in naval shipyards, the interest in human re-source management has spread to civilian ship-yards, where there are a number of successes, in-cluding Lockheed Shipbuilding Co. well-estab-lished Quality Circles program and BethlehemShipbuilding Co. comparatively new program at

20’ ‘Technology Survey of Major U.S. Shipyards, op. cit.,

the Sparrows Point, Md., plant. These programsaddress flexible organization as one of many aims,in conjunction with revised work practices. How-ever, the overall craft form of U. S. shipyard orga-nization is still the most common.

Table 35 lists the number of production workersand the union affiliations and memberships in mostof the largest ASIB yards. Data from the 1980 cen-sus on the makeup of the shipbuilding work forcewill not be published until late 1983—if then—butthe dominance of craftsmen as a worker categoryis expected to persist. The 1970 breakdown, below,appears to remain broadly accurate.

Worker category All industry ShipbuildingLaborers, service workers . . . 21.0 percent 6.9 percentOperatives . . . . . . . . . . . . . . . . . . 23.5 percent 24.8 percentCraftsmen, foremen, etc. . . . . . 18.5 percent 52.6 percentManager, administrators,

technical professions . . . . . 30.9 percent 15.7 percent

These proportions indicate the predominantlyblue-collar character of the existing labor force andsuggest the rather flat organizational structure ofshipyards. Craft dominance of the shipyard laborforce means that technological change must be ne-gotiated, which is time-consuming and can be ex-tremely difficult.

25-417 0 - 83 - 8 QL 3


Table 35.-Unions In U.S. Shipbuilding Yards

Total production workersYard as of November 1982 UnionAvondaie Shipyards, Inc. . . . . . . . . . . . . . . . . . . . . . . .Bath Iron Works Corp. . . . . . . . . . . . . . . . . . . . . . . . . .Bethlehem Steel Corp., Sparrows Point. . . . . . . . . . .Bethlehem Steel Corp., Beaumont . . . . . . . . . . . . . . .General Dynamics/Quincy Shipbuilding Division . . .General Dynamics/Electric Boat Division . . . . . . . . .Ingails Shipbuilding Division of Litton industries . .Lockheed Shipbuilding & Construction Co. . . . . . . .Nationai Steel & Shipbuilding Co. . . . . . . . . . . . . . . .Newport News Shipbuilding Co. . . . . . . . . . . . . . . . . .Todd Pacific Shipyards, Los Angeles. . . . . . . . . . . . .Todd Pacific Shipyards, Seattle . . . . . . . . . . . . . . . . .Bay Shipbuilding Co.. . . . . . . . . . . . . . . . . . . . . . . . . . .Livingston Shipbuilding Co. . . . . . . . . . . . . . . . . . . . .Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Total of 27 ASIB Yards = 90,492)TotalsiUMSWA (industrial Union of Marine and Shipbuilding

Workers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Metal Trades Council, AFUCiO. . . . . . . . . . . . . . . . . .USW (United Steelworkers of America) . . . . . . . . . . .iron Workers (international Association of Bridge,

Structural, and Ornamental ironworkers) . . . . . . . .Boilermakers (international Brotherhood of

Boilermakers, iron Shipbuilders, Blacksmiths,Forgers, and Heipers) . . . . . . . . . . . . . . . . . . . . . .

Nonunion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,5477,293

496482

1,49121,1308,7052,6113,781

19,6683,6913,337

519462

NonunionIUMSWAIUMSWA

Metal TradesIUMSWA

Metal TradesMetai TradesMetai Tradesiron Workers

UswiUMSWA

Metai TradesBoilermakersMetal Trades

79,213

12,97136,72719,668

3,781

5195,547

SOURCE: Off Ice of Maritime Labor end Training Report, Feb. 10, 19S3 (Form MA-S1).

SHIPBUILDING PRODUCTIVITY

Shipbuilding productivity is the eficiency withwhich the industry transforms its raw and semifin-ished inputs into ships, using the classical factorsof production—land, labor, and capital. The phys-ical sites, fixed capital, and labor force of U.S.shipyards have a major impact on their productivi-ty. It is accepted generally that the productivity ofU.S. yards is in many cases constrained by theirsites and by the yards’ inability to effect comprehen-sive replacement of often obsolete physical facilities.However, in many cases, phased facilities develop-ment plans are in place and low-cost, high-returnpilot human resources programs are being applied.The productivity of U.S. shipyards is definitely in-creasing. The rate of increase, however, must beimproved in order to compete internationally.

The Determinants of ProductivityShipbuilding productivity is clearly a function of

the interaction of:

● the length of the shipbuilding cycle;c the number of man-hours required; and● the extent of nonproductive peripheral costs.

The following sections discuss each factor asrelated to U.S. v. foreign experience.

The Length of the Shipbuilding Cycle

Between 1975 and 1980, over 60 commercial and80 naval ships were under construction in U.S.yards at any one time. However, only about 20commercial and 15 naval ships actually are deliv-

Ch. 4—The U.S. Shipbuilding Industry: Status and Trends in Technology and Productivity ● 107

ered per year. This ship-under-construction-to-delivery ratio, furthermore, has not changed ap-preciably over the past three decades. It indicatesthat a commercial ship may take 3 years to con-struct, while a naval ship averages 5 to 6 years. Thisconclusion admittedly is simplified because manyother factors contribute to the large discrepanciesbetween the number of ships under constructionand those delivered during any period of time.However, ship flowrates (a ratio of deliveries toships under construction) in the United States his-torically have been about one-half those of Euro-pean shipyards and less than one-third those of Ja-pan. 21 This means that the average modern mer-chant ship spends over twice as much time in a U.S.shipyard as a comparable ship in modern foreignshipyard. Considering the capital invested per ship,it is evident that the additional construction resi-dence time adds at least 5 to 6 percent to the costof the ship. If this figure is augmented to reflectthe complementary cost of inventory—whichamounts to 4 to 6 months of supplies for the averageU.S. shipyard compared to 1 to 8 weeks in anequivalent foreign yard—the total capital cost ofexcess ship and material inventory time increasesU.S. shipbuilding costs by 8 to 9 percent. Similarcomparisons of the cost of construction of navalships are not possible; combatant and warships varyextensively in detail.

Because there has not been extensive U.S. ex-perience with continuous series production, learn-ing curves for the U. S, shipbuilding industry havenot been established. Results from naval buildingprograms are misleading because of the extent ofchanges expressly allowed in the production of theseries and the frequent splitting of lead ship andseries production between distant yards. It appearsthat the industry is capable of realizing substantialtime savings in series production, with associatedreductions in inventory costs. This requires cus-tomer acceptance of standardized designs, as notedearlier, but the extent of customization by U.S.shipyards is incompatible with maximum produc-tion efficiency.

Zlshipbui]ders Council of America, Association of Western Euro-pean Shipbuilders, and Zosen, annual reports, 1980, 1981, 1982.

The Number of Man-Hours Required

In a recent study by the Maritime Transporta-tion Research Board of the National Academy ofSciences it was noted that, despite increasing mech-anization,

. . . direct labor costs in U.S. shipyards are be-tween 40 and 50 percent of the finished productcost, depending on type of ship . . . (the) ratio (be-tween labor and material costs) has remained rel-atively constant since 1961, increases in labor effi-ciency being largely offset by rising wages.

High as these figures are, they tend to underem-phasize the total labor component in shipbuilding.For a ship, labor costs constitute 70 to 85 percentof the value added. . . . In the 15-year period from1958 to 1972, the share of added value received bylabor in U.S. shipbuilding averaged 77 percent,never falling below 71 percent and rising as highas 84 percent. . . . The labor-intensiveness of theindustry is underscored by noting that, among 22industries, U.S. shipbuilding ranks 15th in assetsper employee and 3rd in sales per invested dollar.22

A basic source of data on the scope of produc-tivity improvement through reduction of man-hoursis the MarAd-sponsored IHI-Livingston project.This has been characterized as a ‘‘unique contractfor transfer of Japanese technology, ” but the proj-ect also established valid cost data on the compar-ative man-hour requirements and average lengthof shipbuilding cycle. It showed that the length ofthe U.S. shipbuilding cycle, in theory, could be re-duced by 50 percent, from 24 months to 12. Simi-larly, the man-hour requirement could be reducedby 60 to 70 percent However, there are social andinstitutional barriers to the measures that would berequired to effect these changes; these will be dis-cussed as they relate to specific productivity -enhanc-ing measures.

The Extent of Nonproductive Peripheral Costs

Workplace Safety and Health Costs .—Zosen’sannual statistical summary of Japanese shipyards’safety record is frequently compared with the U.S.shipyards’ record. 23 The U.S. accident-frequency-rate per thousand workers per year is 269; the sameJapanese rate is 2. While these statistics may not

zzMaritime Transportation Research Board, op. cit.Z3BLS and Zosen figures, 1979 and 1980.

108 ● An Assessment of Marine Trade and Technology — — — ———

be comparable directly due to differences in acci-dent-reporting practices between the United Statesand Japan, it appears that the accident rate in U.S.yards is considerably higher. Since benefit pay-ments under the 1972 amendments to the Long-shoremen’s and Harbor Worker’s CompensationAct (LHWCA) have increased by an estimated 600percent, this is one obvious area of concern .24 Thefive shipyards responding to an SCA 1978 studyestimated these costs at 2.4 to 4.7 percent of theprice of the hypothetical ship and suggested thatthe foreign equivalent requirements were ‘ ‘lessstringent and (had) a lesser cost impact than thoseof the United States. ’25

“Buy America” Policy .—The U.S. supplierbase is comparatively independent of the shipyards,and many shipbuilders argue that it does not makeeconomic sense to hinder the shipbuilding in-dustry’s development to provide marginal supportto the supplier base. Existing ‘ ‘buy America’policies (i. e., requirements that 50 percent ofmachinery and materials for subsidized ships be ofU.S. manufacture) are difficult to supervise anddefine, With more and more U.S. firms taking ad-vantage of lower foreign labor rates—and higherstandards of productivity and industrial discipline—it probably will become harder to follow this pol-icy and more disruptive of production. This is par-ticularly true given the trend toward increased buy-ing of components in lieu of fabrication by the yarditself.

Productivity Trends in theU.S. Shipbuilding Industry

Many measures of production have been usedin the shipbuilding industry. Each has shortcom-ings, and the assessment of shipbuilding produc-tivity remains difficult, particularly in the UnitedStates. Comparing labor and production is partic-ularly difficult because collected production figuresoften relate only to larger vessels or larger yards,but labor statistics typically are inclusive of the en-tire industry. Other problems with productivitymeasures include:— ———

‘+’ I.on~shorrmen’s and Harbor Workers’ Compensation Act NcdsAmending’ (Washington, D. C.: General Accounting Office’, 1982).

25’ ‘Study of Cost of Federal Go\x’rnmcnt Rqgulatmn on ShipbuildingPrices’ (Washington, DC.: Shipbuilders Council of America, 1978),p. 4,

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lack of accepted skills classification schemes;a multiplicity y of ways of quantifying ship pro-duction;difficulty in quantifying compensation andfringe benefits on a comparable basis for in-ternational comparisons;differing proportions of subcontracting in theshipbuilding process, both intra- and interna-tionally; andtoo high a level of aggregation in statistics,e.g. , assimilation of repair to shipbuilding.

Although there are many possible measures of out-put/productivity, the two most satisfactory meas-ures of output are compensated gross registered ton-nage (CGRT) and value-added.

CGRT, unlike gross tonnage, lightweight ton-nage, or deadweight tonnage, attempts to allow forthe differing levels of complexity of ships, whichis particularly desirable where naval vessels figurein many yards’ workload. However, the adjustmentcoefficients are approximate, judgmental, and varyover time and between studies. The present coef-ficients used by West European shipyards, for ex-ample, will be revised shortly to reflect changes inthe Organization for Economic Cooperation andDevelopment (OECD) system for calculating grosstonnage. The OECD system is being aligned withthe 1969 International Convention on TonnageMeasurement of Ships, which changes gross andnet tonnages for several vessel types. Table 36shows the trend in the labor required to produce

Table 36.—CGRT Measure of Productivity Gainsin Private U.S. ASIB Shipyards

CGRT Employmenta CRGTI Manhours/Year (000s) (000s) employee/year CGRT

1980 . . . 393.3 40.9 9.6 2001979 . . . 545.3 39.9 13.7 1401978 . . . 289.5 39.6 7.3 2631977 . . . 446.6 40.0 11.2 1721976 . . . 373.0 38.7 9.6 1961975 . . . 276.7 35.4 7.8 2431970 . . . 199.6 30.4 6.6 292Growth in productivity per year . . . . 3.5°/0aDerived number: proportion of total labor force in private yards (7O Percent) x

proportion of private yard labor in ASIB yards (88 percent) x proportion directlyengaged in shipbuilding (50 percent), i.e., 23 percent of total employees are ship-building production workers in ASIB yards.

NOTE: The CGRT output understates U.S. yards’ potential productivity, given astable workload, because it does not really reduce varying ship types toequivalent tonnage. Only the direction of the trend and its averagemagnitude are significant.

SOURCE: E. G. Frankel Report to the Office of Technology Assessment, 1983


one CGRT of output in U.S. shipyards. This meas-ure indicates that the output per employee has in-creased by 45 percent in the past 11 years, a gainof approximately 3.5 percent per year.

Value-added is the difference between total rev-enues and the cost of purchased intermediate goodsand services and, as such, may be affected by mar-ket imperfections. Value measures of productivityalso are less useful in international comparisons andwhere different technologies, or levels of technology,may be employed. Value-added is superior to sales,however, because the latter reflects widely disparatelevels of Government support to shipbuilding.Table 37 measures the ratio of value-added to thecapital and labor inputs and shows that the U.S.shipbuilding industry has made a 12-percent ab-solute gain in productivity in the past decade, a rateof 1 percent per year.

The ratios of CGRT and value-added to inputmeasures such as man-hours or dollar value of as-sets may be crude absolute measures of productivi-ty, but they do indicate its trend. From 1960 to1980, the value-added-per-employee productivitymeasure for U.S. yards increased by about 27 per-cent while the payroll-per-employee measure in-creased 15 percent (in current dollars).

These real but modest productivity gains of theU.S. shipbuilding industry have lagged the gainsof its Japanese, Korean, and European counter-parts. In 1973, the Commission on American Ship-building compared some historic statistics on theproductivity of major shipbuilding nations over a6-year period and found U.S. productivity to beonly 50 percent of Swedish and 43 percent of Jap-anese. U.S. man-hours per delivered-ton averaged30 percent higher than Japanese and Northern Eu-

ropean yards. These figures have increased at a ratethat reflects the small productivity gain computedabove; but in 1980, A & P Appledore concludedthat U.S. shipbuilding productivity is still generallyonly half that of Scandinavia and Japan.

It is difficult to compare U.S. and Japanese andKorean shipbuilding productivity because the type,size, series, and complexity of ships built vary somuch. Japan and Korea largely have built seriesof standard tankers, bulk carriers, and other typesof ships, usually designed by the yard itself for con-struction by the yard. U.S. yards, by comparison,built small numbers of often custom-designed andcomparatively complex ships. Few of these shipsare built in series of three or more.

Comparing the productivity of U.S. shipyardswith those of Japan and Korea, it is possible onlyto evaluate their respective performance in thebuilding of comparable vessels such as medium-sized tankers or dry-bulk carriers. The limited in-formation available shows that:

● U.S. shipyards require 38 to 65 percent moreman-hours to build the same or similar ship;and

● labor productivity in terms of output-per-man-hour for basic measurable jobs such as stickwelding, is comparable and, in fact, oftenshows U.S. workers to be more productive.

While U.S. shipyard workers appear to performequally well in the performance of comparable jobsunder identical conditions using similar equipment,the percentage of time in which U.S. workers per-form actual work is appreciably lower than that oftheir counterparts in Korea and Japan.

The lower comparative productivity of U.S. ship-yards is considered to be explicable largely in terms

Table 37.—Value-Added Measure of Productivity Gains in U.S. Shipyards(millions of current dollars)

Year Value added + (Payroll + Depreciation) = Productivity ratio (PR) Index of PR

1980 . . . 5,338 3,360.4 163.3 1.51 1.121979 . . . 4,587 2,927.6 152.7 1.49 1.101978 . . . 4,107 2,647.5 138.7 1.47 1.091977 . . . 3,823 2,494.0 139.9 1.45 1.081976 . . . 3,287 2,219.5 1 lo.5a 1.41 1.041975 . . . 2,923 1,995.6 96.5a 1.40 1.031970 . . . 1,610 1,161.2 36.0a 1.35 1.00aE~timated as 0033 percent of ~ro~~ fixed a~~et~: depreciation figures not collected before 1977 Census of Manufactures.

S O U R C E : J.A. Gribbin.


of: 1) the military market demand for excessive cus-tomization, 2) restricted opportunity for learningfrom series construction, 3) older facilities and spe-cific technological weaknesses, 4) materials avail-ability and origin constraints, and finally, 5) a fluc-tuating and less effectively utilized work force, withskill deficiencies arising from insufficient trainingand inflexible union practices, which do not facili-tate redirection of careers and expansion of skills.The Appledore study attributed 30 to 35 percentof the productivity difference to the latter causealone-foreign yards are said to have “superior or-ganization and systems and a more effective workforce. ’26

Improving U.S. ShipbuildingProductivity

Many U.S. shipyard facilities were laid out dur-ing World War II and have not been redevelopedsince. To enhance productivity in these yards,greater attention is needed to integrate productionplanning and engineering functions. Many believethat the scope for improving the productivity ofU.S. shipyards is significant and that, in manycases, only limited capital improvements areneeded. While the prevailing U.S. wage rates prob-ably will make it impossible for U.S. shipbuildingcosts to be as low as foreign competitors such asKorea, it would appear possible to get much closerthan today’s price differentials indicate. In a reportto OTA by E. G. Frankel, Inc., the following ac-tions were suggested :27

. impose serial construction of ships in sets ofnot less than 12, all built in one yard;

● allow material to be bought without referenceto national origin, with no import restrictions,and no duty on imported materials used in theconstruction of foreign-going ships;

. reduce inventory size and cost to no more than1- to 2-month supply needs;

. Utilize lower U.S. capital costs when available;

26A k P Appledore, Development of a Standardized U.S.-Flag@-Bulk Carrier: Innovative Analysis of Cost-Cutting Opportunities(Washington, D. C.: Maritime Administration, U.S. Department ofCommerce, 1980).

27’’ Status and Trends of U.S. Shipbuilding Technology and Pro-ductive Capacity, ‘‘ written for the OffIce of Technology Assessmentby E. G. Frankel, Inc., December 1982.

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employ modern production, production engi-neering, planning, and management methods;andincorporate latest methods of design and pro-duction through effective research-and analy-sis.

Many of these factors have been applied in U.S.shipyards specializing in the construction of offshorevessels, barges, tugs, and workboats with markedsuccess in achieving high productivity.

To make substantial productivity improvements,most U.S. shipyards would need to concentrate onproduction-oriented designs accompanied by indus-trial engineering applications such as simplifiedmaterials flow, mechanization, use of three-dimen-sional subassemblies, and preoutfitting. Productiv-ity-enhancing measures also would include intro-duction of integrated computer systems for outfit-ting, manufacturing, and assembly. Perhaps mostimportantly, improving productivity would requiremodernization of management, planning processes,and organization of work.

The flexibility required by U.S. yards to respondto changing product and output demands in thepast

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has led to the following problems:

delay, deferral, or elimination of introductionof new technology;concentration on investment in basic processessuch as steel preprocessing, fabrication, andsubassembly, activities that are not among themost labor-intensive in any yard;large fluctuations in shipyard manning withhuge manpower turnovers of as much as 67percent per year among blue-collar workers;large expenditures for training, retraining, andlost posthiring and prefiring time;lack of medium- and long-term (strategic)planning and management preoccupation withshort-run, even daily operational problemsthat should be delegated to production man-agement;use of outside ship designers with the resultthat designs usually have to be modified to ac-commodate the particular production/assem-bly needs of the yard. This results not only inadded costs, but also lost time and compro-mised designs;


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lack of effective marketing strategies;lack of standardization in procedures, as wellas product parts and manufacturing and as-sembly standards;insufficient R&D in methods, production aids,basic processes, materials research, etc.; andlack of coordination among the industry.

difficult to determine if this last factor is dueto concern with regard to antitrust actions or sim-ple competitive posture. Yet countries like Japanand Korea, where yards compete much more forthe same markets, have found more effective waysto cooperate and coordinate their R&D in basicprocesses, procedures, and standards. They rely onthe maintenance of competitive positions throughmanagement efficiency, labor-management collab-oration, marketing, and product design. This ap-proach appears to result in efficient, effective tech-nology development.

American shipbuilders have attempted to im-prove the industry’s productivity through:

. improvements in facilities and equipment;● in t roduct ion of CAD/CAM; and. increasing adoption of national shipbuilding

standards.

While facility and equipment improvements wereintroduced starting in 1966, practical adoption ofCAD/CAM (described in ch. 5) was begun onlyin 1972-74, and shipbuilding standards are underdevelopment only now. U.S. shipbuilding lagsbehind foreign shipbuilding in shipbuilding stand-ards and even more so in standards for suppliersand equipment manufacturers. Shipbuilding pro-ductivity is greatly affected by CAD/CAM andstandardization. Japanese shipbuilders, for exam-ple, use more than twice the amount of automaticwelding as U.S. shipbuilders. In Japan, computersare used increasingly not only to assist in weldingautomation but also in welding quality control, Thisin turn has led to a large increase in the use ofwelding robots. In U.S. shipyards, only one weld-ing robot is in use as a pilot operation.

Standards

While 13 U.S. national shipbuilding standardshave now been published, and 100 are in variousstages of development, Japan has established 7)750

industrial standards with 518 shipbuilding stand-ards that cover all types of components, equip-ments, materials, fabrication methods, and more.It must be recognized, though, that Japanese in-dustrial and shipbuilding standards are enforcedby an industrial standardization law enacted in1949. U.S. shipbuilding-standard development andadoption are completely voluntary. At present, apanel of the American Society of Testing Materialsis developing U.S. shipbuilding standards.

Shipbuilding Management

American shipbuilding management and plan-ning has become a topic of increasing discussionin recent years, and various proposals for changehave been advanced. Many of these propose adop-tion of certain techniques and approaches suc-cessfully used in other major shipbuilding countriessuch as Japan and Korea, where shipbuilding man-agement is based on organizational, decision-making, and operating structures and proceduresfounded on quite different cultural backgrounds,human relations, and traditions than those foundin the United States. While some of the techniquesand approaches found successful in those countriesmay be transferable, it must be recognized thatthe environment in the United States cannot bechanged in the short run. This makes successful ap-plication of some of these methods difficult.

Factors that make Japanese and Korean ship-building competitive include the use of cost con-trols in engineering, quality circles, labor incen-tives, high-productivity manufacturing processes,standardized ship design and production, labor flex-ibility, good supplier and customer relations, andeffective production-planning management andcontrol. There are some factors that are distinctlyunique, such as the lack of adversarial relations be-tween shipbuilder and client, and management andlabor. There is a general agreement in these coun-tries that adversarial relations and potential litiga-tion hinder efficiency and timely, low-cost delivery.Similarly, most supplier, client, and labor issueswith shipbuilding management are resolved by var-ious informal approaches resulting in little if anydelay. This is quite different from the generally for-mal approach used in the United States, where pro-cedure, documentation, and even conflict resolu-tion methods are often defined.


SUMMARY

Federal assistance to U.S. shipyards through con-struction subsidies over the past two decades ap-pears to have discouraged independent attempts to

reach and maintain commercial viability. At pres-ent there is uncertainty about the implementationand scope of overall maritime policy and naval pro-curement policy. Since subsidies for commercialconstruction have been terminated, one policy altern-ative would be to replace subsidies with a formof support that directly enhances productivity andcompetitiveness, and at the same time put navalprocurement on a less cyclical basis. In addition,the Federal Government could enhance industryefforts to improve productivity by coordinatingthose efforts or funding their coordination.

Some of the more innovative technical ap-proaches to improving productivity employ a man-machine system perspective. It is considered morecost effective to reduce the labor component of ship-building by using electronic assistance in easilymechanized areas such as precision control, thanby making larger—often inflexible-investments incapital equipment that attempt to emulate humanflexibility and pattern-recognition capabilities. Inaddition, current social philosophies and the trendtoward increasing stability in the industry workforce require from employers a complementary ef-fort to stabilize employment opportunities and im-prove the quality of industrial life. There is greatscope for productivity improvement through bet-ter use of human resources.

Possible directions for productivity improve-ments in U.S. shipbuilding have been discussedthroughout this chapter. It should be recognized,though, that technological improvements will notnecessarily pay off unless accompanied by improve-ments in the structure, organization, and manage-ment approach used in the industry. Product de-velopment, client relationships, and marketing areother important areas where improvements areneeded if the industry is to achieve a more com-petitive position in world shipbuilding.

Many of the deficiencies and opportunities iden-tified in this report have been identified previous-ly, particularly in the MEL survey (1978) and theMTRB’s Shipbuilding Research and Development:

A Recommended Program (1973). Comparative-ly few of their suggestions were implemented. Somein the industry have claimed that the reason is in-stitutional barriers to transfer of foreign tech-nologies for productivity improvement. Othersclaim that the reason for lack of progress is thetendency of the industry to identify a Government-sponsored ‘‘stable increasing (sic) ship constructionprogram’ ’28

as the solution to the problem of lackof international competitiveness, rather than to de-

velop a program based on the industry’s own re-sources and planning.

A larger volume of business could allow U.S.shipbuilders to realize economies of scale and in-crease productivity through higher utilization offacilities, but only at realistic prices. Perceptivemarketing might enable U.S. yards to overcometheir cost disadvantage to some degree, particularlyif a new product were developed and offered. Whilevolume is important, it appears that facilities,management, and labor are the principal areaswhere improvement can be most readily effectedby joint actions of industry and the Federal Govern-ment. These are discussed below.

The Physical Facilities Problem

The work and material flow is severely compro-mised in a converted old yard, as is the method offabrication, assembly, weight handling, and shiperection.

Most major shipbuilding countries have foundthat it is cheaper and more effective to replace oldshipyards with new yards specially designed andlocated for the production of modern ships. It isinteresting to note that the United States and Brit-ain resorted to the modernization of existing yardson a piecemeal basis, while most other major ship-building countries replaced many of their yards withcompletely new yards because they found that inthe long run it was a cheaper and better approach.The primary reasons for this difference appears tobe that U.S. shipbuilding management generally

zaMaritime Transportation Research Board, ‘‘Shipbuilding Re-search and Development: A Recommended Program’ (Washington,D. C.: National Academy of Sciences, 1973), p. vii.


plans only for the short term, while Korean, Japa-nese, etc. , shipbuilding management is organizedto plan for the medium to long term.

Possible policy approaches are to:

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make investment funds available to yards fordevelopment and implementation of viablelong-term plans;guarantee loans for technology transfer by pur-chase, where other means—e. g., joint ventur-ing—are demonstrably infeasible; anddevise a capacity reduction plan that couldconvert some shipyards to other uses and easethe closure of worst affected yards.

The Management Problem

has been argued that the dominance of subsi-dized and naval shipbuilding has stifled U.S. man-agerial innovations. In fact, subsidy has failed todevelop the U.S. shipbuilding industry and may wellbe a cause of the failure to resolve fundamentalproblems, such as the excessive customization ofvessel designs. Many believe that the shipbuildingindustry needs to extend its investment horizons,especially since most U.S. yards are subsidiariesof financially robust companies and have providedpoor return on investment for years.

Management must develop mechanisms for iden-tification of technological voids and evaluation ofsolutions. This requires diagnostic skills and analertness to developments in other industries, rein-forcing the perceived need for a higher ratio of tech-nically skilled managers at all levels in the industryand higher qualifications for these professionals.


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facilitate intra-industry information exchange,technology transfer, and problem diagnoses bysponsoring regular conferences, reporting, andother means;review the content and administration of jointFederal/industry R&D and fund only high pri-ority work;improve the Federal R&D structure and en-courage the industry to implement its efforts;support a Government/industry managementtraining center;

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ensure that any Government support stabilizesthe workload, which in turn allows the reten-tion and training of the work force and the de-velopment of better operational planning tech-niques; andprovide Federal support to development of in-dustry standards, even to the extent of legallymandating their adoption.

The Labor Force Problem

The casualized employment system in U.S. ship-building is one of the largest barriers to improvedproductivity. Since many of the theoretical foun-dations that underpin high foreign productivity areof U. S. origins, there is logically substantial scopefor a program of institutional changes. This areais one where the rate of progress is difficult topredict but could be surprisingly fast.


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disseminate information on the use of ‘ ‘so-cial technologies, such as quality circles and(semi-) autonomous working groups in U.S.yards, both for their beneficial effects on pro-ductivity and for their effect in creating open-ness to new technologies;implement technology transfer in areas of pro-duction skills and management methods bytraining and fellowship programs and transla-tion and dissemination of foreign references;develop a cross-trained labor force to providebetter responses to fluctuations in the need forvarious craftsmen (multiskilling);require shipyards to attack excessive turnoverdirectly and set up interim programs for lim-ited ‘ ‘outplacement’ of redundant employees;andsupport an industrywide training program.

The above approaches are some detailed actionsthat could be used to enhance U.S. shipbuildingproductivity. OTA analysis suggests that U.S.shipyards can improve their competitive positionin the world but only with a concerted effort on thepart of both industry and the Federal Government.However, productivity improvements alone willprobably never close the very large foreign mer-chant ship price differentials that are partly the


result of lower wage rates and the direct and in-direct subsidies of other governments. Federal pol-icy, therefore, must acknowledge that the futureviability of U.S. commercial shipbuilding will de-pend on some form of Federal support. Such sup-port may be minimal where the United States hassome market or technological advantage (e. g.,LNG ships, offshore drill rigs a few years ago, orpossibly Arctic tankers in the future) but will needto be substantial where other nations now have tech-nology, experience, and market advantages (e. g.,large tankers and bulk carriers).

At present, the U.S. Navy is supporting the U.S.shipbuilding industry with massive orders. It wouldbe useful for policymakers now to look beyond theU.S. Navy building program and devise a plan forU.S. shipyards at least 5 years hence. The existingU.S. Navy program can be helpful for encourag-ing productivity improvement in the near term.After the U.S. Navy program slows, either newmarkets must be developed or Federal support mustbe increased or U.S. shipyards will probably con-tract to a much smaller base.

StatusChapter 5

and Trends in Ship Designand Operating Technology

Photo credit: Maritim9 Institute of Technology

Contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 . . . . . . . . . . . ........0

Status and Trends in Ship Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Technological Innovation in Liner Trades. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Technological Innovation in the Bulk Trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Arctic Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Advanced Hull Forms.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Trends in Propulsion Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Technological Innovation in Ship Operations . . . . . . . . . . . . . . . . . . . . . . . . . .

Maritime R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .MarAd R&D Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.S. Navy R&D Related to the Merchant Marine . . . . . . . . . . . . . . . . . . . . . . . . . .Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Federal Role in R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TABLE

Page117

118118120121123123

129

132133134137137

7ablc No. Pa$(’

38. Relative Costs of Maritime Administration R&D . . . . . . . . . . . . . . . . . . . . . . . . 133

Chapter 5

Status and Trends in Ship Designand Operating Technology

OVERVIEW

This chapter discusses technologies in ship designand operations and identifies those that offer signifi-cant opportunities to U.S. shipping and shipbuild-ing enterprises. Trends in the design, construction,and operation of merchant ships of the world’s lead-ing commercial maritime nations are reviewed andanalyzed. The information base included surveysconducted by the U.S. Maritime Administration(MarAd), l 2 the Ship Technical and OperationsCommittee of the Society of Naval Architects andMarine Engineers (SNAME),3 and a study of“Productivity Improvements in U.S. Naval Ship-building’ conducted by the Marine Board of theNational Research Council.4

This chapter also discusses current federallysponsored marine research and development(R&D) and strategies for upgrading technologiesof both ship production and ship operations.

The ebb of the economic cycle of any industryis the time when technological improvements areneeded most to rejuvenate the industry and to sup-port its continued operation at a profitable levelwhen it has recovered from its slump. Unfortunate-ly for the maritime industry and for many others,the reverse is most frequently experienced. R&D

1‘ ‘Research and Development Program Briefing, Maritime Ad-ministration, U.S. Department of Transportation, Jan. 27, 1983.

2’ ‘Merchant Vessel Propulsion Service Margins, ” Maritime Admin-istration, U.S. Department of Transportation, contract No. MA-80-SAC-01067, prepared by The Baham Corp., Columbia, Md., January1983.

“’Assessment of Maritime Trade and Technology, ” questionnairefor SNAME Ship Technical Operations Committee, for the U.S. Con-gress, Office of Technology Assessment, October 1982.

4’ ‘Productivity Improvements in U.S. Naval Shipbuilding, pre-pared by the Committee on Navy Shipbuilding Technology, Com-mission on Engineering and Technical Systems, National ResearchCouncil, National Academy Press, Washington, D. C., 1982.

funds are withdrawn, and the training of peoplein new technologies is reduced to the point thatwhen recovery comes, the industry is far behindits competitors in vying for business and in reestab-lishing itself. Investments in R&D are vital to U.S.maritime capabilities in the future.

Although the Merchant Marine Act of 1936 laidthe groundwork for a modern merchant marine,the ship types in the resultant merchant fleet afterWorld War II did not give a competitive edge overforeign fleets. Compounding the problem, postwarreliance on World War 11 ships, and various con-versions of these vessels, produced an aging fleetwith few modern, high-capacity, efficient shipsnecessary for competitive operations. 5

Following the Merchant Marine Act of 1970, alarge peacetime shipbuilding program was startedand resulted in a number of technologically ad-vanced ships, designed for specific missions andcargoes. Now, in 1983, the U.S. merchant ship-building and ship-operating industries are at a lowpoint. Only a few new merchant ships are underconstruction in the United States. Much of theU.S.-flag fleet is aging and does not meet the tech-nological level of our foreign competitors.

The impetus given by the Merchant Marine Actof 1936 in the form of construction and operatingdifferential subsidies is no longer a popular strategyfor increasing the strength of the U.S. merchantmarine. Furthermore, the technological innovationsthat gave strength to the shipbuilding program thatfollowed the 1970 Act now have been dissipated.

J’ Evolution of Vessels Engaged in the Waterborne Commerce ofthe United States, ” by Robert Taggart, RT-41802, prepared for theCorps of Engineers, Historical Division, January 1983.

117


STATUS AND TRENDS IN SHIP DESIGN

In the past two decades there have been numer-ous changes in the makeup of the world fleet. Tank-ers have increased in size four to five times, to250,000 to 500,000 deadweight tons (dwt); dry-bulkcarriers have increased over twentyfold in total ton-nage, and unitized cargo ships of all kinds havebeen introduced. Until the oil embargo of 1973,ship operators continued to increase speed and pro-pulsion power to improve service. However, cur-rent trends have been to reduce or hold servicespeed constant to control operating costs. The majoreffort today to increase transport efficiency andcompetitive position is via increased hull size andfaster turnaround time in port.

The healthiest sector of world shipping today iscomposed of those fleets engaged in the liner trades.A forecast presented by Kruse projects an increaseof double to quadruple the number of twenty-foot-equivalent units (teu) between 1980 and 2000.6

Liner shipping would continue to be dominated bythe demand for containerized cargo. There wouldalso be a continued shift from breakbulk cargo intounitized cargo trade. Shipments in the form of neo-bulk, roll-on/roll-off (RO/RO), and lift-on/lift-off(LO/LO) cargo will continue to grow in volume.Shipping between developed ports will utilize large,highly efficient carriers. High-value and perishablecargo must be shipped at normal to high optimum-carrier-service speeds. Low-value cargo will beshipped on an unscheduled basis. Medium to smallmultipurpose freight carriers capable of handlingboth breakbulk and unitized cargo will serve lesserdeveloped ports. These ships gradually will displacetramp breakbulk freighters.

As discussed in chapter 2, worldwide liquid- anddry-bulk trades probably will remain essentiallylevel or increase only a moderate amount in thenear term. Bulk shipping will be heavily affectedby changes in world energy consumption patterns.A transition period in which petroleum consump-tion is declining gradually in favor of coal and otheralternative sources will ensure a continuing softmarket for crude-oil tankers. Major scrapping with-in the world supertanker fleet already has begun/

‘Hans Jakob Kruse, “The Future of the Liner Industry, ” Ship-ping2&M, Conference Proceedings (London: British Shippers Council,June 19, 1979), p. 49.

and will continue into the late 1980’s. Coal exports,particularly from the United States, will continueto grow well beyond the next two decades. Like-wise, bulk shipping of grain will be a product sec-tor with continuing strength due to an increasingworld population. This trade is particularly signifi-cant for U.S. interests.

Technological Innovation

in Liner Trades

Perhaps the most important strategy for maritimeindustry improvement is to provide means to rec-ognize potentially profitable technological innova-tions, to test and evaluate them, and to promotetheir incorporation in ship production or operation.

The evolution of containerization illustrates asuccessful maritime innovation. The present in-tegrated, intermodal container system began withan experiment conducted by a land transportationcompany, McLean Trucking Co., which acquiredPan American Steamship Co. and was later re-named Sea-Land. The innovation to be tested wasthe shipboard carriage of trailers between U.S. gulfcoast ports and New York. From this beginning,the present container system has evolved throughactual trials under field conditions.

The first step, in 1956, consisted of carrying thetrailers on specially constructed spar decks oftankers operating between New York and Houston.Having demonstrated the feasibility of the ship-board storage and carriage of trailers, the companydesigned a RO/RO trailer ship, an idea thatwas abandoned at the contract plan stage in favorof the more technically feasible and economicalLO/LO principle. Six general cargo ships were con-verted to full containerships, equipped with ship-board cranes for loading and discharging. The ships .carried 226 35-ft containers. The technical andeconomic attractiveness of the system was demon-strated under these field operations. After this suc-cessful demonstration, the company instituted anintercostal service in 1966, and by 1976 had en-tered foreign trade with the system. Today, Sea-Land Industries, Inc., is one of the world’s largestcontainership operators,

Ch. 5–Status and Trends in Ship Design and Operating Technology . 119

Photo credit: Sea-Land Industries

While containerization permits a vessel to be inand out of port in 1 day—as opposed to a week or

more for breakbulk shipping—it is also acapital-intensive industry

The importance of the implementation stage alsois evident in the adoption of containerization byMatson Navigation Co. This company, whichoperated a service between the U.S. west coast andHawaii, was having economic problems and de-cided that port productivity was a factor that re-quired improvement. To find a solution, Matson,in a move uncharacteristic of the industry, estab-lished an inhouse research department to analyzeits shipping operation and suggest improvements.Using systems analysis techniques, including acomputer simulation model, this department wasable to analyze a number of possible changes. Thesestudies pointed to containerization as the best op-tion to consider for further development and trialdemonstration.

Like Sea-Land, Matson introduced the new sys-tem cautiously by carrying containers on the decksof conventional freighters. The success of thesedemonstrations led to conversion of a C-3 type shipto a full containership. During the planning anddevelopment as well as the implementation stage,Matson not only developed new technology-e. g.,special terminal cranes—in support of the innova-

tion, but also addressed the problems of labor andcustomer acceptance. Therefore, as the trial imple-mentation progressed, the feasibility of containeri-zation was demonstrated both in terms of technicaldesign and in terms of meeting labor and marketingrequirements. The Matson project showed that fielddemonstration of the feasibility of an innovation canbe strengthened by a formal evaluation strategy.7

Handling freight via breakbulk methods has giv-en way to unitized cargo shipping. This includespalletized cargo, containers, barges, and trailers.The major advantage is that most high-volume car-go is now shipped in standard sizes. Shipping instandard container sizes has allowed developmentof specialized cargo-handling equipment. Portsworldwide now have invested large sums in adapt-ing dedicated berthing areas to loading and un-loading of standard 20- and 40-ft containers.

In the design of the latest generation of container-ships, the trend is toward multipurpose service onmajor high-density Atlantic and Pacific routes. Onsome mid- to short-haul routes this trend is rapid-ly displacing the breakbulk freighter service. Theconsensus of opinion seems to indicate that the ad-ditional flexibility gained by this type of vessel off-sets the higher cost of construction and lost deckspace. This type of vessel can moor in almost anyconventional berth by use of angled and skewedramps. Specialized handling systems are not re-quired for RO/RO cargo. Two contrasting designphilosophies have developed among experiencedshippers. The first is that each ship should be fittedwith the necessary crane capacity to unload itself.The second is that all self-unloading will be viaforklift trucks, even for containers. The choice ofdesign will be dictated by the particular trades ofeach shipper.

Cargoes requiring refrigeration, such as foodproducts including meat, fruit, and fish, have beentransported in ‘‘reefer” ships in refrigerated holdsor compartments. In recent years individually re-frigerated containers have steadily displaced cargocarried on specialized ships. One of the new de-velopments that will cause a significant shift of high-

7“Innovation in the Maritime Industry, ” Maritime Transporta-tion Research Board, Commission on %eiotechnica.1 Systems, Na-tional Research Council, National Academy of Sciences, Washington,D. C.} 1979.


value perishable cargo from the air-freight marketto containerized cargo is the development of con-trolled atmosphere containers. Perishable producenow shipped via air can be shipped in modified 40-ftrefrigerated containers at one-fourth the cost, withfar superior quality produce delivered to the cus-tomer. These containers use inert nitrogen gas tolower the oxygen level inside the container.

Technological Innovation inthe Bulk Trades

The major bulk trades include crude and refinedoil products, liquefied petroleum gas (LPG) andliquefied natural gas (LNG), iron ore, bauxite andother ores, coking and steam coal, grains for humanand animal consumption, and neobulk cargo suchas logs and other forest products. While most pre-dictions for crude-oil shipping over the next twodecades are modest, the demand for other types ofbulk carriers should not be as bleak.

Although the United States pioneered the use ofspecialized ships such as barge-carrying ships, wehave fallen behind the foreign competition in cap-italizing on these technological innovations. Thetug-barge concept was considered to be only an at-tempt to get around manning requirements thatnever achieved any economic success. The rest ofthe world forged ahead of the United States in theconstruction and utilization of large crude-oil car-riers, and only in the development of the LNG sys-tems and product carriers have we attained paritywith or superiority over other nations in liquid-bulkcarrier-design innovations. It is foreseen that ma-rine transportation systems of the future will utilizemany more ships that are specifically designed forparticular cargoes and trade routes.

If the latter situation does come to pass, it mayor may not be good news for the U.S. maritimeindustry. In the past, the United States hasdemonstrated proven capabilities in optimizing shipdesigns to match specific operational requirements.However, we have not moved rapidly into suchmarkets and, in some cases, the operational require-ment evaporated by the time the production began.An example of this was the U.S. building programfor supertankers that only began after the rest ofthe world had built tankers far in excess of demand.Current projections for new very large crude car-

riers (VLCCS) indicate no requirements until themid-1980’s depending on the rate of scrapping.New designs of crude carriers will not likely exceeddeadweight tonnages of 250,000,

Most recent industry announcements indicatethat a prolonged period of consolidation and scrap-ping of excess tonnage in crude tankers will be re-quired to restore freight rates to values with whichcarriers can survive. A recent commentary in TheMotor Ship notes that ‘‘recent levels of scrappingmay be historically high, but in the context of theproblem, it is miniscule: it would take 5 years ofscrapping at double the current rates before a bal-ance of tonnage is achieved.

Operators will be looking for conservative gainssuch as propulsion fuel economy and the ability toburn heavy fuels. Two-stroke diesel engines will re-main dominant as long as there are no precipitouslosses of oil supplies. Major emphasis will be placedon increasing docking cycles to 5- or 6-year inter-vals when feasible. There will be a need for im-provement in hull coatings and protection systemsbeyond current levels to accomplish this. Bulktrades will be the most likely for introduction ofsteam plant innovations. Slower optimum servicespeeds than the traditional 15 to 16 knots willpredominate. Most tanker operators have been run-ning crude carriers at reduced service speed to off-set in part excess capacity.

The demand for barge carriers such as LASHand Seabee may continue to increase at a steadypace. These two designs were U.S. innovations.There are two major reasons for building barge-carrier systems. The first is that barges can beloaded and unloaded at inland ports and floatedby tug to a rendezvous with the mothership. Load-ing and discharge of lighters (barges) on the mother-ship is rapid. The second advantage accrues tobarge carriers when serving developing countrieswith limited capacity to handle containerized cargo.Barge carriers are self-sufficient and do not needelaborate shore-support facilities. The primary rea-son that they have not fulfilled expectations is thatthey are expensive large vessels that require a con-tinuous supply of cargo to be profitable. Large deckopenings or catamaran hulls are costly to construct

“’Viewpoint,” The Motor Ship, vol. 63, No. 748, November 1982,p. 5,

Ch. 5—Status and Trends in Ship Design and Operating Technology ● 121

Photo credit: Por7 of New Orteans

A “Seabee’’-type barge carrier unloading in the Port of New Orleans

and some designs have very elaborate stern or bowopenings. Barges, unlike containers, have not beenstandardized from one carrier to another. Also,storage and handling of unmanned barges in portcauses problems.

Arctic Transportation

The severe environmental conditions in the Arc-tic require innovative technology for developing re-source recovery systems. Arctic energy and mineralresources are believed to exist in abundance;however, exploration, production, and transpor-tation will continue to be expensive relative to otheralternatives in the near term. In addition to oil andgas, the Arctic contains large reserves of coal anddeposits of copper, lead, and zinc.

The Federal role in Arctic research has been oneof cooperation with industry. Petroleum industryprojects have included the use of Government lab-

oratories and expert personnel. Some programshave been jointly managed and funded. Continu-ing study is needed on the engineering propertiesof sea ice. The dynamics of sea ice interactions withships and marine structures during wave-drivenstorm conditions are critical, as is the collection ofice/keel and ice/scour data and analysis of ice/sea-floor-interaction dynamics. The effects of the forceof large ice features, such as pressure ridges, on teststructures need to be better understood throughfield studies. g

Future expansion of Arctic oil and gas produc-tion activities will require new technology. Varioustransportation methods have been proposed, in-cluding icebreaking tankers, submarine tankers,LNG barges and ships, and air-cushion vehicles forlogistics support. The United States has a techno-

9’ ‘Research Needs for Arctic and Sub-Arctic Region, Staff paper,Office of Technology Assessment, U.S. Congress, June 15, 1982,p. 21.

25-417 0 - 83 - 9 QL 3


Photo credit: University of Alaska

Future transportation in arctic conditions may require icebreaker support such as shown here

logical lead in some of the above areas but is con-sidered to be behind the U. S. S. R., the Scandina-vian countries, and Canada in icebreaking design.Among present plans are shipments of Canadiancrude to Japan passing through the Bering Straiton icebreaking tankers. However, navigation in theBeaufort and Chukchi Seas now depends complete-ly on ice conditions.l”

In addition to the potential for future offshoreoil and gas discoveries that would lead to increasedshipping needs in the Arctic, there are proven re-serves of land minerals in Alaska, including coaland iron ore that could be developed soon. North-western Alaska has large coal deposits that couldbe extracted and shipped if new port facilities werebuilt. New ports have been planned near Nome.Since the entire transport network for any majorAlaskan mineral development would need to beconstructed, considerable shipping needs are evi-dent.

The presently producing North Slope oilfields inAlaska also contain considerable quantities of gasthat have never been produced. Industry plans of

p. 77.

5 years ago were to build a gas pipeline from theNorth Slope through Canada to the U.S. Midwest.Those plans have never been carried out, mainlybecause of the huge capital requirements of sucha pipeline. Other methods of transporting the NorthSlope gas have been considered—including con-structing a fleet of LNG tankers for the purpose.It appears now that some shipping scheme is stilla viable option. Improved shipping technology aswell as lower costs would be major factors in sucha decision.

There have been numerous studies of the feasi-bility of submarine tankers for carrying crude oilor LNG. Conceptual designs of both nuclear andconventionally powered versions have been pro-posed. At present, no sea tests have been con-ducted. The General Dynamics Corp., ElectricBoat Division, has proposed versions of submarinetankers that they claim could be economically com-petitive with surface icebreaking tankers or pipelinesystems, 11

Carrier Proposed by General Dynamics Arctic Regions, ” Maritime Reporter, Mar. 1, 1982, p. 12.

Ch. 5—Status and Trends in Ship Design and Operating Technology 123

The Beaufort Sea is usually frozen 8 months ofthe year and in the process of freezing or thawingfor another 3 months. Oceangoing barges withouticebreakers can be used for resupply only once ayear. To extend this window, the use of icebreak-ing air-cushion barges has been tested by VECO-International and Global Marine Development,Inc. The development and successful testing of a100-ton cargo-capacity barge was financed by SohioAlaska Petroleum Corp. and Shell Oil Co. at Prud-hoe Bay. 12

One important consideration that affects any oiland gas development in the Arctic is that of pollu-tion prevention and control. There is limited knowl-edge about the environmental effects of oil spillsin Arctic regions, but most indications are that theywould be more severe and persistent than in warm-er ocean waters. In any case, special care in designand operation of both production and transporta-tion systems seems to be warranted to avoid pollu-tion problems. New systems also will be requiredfor oilspill cleanup if that becomes necessary.

Arctic shipping—especially from the AlaskanNorth Slope or the Beaufort Sea—is subject to anumber of political considerations as well. For ex-ample, shipping through either the Bering Straitsor the Northwest Passage is subject to interna-tional agreements for both rights of passage andpollution prevention. Agreements with both theU.S.S.R. and Canada regarding the extent of anyoffshore resource jurisdictions are also a factor. Anymajor development also will need to be consideredin light of possible impacts on Arctic environmentsand the native people of the region,

Advanced Hull Forms

Monohull displacement ships make up the totalof the existing merchant fleet, and most design con-cepts are still based on traditional hull forms oper-ating in the 15- to 30-knot speed range. There arevery few exceptions. Advanced or higher speed hullseventually may find their niche in commercial serv-ice but probably not under present economic con-ditions nor for employment in any major commer-cial cargo service. Advanced hull development has

lz’ ‘Air Cushion Vehicle Successfully Tested for Arctic Icebrcak-ing, A4aritimc Reporter, Mar. 1, 1982, p, 12.

occurred only in the market categories of offshoresupply and passenger/ferry vessels. These hull formconcepts include:

● hydrofoil-supported vehicles;. air-cushion vehicles (ACVS);. surface effects ships (SESS); and● catamarans and small-waterplane-area twin-

hull (SWATH) vessels.

Both surface-piercing hydrofoils and ACVS havebeen built for the small passenger vessel and ferrymarkets during the past several decades, but thesevessels cannot compete with displacement hulls incargo-carrying capacity. Their poor seaworthinessat high speeds also has limited their use to relativelyconfined waters.

Totally submerged hydrofoils and SESS over-come the seaworthiness problem to some extentsince they have the potential of providing high-speed performance in relatively rough seas. Severaloffshore supply vessels have been built in the UnitedStates using the SES principle.

Catamarans are being used as pusher tugs at sea,and SWATH vessels have seen some commercialapplication in servicing ocean drilling and workplatforms in heavy seas. However, these vesselshave limitations when extended to other uses, andthe SWATH vessels especially have been hamperedby high construction costs.

A related hull development is the semisubmers-ible hull used primarily for drilling rigs and oceanconstruction platforms. Here, an abovewater col-umn-supported platform is carried by totally sub-merged twin hulls. This configuration has markedadvantages in maintaining station in heavy seas,but its transit and variable load-carrying abilitiesare limited.

In general, advanced-hull forms undoubtedly willcontinue to be investigated for certain commercialapplications but, in each case, cargo-carrying ca-pacity and economic feasibility will be the majordeterminant of commercial viability.

Trends in Propulsion Technology

The propulsion plants in service today for mer-chant ships have been subject to continuous devel-opment during the past decades. This development


has been generated principally by concern for futurefuel availability and the economic burden of in-creasing fuel costs on shipowners.

Most of the U.S.-flag fleet has steam-poweredmachinery. The traditional steam-turbine power-plant represents the culmination of many extendeddevelopment programs in both the electrical utili-ty and the maritime industries. The developmenthas reached a level of diminishing returns withrespect to cycle efficiency. The maritime industry,however, has not followed electric utility practiceto the same level of development because it has notbeen justified economically for a powerplant attypical marine ratings. Secondly, electric utilityunits operate for very long periods at constantspeed; consequently, the refinement of those unitsis not practical for a marine engine which operatesat variable speeds, reverses rotation, and has to beon-line within a few hours. The expected improve-ments in marine steam-turbine powerplants willcome in four general areas: further refinements inthe steam cycle, use of boiler reheat cycles, changeto coal-firing, and more efficient auxiliary drives.

Diesel propulsion is used extensively in the worldfleet-diesels power over 90 percent of the world’smerchant ships. Recent interest by U.S. operatorsand Government agencies in diesel propulsion hasled to the licensing and construction of slow-speeddiesel engines in this country. The American Presi-dent Lines (APL) new C-9 class containership, thePresident Lincoln, represents the first diesel-pow-ered containership to be constructed in the UnitedStates. APL has constructed three C-9S. With agross registered tonnage (grt) of 40,500 each, theyare the largest in this country. The total containercapacity is 2,500 teu which includes accommoda-tion of 400 refrigerated 40-ft containers. The slow-speed two-stroke engines are Sulzer Brothers Ltd.,designed and licensed for construction by AllisChalmers Co. in the United States. They are thefirst such engines constructed in this country in thepast 30 years. Changes in MarAd regulatory re-quirements were necessary to allow construction ofthe engines with a high percentage of foreign man-ufacturer components.

Diesel engines are the most efficient prime moveravailable in mass production in the size ranges re-quired for main propulsion plants. The diesel in-dustry has a long history of improvements in the

performance and power ratings of their engines.In recent years, the ability to burn heavy fuels wasdeveloped for the low-speed engines which gavethem an economic advantage over steam turbineplants. This experience has been extended to themedium-speed diesels although typically with some-what lighter fuel characteristics. Since the fuel crisisof the mid- 1970’s, the efforts to use less expensivefuels and to recover waste heat to the greatest ex-tent have been intensified.

Diesel engine manufacturers have worked towardraising the mean-effective-cylinder pressure (mep),together with improved designs for turbocharging,to improve both the efficiency of the engine andthe power rating of each cylinder. Parallel effortshave been made to protect the engine from theproducts of combustion with heavy, dirty, and cor-rosive fuels. Very recently, several major enginebuilders and research organizations have experi-mented with firing pulverized coal as an injectedslurry. The results of tests to date have been en-couraging. Typical slurries have been 68 percentoil and 32 percent coal by weight and 66 percentwater with 34 percent coal by weight. Syntheticfuels, derived from coal, also can be used as dieselfuels.

Alternate Fuels

Currently, the merchant fleet consumption ofbunker fuels amounts to 3 percent of the world pe-troleum supply. 13 Bunker fuel sold in 1981 totaled730 million barrels at an average cost of $32 each.Current prices are dropping rapidly along withcrude reductions below $30 per barrel. Marine con-sumers represent a large single user of petroleumproducts but not enough to affect the mix of fuelproducts produced by the world’s refineries. In gen-eral, the mix of distillate and residual productsrefined by the oil industry is dictated by consumerand industrial demand for gasoline and light dis-tillate-fuel oils. The marine, utility, and asphalt in-dustries consume the remaining residual-oil prod-ucts. The properties of residual oils have beendeteriorating in recent years due to the improvedefficiency of new refineries. A greater percentage

IJL. Bergeson, et ~., ‘‘Wind Propulsion for Ships of the AmericanMerchant Marine, ” Wind Ship Development Corp., U.S. MaritimeAdministration Report No. MA-RD-940-81034, NTIS No. PB-81-162455, March 1981.

CIf. 5-Status and Trends In Ship D&slgn and Operating fechnOlOy,.

The engine room of a modern U.s.·flag die.el containership

126 ● An Assessment of Mar/t/me Trade and Technology

of distillate-oil products is now produced from eachbarrel of crude oil.

Since the oil embargo of 1973 there has been agradual shift from oil firing back to coal in land-based steam utility boilers. This increased utiliza-tion of coal will increase demand for worldwide coaltransportaton. Coal remains an outstanding re-source, with about six times the proven worldreserves of crude oil. As a result, an increase in coalshipping seems assured during the next century.If U.S. coal exports grow as most experts project,new bulk carriers will enter that trade. These shipsalso could burn their cargo as fuel. Advanced tech-nology for handling and burning coal now is be-ing developed. For example, research in fluidizedbed combustion and the use of micro-coal slurriesfor firing piston engines is well underway.

Coal-fired ships only recently are being reintro-duced in a few bulk trades. General Dynamics

Corp. shipyard at Quincy, Mass., delivered a36,000-ton coal-fired coastal collier in July 1983 forNew England Electric. This ship is the first coal-burning vessel built in the United States in over30 years and is projected to offer considerable sav-ings to the utilities that transport coal from Nor-folk to New England powerplants. Mitsubishi’sNagasaki shipyard completed the first of a seriesof two coal-fired bulk-carriers in September 1982for Australian National Line (ANL). Two addition-al coal-fired bulk-carriers will be constructed in Italyfor TNT Bulk Ships, another Australian operator.All four ships are chartered to carry bauxite ore,The ships’ main boilers are twin, U.S.-designed,Combustion Engineering Co. boilers licensed forconstruction by Mitsubishi. All coal-handling oper-ations from transfer to ash disposal as well as boilercombustion control are automated or remotely con-trolled in accordance with recommendations issuedby Lloyds Register of Shipping. ANL currently es-


timates an annual savings of $1.3 million from op-eration of these vessels. The company indicates coalprices would have to double relative to heavy fueloil for operating cost parity. In addition, two formerLNG tankers were converted to grain carriers withcoal-fired boilers at a Korean shipyard for U.S.owners.

Nuclear-fueled steam plants have been installedin oceangoing vessels for several decades. Thelargest number of nuclear vessels are naval subma-rines. A small number of nuclear-powered mer-chant vessels have put to sea during the past severaldecades. The technology of these vessels has im-proved gradually. Most experts agree that, basedon the price of oil, they are not yet economicallycompetitive with their fossil fuel-fired counterparts.Other obstacles have hampered the developmentof nuclear ships, including the issue of dispositionof spent nuclear fuel. In addition, there is signifi-cant popular opposition to the entry of nuclear-pow-ered ships into major world ports.

Research has been intensive during the past dec-ade in alternative fuel sources due to the expectedcrude oil shortfalls. A range of synthetically pro-duced fuels from coal have long-term developmentpotential. Likewise, natural gas vented from oil-fields has not been competitive due to uneconomicaltransportation costs. Reserves of shale and tar sandsrepresent about 13 percent of all fuels but are con-siderably more expensive to extract. As supplies ofcrude oil tighten and the price rises, producing com-petitive alternate fuels will become more feasible.The recent drop in crude oil prices may cause in-terest in alternative fuel for marine propulsion towane.

Advanced Powerplants

The declining availability of liquid fossil fuelsmay provide long-term incentives for changing tonew advanced powerplants. A recent MarAd studyidentified several advanced powerplants with de-velopment potential for marine applications. 14 Eachwas found to be potentially compatible with futuremarine plant requirements and to be economical-ly competitive with the best existing technology. A

. —‘+’ ‘Merchant Vessel Advanced Power Systems, Maritime Admin-

istration, U S Department of Transportation, contract No. MA-80 -SAC-01072, prepared by The Baham Corp., Columbia, Md., January1982.

crucial factor was freedom from the use of crudeoil-derived fossil fuels. After screening several dozenoptions, the following plant types were selected for‘ ‘long-term’ development potential:

●

●

●

machinery plants under development thatburn solid (coke and coal) slurry fuels includetwo-stroke marine diesels, fluidized-bed boilersfor steam plants, Stirling cycle reciprocatingengines, closed Brayton cycle gas turbines;lightweight nuclear powerplants in the nearterm using light-water reactors and high-tem-perature gas-cooled reactors beyond; andfuel cells.

The suitability of those advanced powerplants isdirectly related to the type of ship considered fortheir application. Representative hull forms weretested for applicability. The advanced powerplantsthat show a potential advantage were comparedagainst one another and against the projected de-velopment of present-day powerplants. The resultsof the study indicated that fuel consumption ratesof advanced plants are not likely to be significant-ly better than the current performance of low- andmedium-speed diesel engines. Their only advan-tage is the ability to burn alternative fuels.

Propulsor Technology

While a few other special-purpose propulsor de-vices are used occasionally on merchant vessels, thescrew propeller is accepted universally as the mostefficient and cost-effective propulsor that can beused with any type of powerplant. Over severalhundred years of development, the capabilities andlimitations of the screw propeller have been thor-oughly analyzed and are well understood. Whenthe ship hull is defined, the powerplant selected,and the operating conditions are known, the opti-mum propeller for the ship can be designed.

This is not to say that all ships are operated attheir maximum propulsion efficiency. Constraintsimposed by hull form, powerplant characteristics,variable trim or displacement, or variation in speedrequirements may compromise the propeller designto the point where its efficiency is much lower thanwhat might otherwise be realized. An explanationof the effect of some of these factors on propulsorperformance, and the means of circumventing someof the problems, are described below.


To carry the maximum cargo within a givenlength, beam, and draft, it is often the practice todesign a ship hull that has very full stern lines.These in turn interfere with the flow to the propel-ler and create a very high wake. This means thatthe inflow to the propeller is restricted, reducingpropulsive efficiency. The situation can be im-proved by converting to large-diameter propellersthat capture more of the flow around the hull orby using wake-adapting nozzles or ducts that selec-tively accelerate the flow from the ship sides andbottom into the propeller where it can be utilizedmore efficiently.

The characteristics of marine powerplants havemuch to do with propulsive efficiency. Steam re-ciprocating engines and steam turbines are uniquelyapplicable to the torque demands of a screw pro-peller at a given RPM. In other words, there is arelatively flexible relationship between the torqueand RPM of a steam engine that can adapt it tothe torque-RPM demands of a screw propeller.This gives the propeller designer a bit more leewayin keeping the design in an efficient range. How-ever, as cited earlier, the higher fuel consumptionand costs of steam-powered propulsion systems tendto more than offset this design advantage.

A diesel drive, on the other hand, requires amuch more precise matching of the propeller powerdemand with the engine output capability. Caremust be exercised that the propelter torque demanddoes not exceed the engine torque supply beforethe engine gets up to speed. Thus, the designer’stendency is to design the propeller on the low-torqueside of the maximum efficiency curve to stay outof trouble; as a result, the propeller may not be ofoptimum efficiency.

As a general rule, the efficiency of a screw pro-peller can be improved by increasing the propellerdiameter and decreasing the propeller RPM, Obvi-ous limitations on diameter are the cross-sectiondimensions of the ship’s hull, the need for adequatetip clearance, and the desire not to have the pro-peller swing below the keel line. The low-RPM lim-itation is a function of minimum speed of main pro-pulsion engines and the size of reduction gears re-quired. As engine RPM decreases and reductiongear size increases, there is a point of diminishingcost effectiveness in improving propeller efficien-cy with large-diameter, slow-turning propellers.

The overall weight of the propulsion system is alsoa serious consideration in selecting propellers.

There are also several alternatives to increasingthe diameter of a propeller. Various forms of ductedpropellers can be used since, with a flow-acceler-ating nozzle surrounding the propeller, the thrustload is divided between the propeller and the noz-zle with the nozzle delivering up to one-half of thetotal thrust under certain conditions. Also, a pro-peller in a nozzle can turn at a higher RPM thanan equivalent open screw, alleviating the problemof lowering the rotational speed to impractical rates.

Another alternative that can be used to reducepropeller blade loading is to employ tandem or con-trarotating propellers. In these units, the forwardpropeller gives an initial acceleration to the flow,and the after propeller provides additional accelera-tion with the result that neither propeller is as heavi-ly loaded as would be a single propeller under thesame circumstances. The after contrarotating pro-peller also can recover additional energy from thetangential outflow of the forward propeller, givingthis system a higher propeller efficiency than thetandem propeller for corresponding size and hydro-dynamic conditions.

Each of these additional techniques for improv-ing propulsive efficiency has certain drawbacks.Propellers in nozzles are subject to problems, andthe cost of’ acquisition, installation, and adequatesupport of a duct with the required small tip clear-ance is high. However, some of these drawbacksare ameliorated in the Mitsui integrated-ductedpropeller where the nozzle is placed aft of the pro-peller. Tandem propellers involve the additionalcost of the second propeller. Moreover, the extraaperture length and shaft support augment the de-sign difficulties and installation and repair prob-lems. Despite the fact that contrarotating propellershave been used since the 1830’s and are known togive a significant increase in propeller efficiency,the mechanical difficulties of turning propellers onconcentric shafts in opposite directions and the as-sociated high installation and maintenance costhave deterred ship operators.

One promising method of increasing propulsiveefficiency is the use of vanes forward and after thepropeller to convert the tangential flow generatedby the propeller into forward thrust. This technique


was patented by the Goldschmidt Corp. in the1930’s and called the “contrapropeller” or “con-trarudder.

The contrarudder principle was used in the ear-ly Maritime Commission ships (during World WarII) and, on a model test of a C3 cargo-ship hull,a propulsive efficiency increase of 15 percent wasdemonstrated over that obtainable with the thencustomary flat-plate rudder. Such significant im-provements cannot be anticipated with modern rud-der-foil configurations, but Mitsubishi has reportedpower savings of up to 7 percent with similar mod-ifications to the stern and rudder that now are be-ing called ‘ ‘reaction fins. This appears to be apromising propulsor system modification that canattain demonstrated fuel savings at a modest ini-tial investment and no additional operating costs.

Sail Propulsion

Ocean winds have been a traditional source forship propulsion for the past several millenia. His-torically, trade routes and shipping patterns weredesigned to be compatible with seasonal wind andcurrent patterns. With the advent of mechanicalpropulsion, there developed a tendency to ignoreweather in setting routes and schedules. But, overthe past 25 years, ship operators have come to rec-ognize the savings made possible by routing theirvessels to avoid adverse weather and to use favor-able currents. Advances in satellite weather obser-vation and computerized prediction techniqueshave made weather routing practical.

In the past few years, proposals have been madeto employ wind energy as the means for propel-ling small- to moderate-sized oceangoing ships,either as the sole means of propulsion or as a sup-

plementary form of thrust to reduce the requiredmain engine output. The most suitable applicationsappear to be for smaller vessels, particularly thoseoperating on an open schedule. Economic assess-ments of modern sail installations have been madeboth as a retrofit to an existing ship and on a newship designed for sails. The proposals presented todate are quite varied, and several small ships havebeen fitted out with modern sails for evaluation inservice. Most proposed applications are for smallmotorships of 500 to 4,000 dwt. To minimize thehazards to personnel, and the manning and main-tenance costs of traditional rigging, these proposalsgenerally are based on power-operated devices withremote controls for setting and furling sails,

It appears that modern sail arrangements arefeasible for some types of cargo ships as a sup-plementary means of propulsion. Evaluationswould have to be done on the type of sail, the vessel,and the operating route. A study was conductedby MarAd and published under the title “WindPropulsion for Ships of the American MerchantMarine . The results of the MarAd study, con-ducted by Wind Ship Corp., indicate the cost ofsail-assisted motorships to be competitive with con-ventional motorships and predicted that they wouldconsume 18 to 25 percent less fuel. The Japanesebuilt a 1,600-dwt sail-assisted motorship in 1980and have been operating it as a pilot project sincethen. They claim similar fuel savings as Wind ShipCorp. Wind Ship also operated a converted smallfreighter in Caribbean trades which has a sail addedfor supplementary propulsion and fuel reduction.These projects, while limited in scope and at an ear-ly stage, do provide valuable data about the feasi-bility of future applications of sail power for mer-chant shipping.

TECHNOLOGICAL INNOVATIONIN SHIP OPERATIONS

There is a strong perception on the part of many gradual increase in the cost of U.S. ship operationsin the maritime industry that the noncompetitive relative to foreign ship operations. Likewise, thisnature of the U.S. merchant marine is due to a noncompetitiveness is often associated with the be-


lief that technological innovation has not resultedin implementation of new concepts into the U. S.-flag fleet.

To address this question, OTA sent a question-naire to members of SNAME’S Ship TechnicalOperations Committee. 15 The following summa-rizes the opinion of those responding to each of thefour questions. * While the responses differed onmany points, there were important areas of agree-ment.

Question 1:How do the U.S.-flag, U.S.-owned and for-eign-owned, foreign-flag fleets compare intechnological advancement, including auto-mation, fuel efficiency, propulsion, cargospecialization, or others that you consider im-portant?

Two-thirds expressed the concern that the overalltechnological advancement of U.S.-flag fleetslagged behind foreign competitors. Two made thepoint that recent U.S. construction has tended toincorporate a significant amount of new technology.One insisted that U.S. innovation is on a par withthe rest of the world, and that ‘‘the popularly per-ceived deficiencies in U.S.-flag, U.S.-owned fleetsare not technological in nature, but institutional andeconomic.

All agreed that with respect to fuel efficiency andthe introduction of diesel engines, the United Stateshas lagged considerably. Various reasons weregiven including lack of available diesel engine in-dustry ‘‘infrastructure, low fuel cost (prior to the1973 embargo) for steamplants, and insufficientresearch facilities and expenditures.

=~~ ‘A~~~SS~ent of Maritime Trade and Technology, questionnairefor SNAME Ship Technical Operations Committee, for the U.S. Con-gress, O!Xce of Technology Assessment, October 1982.

“Respcnses to footnote 15: Matson Navigation Co., A. J. Haskell,Jan. 27, 1983; Reomar, Inc., N. M. Miller, Feb. 11, 1983; Sun Refin-ing & Marketing Co., Joseph D. Mazzei, Feb. 11, 1983; Society ofNaval Architects and Marine Engineers, James J. Sweeney, Chair-man, SNAME Panel O-21, Feb. 14, 1983; Energy TransportationCorp., E. G. Tornay, Feb. 14, 1983; Exxon Shipping Co., T. W,Gillette, Feb. 25, 1983; Mobil Oil Corp., J. V. Caffrey, Mar, 3, 1983;Chevron Shipping Co., W. H. Banks, Mar, 3, 1983; E. V. Lewis(formerly Webb Institute Director of Research), Mar. 12, 1983;Marine Transport Lines, Inc., Donald V. Horn, Mar. 2, 1983; U.S.Lines, Inc., William B. Bru, Apr. 21, 1983; Delta Line, Richard F,Andino, Apr. 4, 1983; Cushing & Co., C. R. Cushing, Jan, 11, 1983,

Automation in U.S.-flag fleets generally was con-ceded to be inferior to foreign-flag, foreign-ownedfleets. Most U.S.-flag ships are not certified forunattended engineroom operation. The reasons putforward were basically that it is difficult to automatesteam-propulsion systems and that operators haveno incentive to do so because prevailing labor agree-ments do not allow removing watchstanders.

Cargo specialization is another area in whichU.S.-flag ships generally lag foreign competitors.Those innovations that have been developed in thiscountry have long since been replicated by foreigncompetitors. A telling example was cited in the caseof containerized liner cargo. A U.S. operator pio-neered the concept over two decades ago. The U.S.liner operators are generally conceded to be thehealthiest segment of industry. However, today theU.S. liner fleet is less containerized overall thanits major European and Far East competitors. TheUnited States has not participated in cargo special-ization developments, particularly in the bulk andspecialty trades. The one exception mentioned isin the area of product tankers. The extensive im-portation and coastwise shipping of refined crudeoil products have resulted in refined practices be-ing developed for these ships by U.S. fleet opera-tors.

Question 2:What new technologies are most likely to beincorporated in the fleets over the next 20years and will have a major impact on howfuture ships are designed, built, and operated?

The overwhelming opinion of the respondentswas that technological resources in the shipping in-dustry would concentrate on reducing operatingcosts with the cost of manning and fuel of most con-cern. The largest number of respondents, identi-fied the need for automation technology to be im-plemented to reduce manning requirements onU.S.-flag ships. Crew costs are high on U.S. shipsbecause crew sizes are larger than competitors andcost per man is among the highest in the world.They cited several areas where microprocessor tech-nology could be applied with a minimum of devel-opment effort. These included reducing onboardadministrative burden, satellite navigation, weatherrouting, and cargo management. With automation

Ch. 5—Status and Trends in Ship Design and Operating Technology . 131

technology currently available and implementationof new training, maintenance, and administrativeprocedures, crew size could be reduced to 20. Withthe technology that will be introduced in the nextdecade, it will be possible to reduce crew size to10 on diesel-powered ships, and, in the long term,no personnel will be required onboard for normaloperations. However, several respondents notedthat even if these latter options could be negotiatedwith labor unions and regulatory bodies concernedwith vessel safety, it would not necessarily be themost economical way to operate. An optimum bal-ance must be derived that takes into account notonly the technological implications but also theeconomics of ship acquisition, manpower costs, andsafety considerations.

Eight respondents noted that phasing-out steamturbine, high-speed diesel, and gas turbine propul-sion in favor of medium- and low-speed diesel en-gines for most ship designs is a likely trend. As longas oil remains the primary marine fuel, diesel en-gines will predominate as the most efficient pro-pulsion system. Decreased availability of oil andhigh prices relative to other energy sources willfavor development of other engines. The only near-term alternative for large ships is steamplants us-ing coal-fired boilers. Coal is not readily availableat all major ports. Thus, its use is likely to be limitedby fuel supplies. Five respondents predicted the re-turn of coal-fired ships, particularly for bulkshipshauling coal. Twenty-five percent of the respond-ents identified nuclear propulsion as the most likelylong-term development beyond the next two dec-ades.

As mentioned earlier, fuel consumption is oneof the major cost factors that shipping companieswill target for reduction. More than half of therespondents identified improved hull-form designand acceptance of ablative (self-polishing) antifoul-ing hull coatings as a continuing trend. Optimumspeed of inservice vessels, particularly for bulktrades, will continue to reduce. There will be a con-tinued trend to larger hull sizes for most high-vol-ume trades except tankers, which have peaked intonnage. Cargo specialization such as containeriza-tion, RO/RO ships, and automobile carriers willcross-over increasingly into the bulk trades. Al-though LNG technology was introduced prema-turely, it most likely will be viable over the long

term. Icebreaking tankers will be required for arc-tic shipment of crude oil. Finally, 25 percent of therespondents identified cargo-handling and port-facility improvements for reduction of loading timeas an area of continuing improvement.

There were a number of additional elements ofship operations identified by less than half of thequestionnaire respondents that affect operatingcosts. They include the hydrodynamic efficiency ofthe propeller, power losses associated with append-ages, and the mechanical efficiency of the main pro-pulsion system as well as hotel services for the crew.About 25 percent of the respondents identified theseareas for selected improvements.

Question 3:What technological innovations in operationof ships and shipping systems are most impor-tant for future U.S. shipping? (i. e., whereU.S. shipping conditions are unique or whereopportunities exist for the United States totake the lead).

There were five respondents who expressed theopinion that the U.S. Government and shippingindustry should concentrate on crew organization,training, laws, and regulations that affect operatingcost. Specific recommendations included makingsubstantial changes in maritime law and manningregulations to delete the three-watch requirementand allow cross-training of trades, particularly deckand machinery. In the area of industry practices,it was mentioned that rationalization of galley/mess-ing practices that would lead to use of a single mess-space, preplanned meals, or perhaps self-servicewould yield savings.

Twenty-five percent of the respondents indicatedthey felt the area of greatest ‘ ‘business opportuni-ty’ for U.S. technology was the application of com-puters to every facet of the shipping industry. Rapidassimilation of computers into shipping operationswould give U.S. companies a competitive edge,

Similarly, 25 percent of the respondents identi-fied opportunities in the specialty trades that wouldhave a high payoff for U.S. companies. In the linertrades, encouragement of laws and regulations fa-voring intermodal shipping would be most benefi-cial in giving U.S. companies a boost. In the bulktrades, ‘‘neobulk’ shipping of commodities such


Photo credit: Atlent/c Rlchfleld, Inc.

Computers such as this one for satellitecommunications are commonly used aboard modern

merchant ships for automation of many tasks

as vehicles, forest products, and refrigerated cargorepresents a large area of trade in which U.S. ship-ping companies have almost no presence. Exportof perishables and grain should be high on the op-portunity list. One respondent suggested that thepresence of a U.S. cruise ship operator in the Carib-bean trade would be desirable.

Question 4:What Federal policies and programs have asignificant effect in encouraging or inhibitingtechnological innovations in U-. S. shipping?

The opinion of half the respondents was that, ingeneral, substantive, long-term changes are re-quired in U.S. maritime policies affecting the ship-ping industry. However, there was no agreementon what these policy changes should be. Policiesthat tend to reduce the size of the U.S.-flag fleetalso will tend to retard innovation. Long-term sta-bility also was mentioned as being needed for reduc-ing the risk for new investment. The current rapidlychanging policy environment creates uncertainty.

Four respondents indicated that ship construc-tion and operating subsidies have impeded innova-tion and investment in U.S. shipping during thepast several decades. Either removal or restructur-ing the subsidy programs to encourage investmentof new ships was recommended.

Three respondents noted the following areas ofconcern:

●

●

●

●

“buy America” provisions for building andrepairing ships are considered excessive Gov-ernment intervention;U.S. Coast Guard (USCG) regulations areunnecessarily restrictive, particularly wherethey exceed international standards;labor policy should be directed toward reduc-tion of U.S. manning and watchstanding re-quirements; andMarAd R&D programs should be directedtoward industry cooperative efforts with‘‘front-line’ shipping organizations ratherthan consulting firms and academic institu-tions. In general, the level of research activi-ty should be increased.

MARITIME R&D

The majority of direct Federal Maritime R&D Navy program is watched carefully for fallout thatsupport his been provided by MarAd, augmented will benefit the merchant marine. As one exampleby support from USCG for work falling within its of cooperative effort that has been in effect sincejurisdiction. U.S. Navy R&D frequently benefits World War II, the NAS Ship Structures Commit-the maritime industry as a whole, and thus the U.S. tee is supported jointly by MarAd, USCG, the


Naval Sea Systems Command, the Military SealiftCommand (MSC), and the American Bureau ofShipping (ABS).

MarAd R&D Program

Most federally sponsored R&D that is applicableto merchant ship design, construction, and opera-tion is that currently funded by the MarAd R&Dprogram.

The relative costs of the various aspects ofMarAd R&D are indicated in table 38, listing fiscalyear 1982 procurements as percentages of the$14.45 million total.

These funds include both cost-shared projectsand projects that are interagency reimbursable. Itcan be seen that shipbuilding research, cargo-han-dling, and CAORF* account for two-thirds of thetotal budget with all other areas of R&D makingup the remainder. A brief examination of the R&Dresults is contained in the paragraphs below.

‘“ ‘Research and Development Program Briefing, ” Maritime Ad-ministration, U.S. Department of Transportation, Jan. 27, 1983.

*CAORF is a ship’s bridge, harbor, and navigation systems com-puter-assisted simulator, located at MarAd’s Kings Point, N.Y. fa-cility. It is used to study ship control, navigation, and maneuveringand new devices for safe operations. It also is used for operationaltraining.

Table 38.—Relative Costs of Maritime AdministrationR&D (fiscal year 1982)

Research area Percent total

Shipbuilding research . . . . . . . . . . . . . . . . . . . 26.09Ship machinery . . . . . . . . . . . . . . . . . . . . . . . . . 6.25Fleet management . . . . . . . . . . . . . . . . . . . . . . 5.83Ship performance and safety . . . . . . . . . . . . . 3.07Cargo-handling . . . . . . . . . . . . . . . . . . . . . . . . . 12.58University research . . . . . . . . . . . . . . . . . . . . . . 1.72Structures (ship structure committee). . . . . . 0.24Arctic technology . . . . . . . . . . . . . . . . . . . . . . . 2.50Marine science . . . . . . . . . . . . . . . . . . . . . . . . . 1.95Navigation/communication . . . . . . . . . . . . . . . 6.54Advanced ship systems . . . . . . . . . . . . . . . . . . 1.69Computer assisted operations

research facility (CAORF) . . . . . . . . . . . . . . 28.59Port and intermodal development . . . . . . . . . 1.81Market analysis . . . . . . . . . . . . . . . . . . . . . . . . . 1.16SOURCE: US. Maritime Administration, 1983

The National Shipbuilding Research Program

The shipbuilding productivity aspect of theMarAd program is essentially the National Ship-building Research Program (NSRP) being carriedout with joint sponsorship of SNAME and a num-ber of shipyards and other members of the maritimeindustry. This program is considered effective bymost participants, and the joint industry/Govern-ment cost-sharing approach has been cited as amechanism that assures resources are applied to themost pressing problems.

The program currently is conducted on a cost-sharing basis with four major shipyards: ToddPacific Shipyard, Avondale Shipyards, Inc., BathIron Works, and Newport News Shipbuilding.Todd is working on improved outfit and produc-tion aids. Avondale is working on improved sur-face preparation and coating and the feasibility ofincorporating process lanes in U.S. shipyards. Bathis developing shipbuilding standards and improvedproduction methods, and Newport News is work-ing on design/production integration methods andon welding productivity and quality. This programwas instituted in 1973 by the Ship Production Com-mittee (SPC) of SNAME, the cooperating ship-yards, and MarAd. Some important advances inship production technology have resulted.

One element of the program involved settingup the Institute for Research and EngineeringAutomation and Productivity in Shipbuilding(IREAPS). IREAPS is a not-for-profit organiza-tion of shipbuilders and other members of themaritime industry set up to facilitate contractingprocedures and the dissemination of informationresulting from NSRP.

The SPC and IREAPS have prepared “TheFive-Year National Shipbuilding Productivity Im-provement Plan (1983 -1988 17 This plan wasprepared under the guidance of a steering commit-

“’’The Five-Year-National Shipbuilding Productivity ImprovementPlan (1983 -1988),” prepared by the Ship Production Committee andthe Institute for Research and Engineering for Automation and Pro-ductivity in Shipbuilding, March 1983.


tee composed of nationally recognized experts inthe field of shipbuilding, including members fromboth Government and industry. Seven task groupsparticipated in the preparation of this plan. Theplan contains a large variety of proposals for ship-building research projects. The authors claim thatit details a strategy for restoring the U.S. ship-building industry to a position of worldwide leader-ship, the structure of an implementing organiza-tion, a methodology for project development andscreening, a means of measuring project perform-ance, suggested sources of funds and a fundingplan, and a procedure for plan review and adjust-ment.

The plan appears to provide a reasonable ap-proach to many aspects of productivity research.Such research couldtive and profitableUnited States.

Cargo Handling

contribute to a more produc-shipbuilding industry in the

The MarAd cargo-handling program is devotedmostly to the development, testing, and evaluationof techniques and equipment for handling and stow-ing military equipment aboard containerships. Fif-ty-one percent of the financing is provided by theU.S. Navy. Results so far have been the design andfabrication of very large transport units for a proj-ect called ‘‘Sea Sheds’ that will permit container-ships to carry a full range of military vehicles andequipment. Crane installations aboard container-ships for handling Sea Sheds also are being stud-ied. A significant portion of this work is financedby the U.S. Navy, and it is directed toward U.S.Navy problems.

CAORF

The operation of MarAd’s CAORF, which isprincipally the bridge simulator with associatedequipment, consumes a larger percentage of theMarAd R&D budget than the expenditures figureindicates. Of the 1982 total of $4.13 million spenton CAORF, $2.61 million was for operation, main-tenance, and engineering support; only $142,000was expended directly for outside agency projectwork. The remainder presumably was used forMarAd project work, although the output from thisremaining $1.38 million expenditure is not readi-ly identifiable in MarAd program summaries. The

output of this facility has not been evaluated ade-quately. Its cost appears to exceed the importanceof this type of research relative to the overall MarAdprogram.

CAORF has absorbed a major part of MarAdR&D program funds over the last several years.Despite the fact that the construction of this facili-ty was based on conducting research work, its pri-mary use has been for training that might have beenaccomplished more economically by other means.

U.S. Navy R&D Related tothe Merchant Marine

There are a number of areas where the work be-ing done by the U.S. Navy is directly applicableto merchant work. It is assumed that U.S. NavyR&D will continue to be funded adequately. Solong as there are no security problems involved,it is important that those efforts that produce resultsof value to the maritime industry are made avail-able to the industry.

Ship hydrodynamics encompasses hull-form con-figuration for minimum resistance and maximumseaworthiness, frictional resistance of the hull, pro-pulsion system performance, interaction betweenpropeller and hull, performance of maneuveringsystem elements (including rudders and maneuver-ing propulsion devices), performance of bilge keelsand other antiroll devices, and hydrodynamicallyinduced noise and vibration. The U.S. Navy hasactive R&D in all of these areas, including both in-house R&D and contract work under the GeneralHydromechanics Research Program. 18 The resultsof these programs are generally applicable to mer-chant ships and, except for a few programs relatedto hydrodynamic noise, most results are availabledirectly to the maritime industry through reports.

The only hydrodynamic research probably re-quired on merchant ships that is not covered byU.S. Navy programs is that related to inshore ma-neuvering and docking in rivers and harbors, par-ticularly of large-beam, shallow-draft vessels. How-ever, there is research on ship mooring loadingssponsored primarily by the Naval Facilities Engi-

‘8’’ General Hydrornechanics Research Program, ” fiscal year 1983,Ship Performance Department, David W. Taylor Naval Ship Researchand Development Center.


neering Command, and the results of work in thisfield are equally applicable to both naval vessels andmerchant ships, In fact, the U.S. Navy has a spe-cific interest in merchant ships that are moored forlong periods at advanced base locations as part ofthe Rapid Deployment Forces supply system. 19

Navy structures research that is related to mer-chant ships is carried out primarily by the NASStructures Committee, which the U.S. Navy spon-sors through both the Naval Sea Systems Com-mand and the MSC. Other research on ship struc-tures carried out by the U.S. Navy in its own lab-oratories and under contract is devoted generallyto studies of special materials or to structures sub-jected to high-submergence pressures. This latterwork is not of any particular interest in merchantship construction.

Shipbuilding productivity is of as much interestin the construction of naval vessels as in the con-struction of merchant vessels. The U.S. Navy hassupported the joint SNAME/MarAd/Industry pro-grams and also has encouraged private shipyardsto incorporate high-productivity techniques in navalconstruction. Several technological advances in thisarea have been attained on military constructionprojects. 20 Many yards have adopted computer-

aided design and manufacturing (CAD/CAM) sys-tems in some portion of their operations. Severalyards have begun implementing zone constructionand outfitting techniques, in some cases utilizingJapanese consultants to evaluate the most suitableprocess. Since the U.S. Navy is now, and for thenear future will continue to be, the principalcustomer for U.S. shipyards, productivity improve-ments here are most important to reduce the costof military ships.

Computer-Aided Design and Manufacture

The term CAD/CAM is commonly used to referbroadly to the use of computers in industrial designand manufacturing. Currently the most sophisti-

‘“ Forces and Moments on Ships To Be Moored at Diego Car-(. ia ~ ~ prepared by Robert Taggart, R’I’-4 1401, submitted toChesapeake Dl\ision, Ocean Engineering and Construction ProjectOffice, Na\al Facdlt]cs Englnecring Command, July 1980,

20’4Shipbuilding Producti\it): Something is Being Done, discus-sion b) Peter F.. Jaquith, Bath Iron Works, panel discussion at thejoint AS.NE, Flagship/S.NAhl E, Chesapeake Section mcetlng on Jan.18, 1983

cated systems are ‘‘integrated information systems’that encompass product definition as well as engi-

neering and manufacturing configuration control.It is recognized now that a key factor in the suc-cessful utilization of CAD/CAM technology is de-veloping a product definition database with theability to communicate with other information sys-tems. During the past decade, MarAd and the U.S.Navy have been promoting the transfer of this tech-nology into the shipbuilding industry. Directly andindirectly as a result of these efforts, a variety ofincompatible software systems have been institutedand now must be integrated.

A recent study conducted for the U.S. Navy bythe National Research Council (NRC) found thatnew applications of CAD/CAM in the last decadehave resulted in applications over a broad rangeof industries internationally. Over 25,000 work-stations are in use worldwide in all industries to-day. The Navy Shipbuilding Technology Commit-tee of NRC concluded that less than 500 CAD/CAM workstations are in use by the U.S. Navyand shipbuilders in the United States currently. Themajor findings of the committee were:

●

●

●

Navy and MarAd support for NSRP shouldbe continued;the productivity of the U.S. shipbuilding in-dustry for commercial vessels is one-half thatof foreign competitors. Naval vessel construc-tion productivity was not evaluated; andCAD/CAM applications in U.S. shipyardshave resulted in reductions in fitting and weld-ing costs to date. The U.S. Navy is in a goodposition to resolve CAD/CAM issues to fosterits rapid application in shipbuilding in con-junction with the industry.

The NRC study specifically recommends CAD/CAM technology as a method for improving therelative productivity of shipbuilding design and pro-duction. Computer hardware and software com-panies in the United States have developed state-of-the-art CAD systems that have an importantshare of the world market. U.S. commercial yardsutilize this technology to some extent. NRC esti-

‘“ ‘Productivity Improvements in U.S Naval Shipbuilding, ” Com-mittee on Navy Shipbuilding Technology, Marine Board Comm is-slon on Enginccnng and ‘lTechnical Systems, National Research Coun-cil, Nat ional Academy Press, Washington, D, C,, 1982.


mates that 1 to 5 percent of shipbuilder design anddrafting tasks are conducted with CAD assistance.Additional tasks can be incorporated in the futurewhen database information necessary to utilize theCAD system potential becomes available.

The U.S. Navy, both inhouse and through de-sign agents, creates thousands of drawings anddesign reports when designing a ship and establish-ing its specifications. These are then passed to thecontracted shipbuilder in paper form as a designinformation package. The same hull geometry isredrawn and manipulated by many engineers anddesigners in different organizations prior to ship-builder preparation of production plans. The ship-builder then manually reviews the design paper-work to complete material and equipment order-ing, develop schedules, and other activities. Todate, computers have been used for such designcalculations as preparing hydrostatic curves, power-ing and stability analysis, longitudinal strength

calculations, structural design, and structural finite-element analysis.

The use of integrated CAD/CAM has not beenimplemented fully in the world shipbuilding indus-try. However, according to a report prepared byA & P Appledore, Ltd., for this study, the Euro-pean, Japanese, and Korean yards are considerablymore advanced than U.S. shipyards at the presenttime. 22 The Appledore report concludes ‘‘a neces-sary adjunct of installing CAD/CAM is that alldesign and drawing offices and the loft (shipyardlayout functions) must be brought together. ” Whileshipbuilding shares many design and constructionrequirements with other production industries, ithas

●

●

three unique features. They are:

the use of a single set of technical and produc-tion resources with overlapping contract cycles.The products of a typical production line oftenare quite different from one project to the next.Completely standard ships and series produc-tion are more the exception than the rule;the large variety of hull-surface geometries thatmust be matched with hull-volume and pay-load constraints; and

ZZ’ ‘Technjc~ and Capability Developments in Shipbuilding,prepared for the Office of Technology Assessment by A & P AppledoreLtd., Document No. OTA: OOO1, November 1982.

● the amount of data required to generate an ac-curate definition of the spatial geometry of thehull and its stiffening structure and founda-tions is very large compared to other indus-tries.

The potential benefit of CAD/CAM technologyto the shipbuilding industry is improving produc-tivity by reducing the direct labor contribution andfacilitating coordination of management and en-gineering functions during the shipyard productionphases. Reliance on the traditional paper mode ofproduct description produces a slow rate of infor-mation flow. Tighter schedules and increased con-trol of production results from increased informa-tion flow. Real productivity improvements can berealized from more efficient planning, scheduling,and sequencing of the work processes of manufac-turing, inspection, and testing of the ships’ sub-assemblies.

CAM packages have been developed in a num-ber of countries (including most West Europeanshipbuilding countries, Japan, and the People’sRepublic of China), but with initial use in theirdomestic yards only.

Now, however, a number of them are being ex-ported. AUTOKON (from Norway) and FORAN(from Spain) have the highest export sales. Japanhas actively promoted the export of their ship-building technology abroad. A Japanese ship-builder, Ishi Kawajima, Harima Heavy IndustriesCo. (IHI), is under contract to Avondale Shipyardand Bath Iron Works. Several U.S. yards have ac-quired versions of the Norwegian AUTOKON sys-tem as well as a number of additional systems. Ex-amples of systems used by U.S. yards are:

Avondale:CADAM (drafting system) by Lockheed Corp.AUTOKON by SRS, NorwaySPADES by Gali Associates, United States

Newport News:CADMAN by Lockheed Corp.AIDS (topological model) by Italcantieri, ItalyAUTOKON by SRS, NorwayAD 2000 (drafting system), by Newport News

Electric Boat:AUTOKC)N by SRS, NorwayAIDS by ItalcantieriCADDS 4 (drafting system) by Computer vision

Each shipyard now must integrate the variety ofsoftware they own; however, no U.S. shipyard has


accomplished the necessary integration. Appledore,in its report to OTA, identified the importance offocusing on a broader range of database and soft-ware capabilities to obtain the full potential sav-ings from CAD/CAM implementation. Increasedproductivity accrues from creation of one commondatabase and then using it in several different ship-building applications such as lofting, weight esti-mating, vibration analysis, hull geometry, linesdefinition, material requirernents, and productionmanagement. Major U.S. companies in other in-dustries such as General Electric Corp., BoeingCorp., and General Motors Inc. are committed tomoving from product definition on paper to prod-uct definition in electronic form. Today the mostsophisticated systems are part of integrated infor-mation systems that encompass product definition,engineering configuration control, manufacturing,purchasing, materials planning, quality assurance,and customer acceptance testing.23 A system forshipbuilding would include the following typicalmodules:

geometric design and manufacturing:— steelwork geometry and hull-form genera-

tor,—piping and electrical cable-routing system,—accommodation design system;

● design analysis:—naval architectural design analysis,—finite-structural-element model-analysis

package; and. management information and control:

—material/drawing/work information data-base,

—contract management package (networkanalysis)

—purchasing and expediting system,—man-hour recording and job scheduling sys-

tem,—material control system, and—estimating and forecasting system

Technological Innovation

Technological innovations in ship production andship operation do not necessarily stem from R&Dprograms such as those cited earlier. These innova-

‘3’ ‘Productivity Improvements in U.S. Naval Shipbuilding, ” op.cit. , p. 47,

tions often are the result of an operator or designoffice observing a requirement or a potential marketand evolving a design, selecting from availableR&D results, to meet the need. This results in aninnovation moving from the drawing board to ship-yard production and into operation. Classic ex-amples of this are the containership, LASH, Sea-bee, and the various seagoing tug-barge systems.Incorporation of technological innovations appliesto subsystems as well as to total ship systems, e.g.,the Ebel mechanical guy or split-vang cargo-handl-ing gear, dockside container-handling systems, andbow thrusters for inshore maneuvering control .24There seems to be no apparent reason why thistrend will not continue to apply in the future as ithas in the past.

This is not to say that R&D programs are notimportant but that they should be recognized forwhat they are. As an example, laser photogram-metry is a development resulting from the combina-tion of research on lasers and research in the scienceof obtaining reliable three-dimensionial measure-ments from photographs. When laser photogram -metry is applied to the fabrication and precisemating of two hull sections in a shipyard, thisbecomes an innovation in ship production technol-ogy.

Federal Role in R&D

There is obviously some overall national needfor maritime R&D. An important part of such re-search should be a continuing assessment of thoseareas where technological innovation can be appliedto acquiring a greater share of the world maritimetransportation market and a greater share of theworld shipbuilding orders. Additionally, the R&Dshould include an ongoing evaluation of the workgoing on in marine and other fields (both U.S. andforeign) that can contribute to applicable techno-logical innovation. This should be supplementedby programs to incorporate these innovations intodesign, production, and training programs thatwould lead to building and manning ships, as wellas selling ships to other maritime powers to assurethe United States an improved posture in worldshipbuilding and ship operations. Both long-term

24’’Inno\ation in the hfaritimc Industry, op. cit.

25-417 0 - 83 - 10 QL 3


financial support and a research plan are neededto assure effective utilization of resources.

There are several basic problems associated withexisting Federal maritime R&D programs. First,since there is no comprehensive policy defining theFederal role in maritime affairs, there also is noclear policy regarding the Federal role in maritimeR&D. While the Federal approach to industry pro-motion has changed drastically in recent years,there appears to be little attention given to theresulting effect on R&D. The program now underthe authority of MarAd has no clear focus nor setof long-range goals. This program is much too smallto be expected to address in depth the broad rangeof technical problems in the maritime transporta-tion business. Furthermore, there is no rationalefor selection of a few projects as worthy of Federalsupport while others are left for industry or someother research enterprise. For example, the MarAdprogram is skewed toward supporting an expen-sive computer-aided ship-maneuvering-simulationfacility that has several counterparts in industry.And, shipbuilding productivity research, while agood program, is difficult to justify as a MarAd ef-fort when U.S. shipyards are building only militaryships, and a major MarAd policy initiative is to pro-mote foreign building of U.S. merchant ships.

For the future, it would be useful to define theFederal role in maritime R&D before additional

funds are allocated and before a program is de-signed. As discussed in this chapter, near-termneeds for energy-saving and automation technologyare being addressed by numerous industries andprivate research groups worldwide. A broad rangeof new maritime technologies have been developedin a number of other countries and are readilyadaptable. The U.S. Navy and other Federal agen-cies spend considerable funds on basic and appliedmaritime research problems, and applicable datacan be transferred.

The future Federal role in maritime R&D shouldbe based on a few overall principles:

●

●

●

●

the Federal role in R&D should be a subsetof an overall maritime policy;the Federal research effort should consider andexclude what U.S. industry can better do itself.There may be considerations of indirect incen-tives for industry R&D;the Federal effort should include methods ofcoordination and transfer of technology withinthe industry and from military, foreign, andother sources; andthe Federal effort should focus on long-rangeproblems and high-risk areas that are not ad-dressed adequately by industry or elsewhere,the solution of which could contribute to over-all national goals.

Phoio credif” Sea-Land /ndustries

~

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Contents

PageOverview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Development of Maritime Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141General History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Policies for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Comparison With Other Transportation Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146U.S. Coast Guard Safety Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Subsidy Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Maritime Regulatory Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

U.S. Shipping Taxation Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Cabotage Po!icies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

TABLES

Table No. Page

39. Comparison of U.S. and U.S.S.R. Merchant Fleets . . . . . . . . . . . . . . . . . . . . . . 14640. Maritime Subsidy Outlays—1936-80 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15441. U.S. Shipyard Orders, 1970-81, Financed Under Title XI Program ....,... 15542. “BuyAmerica” Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Chapter 6

U.S. Maritime Policies

OVERVIEW

An array of Federal policies and programs hasbeen established in the past with the goal of aiding,assisting, or promoting the U.S. maritime industry.It is widely held that most of these policies are in-effective under current conditions and that majorchanges are needed. Some significant changes, mostnotably in funding cuts of subsidy programs andrelaxing of some ‘‘buy America’ provisions, havebeen instituted by the present administration overthe past 2 years. Also, a regulatory measure to pro-vide increased antitrust immunity and greater flex-ibility for U.S. liner operators to compete withforeign shipping is working its way through Con-gress. *

However, many argue that the United States hasno overall, coordinated, consistent, and effectivemaritime policy that is based on today’s challengesand problems of future survival for the U.S. mari-time industry, nor is it directed toward assuringthat future national needs are met. Clearly, existingmaritime policies are a patchwork. The Federal rolein maintaining an industrial base, assuring com-petition, and coordinating national and interna-

“The Shipping Act of 1983 passed the Senate as of Apr. 4, 1983.

tional initiatives, is poorly defined. The administra-tion has spent 2 years in an attempt to articulatea new maritime promotional program. The resulthas been announcements of a variety of programelements with a promise of more to come. 1 Severalof these elements were incorporated in a draft billto amend the Merchant Marine Act of 1936 andwere submitted to the Senate on April 8, 1983.2

The legislative package is being considered in H.R.3156 in the House and in S. 1038 in the Senate,

This chapter will describe briefly the develop-ment of the more significant maritime policies thatexist or are part of major current debates. It willalso discuss some important future considerationscovered in previous chapters and will compare exist-ing maritime policies with other transportation pol-icies. Separate sections will discuss subsidy policy,maritime regulatory policy, taxation policies, andcabotage policies.

‘See “Initial Elements of Maritime Policy Announced by DOT, ”May 1982; and ‘ ‘Lewis Announces Additional Elements in Admin-istration Maritime Policy, August 1982.

‘Letter from Secretary of Transportation to President of the Senate,Apr. 8, 1983.

DEVELOPMENT OF MARITIME POLICY

General History

It is possible to trace maritime policy develop-ment from the beginning of the Nation. For exam-ple, in his second annual address to Congress onDecember 8, 1790, President George Washingtonsaid:

I recommend it to your serious reflection howfar and in what mode, it maybe expedient to guardagainst embarrassments from these contingencies,by such encouragements to our own Navigation as

will render our commerce and agriculture lessdependent on foreign bottoms. . . .

One of the first acts of the First Congress of theUnited States dealt with the promotion of industry,trade, and shipping. Between 1789 and 1828, over50 additional statutes and commercial treaties wereapproved to protect and promote American ship-ping. Since that time, Federal assistance in sup-port of the Nation’s maritime industry has beena constant of Government policy, including theTariff Act of 1789, the Cabotage Law of 1817, the

141


Reciprocity Act of 1828, Government mail con-tracts in 1845, the Subsidy Act of 1891, the MilitaryTransportation Act of 1904, the Shipping Act of1916, the Merchant Marine Act of 1920, the Mer-chant Marine Act of 1928, the Intercostal Ship-ping Act of 1933, Public Resolution 15 in 1934,the Merchant Marine Act of 1936, Public Laws 480and 664 in 1954, the Merchant Marine Act of 1970,and the Trade Act of 1974.3

Since the 1930’s, U.S. maritime policy and thedevelopment of U.S. maritime industries have beeninfluenced heavily by the philosophies of AdmiralAlfred T. Mahan, which were published in 1918in his book, The Influence of Sea Power UponHistory, 1660-J783. In essence, Mahan held thatnational power was dependent on sea power andthat sea power consisted of merchant ships, navalvessels, and the necessary supporting bases and in-dustries.

Prior to the passage of the Merchant Marine Actof 1936, the U.S. merchant marine was at a lowebb. Inconsistent Government policies had discour-aged capital investment, and a subsidy system tiedto mail contracts proved to be ineffective. The Mer-chant Marine Act of 1936 was modeled after theMahan philosophy and provided for Governmentsubsidies to U.S. maritime industries.

Following 1936, the role of the maritime indus-tries was perceived as vital and heroic during WorldWar II and the Korean and Vietnamese conflicts.The performance of the maritime industries inWorld War II enabled America to sustain a two-front war across both the Atlantic and PacificOceans. Due primarily to the running start affordedby the Merchant Marine Act of 1936, the countryproduced 5,500 merchant ships for the war effort.Both the shipbuilding and operating industriescooperated in the construction and operation of thewartime merchant fleet. The merchant marine wasthe only civilian industry directly exposed to thecombat of war. The extent of the involvement isevidenced by the fact that by 1943 there were a totalof 130 ship-operating organizations, called generalagents, serving the U.S. Government. * The U.S.—

‘Irwin M. Heine, “The United States Merchant Marine: A Na-tional Asset’ (Washington, D. C.: National Maritime Council, July1976).

4McDowell & Gibbs, Ocean Transportation (New York: McGraw-Hill, 1954), p. 452.

Army utilized 330 ports of debarkation for over 7million troops and 268 million tons of cargo.5 Withonly 14 percent of the world’s merchant tonnageat the start of World War II, the U.S. fleet grewto 60 percent of the world tonnage after the war.The experience of World War II is relevant becauseit has a profound and continuing influence on thepolicy and performance of our maritime industries.

In all statements of policy or purpose of past ma-jor maritime legislation, the national defense ismentioned first. This is not surprising when thetiming of the acts is considered. The Shipping Actof 1916 followed the outbreak of World War I inEurope in the summer of 1914. At the time, theUnited States was dependent on foreign-flag vesselsfor 90 percent of its foreign trade. As foreign vesselsdisappeared from the sea lanes, U.S. cargoes wereleft rotting on the piers. In August 1914, Congressacted to allow the registration of foreign-built ships.By 1916 the experience was fresh in the minds ofboth the public and the legislators. The motivesunderlying the legislation of 1916 were stated inhistorical texts as “fear of trusts and monopolies;realization of inadequacy of the U.S. fleet for com-merce, particularly in times of emergency. . . .‘‘G

The Merchant Marine Act of 1920 was enactedbasically to dispose of Government-owned shipsconstructed for World War 1, most of which weredelivered after the war was over. Here again, thispolicy was conceived and enacted in a war envi-ronment.

The Act of 1936 was passed at a time when Eu-rope was on the brink of war, and the United Statessaw the need to prepare. The Act of 1936 resultedafter 15 months of debate and the compromise ofmany disparate points of view. Although the pend-ing war was the primary motivation behind passageof the act, it included promotional features whichencouraged investment in both the operating andbuilding industries.

In retrospect, the Act of 1936 was most appro-priate for the times. The policy it espoused servedthe Nation well in the ensuing 10 years. It was un-doubtedly the headstart afforded by the Act of 1936that allowed the United States to respond so rapidly

51bid. , p. 445.‘Ibid., p. 412.

Ch. 6—U.S. Maritime Policies ● 143

to the merchant ship demands of World War II.The Act of 1936 was a useful policy for its time,but many believe that its time is past.

Policies for the Future

In the future, the most effective U.S. maritimepolicies will be those that can respond to changingconditions of the industry and competition, chang-ing conditions of trade and technology, and chang-ing conditions in the international arena.

Virtually all maritime nations provide direct orindirect aid to their merchant fleets and ship-building industries. Assistance may include oper-ating subsidies, construction subsidies, trade-inallowances, official low-interest loans, interest sub-sidies, official loan guarantees, accelerated deprecia-tion, tax-free reserve funds, duty-free imports ofrequired materials, cargo preference, and cabotage.In addition, social, economic, and political assist-ance may be provided. Examples include schoolsfor training merchant seamen, hospital and medicalcare for seamen, social security family payments,and laws requiring that materials and componentparts for ships be acquired from domestic sources.

A recent report prepared by the Maritime Ad-ministration (MarAd)7 describes maritime policiesof 48 nations. It contains examples of many ap-proaches to industry assistance, reflecting the con-cern of other nations for the support of their mer-chant marine. It should be recognized that theinternational competitive nature of shipping andshipbuilding makes it imperative to consider relativeinfluences of many other governments on the via-bility of the U.S. maritime industry.

Industrial Changes

Some recent analyses have concluded that ma-jor changes have taken place in industrial America.Plants and factories that closed because of reducedconsumer demand are being replaced by modern,more automated facilities or, in many cases, thework has been exported to low-cost foreign coun-tries. Several recent studies claim that the UnitedStates is in a transition period from an industrialsociety to an information-based society and that the— — —

‘U. S. Maritime Adm inistrat ion, ‘‘Maritime Subsidies, February1983.

production of industrial hardware is irretrievablymoving out of the country toward those countrieswith low wage rates.

The same studies project that the U.S. economyis moving away from self-sufficiency and that allthe industrialized countries, including Japan andGermany, are deindustrializing. There appears tobe some evidence of this in the maritime field withKorea emerging as the second largest shipbuilderin the world and with significant amounts of itsbusiness diverted from Japan.

The predictions about U.S. deindustrializationcould significantly affect the maritime industries.An example is the well-known disadvantage of high-cost labor in both our ship-operating and ship-building industries. Despite a myriad of studies withproposed solutions, the problem remains as chronictoday as when it was first perceived. Therefore,some believe that the tide of inevitable change inour maritime industries will be met from the bot-tom up by entrepreneurs and scientists with creativenew solutions.

It appears that if U.S. ship operators are to com-pete in the future, it will require new breakthroughsin vessel design and system operation that increaseefficiency and system capabilities. Shipyards, aswell, will become competitive only through inno-vative approaches, products, or marketing. Futurepolicies— if they are to benefit the Nation—mustallow and encourage a high degree of innovation.

National Defense

The future of the maritime industry is impor-tant to the national defense. The Department ofDefense (DOD), with assistance from MarAd, isin the process of defining specific national defenseneeds for ships and shipbuilding. Two separatestudies were initiated early in 1983. One addressesthe possible wartime demands for and existing capa-bilities of the U.S. shipyard mobilization base, andthe other examines similar demands and capabilitiesof the U.S. sealift (merchant shipping) base. Nei-ther was released as of September 1983, but initialfindings of the shipyard study were discussed in apaper in May 1983.8 Policy proposals in that paper

— —‘R. V. Buck, ‘ ‘Maritime Policy Formulation: Preservation and

Enhancement of the Maritime Industrial Base, ” presented to theSenior Officers’ Forum, Naval Amphibious School, May 1983.


varied from support for broadly based cargo pref-erence to preserving the Jones Act to suggestionsfor more study.

The second study—examining sealift needs andcapabilities— is based on a projected scenario speci-fying military requirements to deploy and supportforces under wartime conditions. The requirementsdo not include support to U.S. mainland industryor civilian activities. The study assumes that shipsof several fleets-Military Sealift Command (MSC)fleet, U.S.-flag active commercial fleet, U.S.defense reserve fleet, fleets of U.S. allies, and theU.S. Effective Control fleet-all would be avail-able under appropriate time constraints. The gen-eral conclusion of the sealift study, as discussed in-formally, is that the collection of all shipping assetsthat probably would be available to the UnitedStates in a national emergency are “marginally in-adequate .

Following the release of both of these reports,DOD intends to conduct a separate analysis ofspecific national objectives to support a certain leveland type of a shipbuilding and sealift base to meetthe defense needs described. The method of sup-port of those objectives are key elements in anyfuture U.S. maritime policy. The release of bothreports is scheduled for late 1983. They should serveto clarify defense needs and identify approaches tomeet those needs.

Although there is continuing discussion of theneed for an active shipbuilding base and a strongmerchant marine to serve the national defense, theconcepts most often discussed are those of WorldWar II and before. In a future war, there may bevery different needs. Major conflicts today mightresult in the use of nuclear weapons; limited con-flicts would require an existing force. This lattercapability, insofar as it involves merchant vessels,probably can be met through continuous purchasesof new and existing vessels for both operations andreserve. Whatever scenarios are postulated, policiesmust include a realistic appraisal of shipping andshipyard capabilities, a commitment of resourcesto maintain acceptable levels, and careful and con-tinuous evaluation and support of the necessaryreserves.

‘Meet ing with staff of the Secretary of Defense, Office of ProgramAnalysis and Evaluation, July 27, 1983.

Although the Merchant Marine Act of 1936 citeda ‘‘Declaration of Policy, the exact meaning neverhas been defined in terms of specific national goalsfor maintaining a merchant fleet adequate to servein a national emergency. Many believe that rela-tively few ships under U.S. registry today have thegenuine capability to meet military needs. Contain-erships rarely are equipped with cranes to handletheir cargo. There are few heavy-lift, breakbulk,or roll-on/roll-off (RO/RO) ships under U.S. reg-istry, though these types are very useful for carry-ing military cargo. Industry spokesmen have sug-gested that defense features should be incorporatedand continually maintained on the U.S.-flag fleetand that DOD should bear the cost of these fea-tures.

One of the most expensive national defense fea-tures (for large merchant ships) is the requirementthat they be able to maintain cruise speed with aU.S. Navy task force deployed in time of war. Inlight of current design trends, it appears that theability to maintain such cruise speed at adequaterange will not always be present in ships constructedto be competitive on the open commercial market.

Such considerations of defense requirementsneeds to be more completely defined to devise na-tional and international policies to satisfy thoseneeds.

The U.S.S.R. Comparison

The Soviets have a large, modern, and diversi-fied oceangoing merchant fleet consisting of 1,727ships totaling about 19 million deadweight tons(dwt) (as of April 1983). While the number of shipsis over three times the U.S.-flag fleet, the total ton-nage is nearly the same. The Soviets, however, ap-pear to have been much more successful than theUnited States in developing and maintaining astrong merchant fleet that has substantial militarysupport capabilities. In addition, the Soviets recent-ly have expanded their capabilities of serving com-mercial worldwide trade and, by offering low rates,have made substantial advances as cross-traders.

After the Cuban missile crisis in 1962, theU.S.S.R. carried out a series of fleet expansion and

IOSee ‘ ‘Recent Figures and Movements of Soviet Merchant Ma-rine, a research department report by Mitsui OSK Lines, Ltd.,November 1982.

Ch. 6—U.S. Maritime Policies 145

modernization plans. As a result, the Soviet mer-chant fleet showed a fivefold increase to 1981. Thegrowth in size of the fleet has slowed in recent years,but there appears to be a trend toward moderniz-ing and diversifying—especially with additions ofnew flexible types of ships—RO/ROs, barge car-riers, heavy-lift ships, and containerships—all ofwhich have significant military adaptability as well.

The Soviets have been quick to recognize the mil-itary significance of these new commercial-typeships. Their fleet contains 50 RO/ROs totaling510,000 dwt (the third largest RO/RO fleet in theworld) plus a number of smaller vehicle/train fer-ries. The RO/ROs have stern ramps and decksstrengthened to carry tanks. The newest designs,some of which are now under construction, haveservice speeds of 20 knots and ranges of up to20,000 nautical miles. This compares to the U.S.fleet of 25 RO/ROs, totaling 380,000 dwt.

“% “ ?$l

The Soviets possess five heavy-lift ships and fivebarge carriers of two types, both constructed inFinland. The lighter-aboard-ship (LASH) typecarry 26 barges. The smaller type can carry eitherbarges or patrol craft, and have heavy-lift capabili-ty. They are equipped with 350-ton-capacity gan-try cranes. Also, construction of a new nuclear-pow-ered LASH is almost completed. The Soviet con-tainership fleet consists of about 125 vessels. Nearlyall of their containerships have the ability to off-load without port assistance.

The Soviet’s new Five-Year Plan (1981-85) in-cludes construction of many modern specializedships replacing the older, smaller, general cargoships. The trend is toward a smaller number oflarger, more specialized ships with only modestgrowth in total fleet tonnage. To be completed by1985 are about 250 vessels, including 50 container-ships, 64 RO/RO ships, heavy-lift and barge car-

.\

1 -

.

Photo credit: U.S. Navy

The Russian fleet of RO/RO ships is one of the largest in the world


riers (including nuclear-powered icebreaking de-signs), and over 1 million dwt of tankers.

Table 39 shows a comparison of the U.S. andU.S.S.R. merchant fleets as of April 1983. Ofcourse, the Soviet merchant fleet is operated by theState under a system different from that of a freeeconomy. This means that commercial operatorsfrom the United States and the rest of the free worldcannot compete on an equal footing. Most of theSoviet merchant fleet is maintained within theU. S.S. R Navy’s budget, and crewmen of merchantand naval ships are regularly exchanged to trainseamen in line with naval strategic objectives.

The Soviet fleet does not operate on a commer-cial basis but exists to fulfill specific national goalsof: contributing to military strategies, expandinginfluence over developing nations, strengtheningmaritime transport capacity for its own trades, andearning foreign currency through cross-trades.Many of these are similar to U.S. goals, but theU.S. Government is far less involved in any com-mercial activities. Therefore, the competitive posi-tion of U.S. operators may be influenced substan-tially by future Soviet actions, especially as theyadvance more and more into commercial shipping.

Table 39.—Comparison of U.S. and U.S.S.R. MerchantFbets (vessels 1,000 gross registered tons and upward)

U.S. active U.S.S.R.Type ship (numbeddwt) (numbeddwt)

Cargo. . . . . . . . . . . . . . . . . . 271/4,948,000 1,355/11,647,000Tanker . . . . . . . . . . . . . . . . . 272/16,167,000 308/7,884,000Passenger. . . . . . . . . . . . . . 11/62,000 64/142,000

When built:Cargo:

1982 and prior . . . . . . . .1983 through 1972 . . . . .1973 through 1983 . . . . .

Tanker:1962 and prior . . . . . . . .1983 through 1972 . . . . .1973 through 1983 . . . . .

Passenger:1982 and prior . . . . . . . .1983 through 1972 . . . . .1973 through 1983 . . . . .

8611570

1404587

740

255706394

58159

91

291520

Speed by type: 14 knots or more:Cargo. . . . . . . . . . . . . . . . . . 261 884Tanker . . . . . . . . . . . . . . . . . 259 197Passenger. . . . . . . . . . . . . . 11 60NOTE: The US. fleet includes only the privately owned, active oceangoing fleet

(no reserve fleet). The Russian fleet includes only active oceangoing ships.

SOURCE: U.S. Navy, April 1983

U.S. maritime policy must be developed with aclear understanding of Soviet capabilities and par-ticipation in world maritime trade.

Comparison With OtherTransportation Policy

Ocean transportation is a unique transportationindustry, particularly in the foreign trades. Al-though some parallels can be found between foreignand domestic transportation, as well as internationalair and ocean transportation, in most cases the cir-cumstances differ greatly, and meaningful compar-isons are possible only in the academic environ-ment.

To understand the differences, similarities, andbases for transportation regulation, it is firstnecessary to examine the history. The regulationof transportation in the United States can be traceddirectly to the late 1800’s when American railroadswere pushing into the last of the western frontiers.Between 1865 and 1870, there was an unprece-dented burst of construction, centering on the Mid-western and western grain States. Competing lineswere run adjacent to each other, and railroads wereactively recruiting homesteaders to settle the sur-rounding land in hopes of creating business to payfor their investments. However, by the mid-1870’s,the expectations of the new homesteaders had notbeen realized, and the railroads rapidly fell intodisfavor. As one text noted, railroads ‘‘were nolonger the pioneers of dawning civilization or theharbingers of increased prosperity; they were thetools of extortion in the hands of capitalists. 11

Antagonism toward the railroads and big busi-ness eventually culminated in the Act to RegulateCommerce (1887). This act—now the InterstateCommerce Act (ICA)—has served as the founda-tion of U.S. transportation regulation from 1887until the present. The areas of rate regulation in-cluded in the Act of 1887 focused on such railroadabuses as unreasonable rate levels, service discrim-ination, rebates, and combines that destroyed com-petition. The act created the Interstate CommerceCommission (ICC). Part I of the 1877 Act appliedto railroads; part II, added in 1935, applied to— .

t 1 F~ir ~d willi~s, The fionomjcs of Tmmportacion (New York:Harper, 1959), p. 429.

Ch. 6—U.S. Maritime Policies ● 147. — .

motor carriers; part III, related to water carriers,was added in 1940; and part IV, treating freightforwarders, was enacted in 1942. Air carriers werethe only domestic mode of interstate commerce toremain outside the act.

A rise in freight rates at the turn of the century,plus continued abuses by powerful business inter-ests, spawned a new round of regulatory bills. In1903, the Elkins Act sought to improve the enforce-ment against rebating. The Hepburn Act of 1906also focused on rebating and allowed the ICC toset maximum rates. Also, it prohibited carriers fromcarrying articles they produced. The Panama CanalAct of 1912 forbade railroads to own, lease, operate,control, or have any interest in water carriers oper-ating by way of the canal.

It was against this background of active domesticregulation of transportation that the Nation beganto focus on waterway transport. At the turn of thecentury, there were two aspects of ocean transpor-tation that differed substantially from today. First,there was an active intercostal and coastal linertrade that was in competition with the railroads,and second, the United States, prior to World WarI, was an extremely insular country, with little in-terest in foreign trade.

The Shipping Act of 1916, the primary regula-tory law affecting ocean transport, was promptedby two specific conditions—the shipping shortagecaused by the initiation of hostilities in Europe in1914 and the country’s general economic philoso-phy toward free and open competition. One partof the Shipping Act of 1916 applies to domestictransportation, the other to foreign transportation.

For domestic trades, the act applied similarprinciples of regulation to domestic water carriersas were applied to railroads competing for the sametraffic. In the domestic sphere, the 1916 Act fol-lowed the lead of the ICA by setting maximum ratesand prohibiting rebates, This authority over coastaland intercostal water carriers was shifted to theICC by the Transportation Act of 1940 (part 111of the ICC Act).

For international water transportation, theShipping Act of 1916 applied some uniquely Amer-ican regulatory principles to an internationalmarketplace, However, the so-called AlexanderCommittee prepared an Investigation of Shipping

Conditions under H. Res. 587 that preceded pas-sage of the Shipping Act of 1916 and concluded thatconferences and cooperative industry agreementsshould be allowed. The following statement was of-fered in the Alexander report:

To terminate existing agreements would neces-sarily bring about one of two results: the lineswould either engage in rate wars which would meanthe elimination of the weak and the survival of thestrong, or to avoid a costly struggle, they wouldconsolidate through common ownership. Neitherresult can be prevented by legislation, and eitherwould mean a monopoly fully as effective, and itis believed more so, than can exist by virtue of anagreement. Moreover, steamship agreements andconferences are not confined to the lines engagingin the foreign trade of the United States. They areas universally used in the foreign trade of othercountries as in our own.

Based on the Alexander report, U.S. ocean car-riers were allowed antitrust exemption in the 1916Act under the provisions of section 15. The U.S.Shipping Board, predecessor to the Federal Mari-time Commission (FMC), was given the power togrant antitrust immunity to shipping conferencesand to approve, cancel, and modify proposed agree-ments.

The 1916 Act required all carriers by water inforeign commerce to file rates on all commoditiesexcept those carried in bulk. The remainder of theact gave considerable attention to the prohibitionof rebating and discrimination.

Any comparison of regulatory and promotionalpolicies among various transport industries mustbe based on the recognition that both are in tran-sition. The domestic air, rail, and motor industrieshave been deregulated, including prohibitions con-cerning common ownership of various modes. Boththe domestic offshore and foreign merchant fleetsare the subject of pending legislation and admin-istrative review.

The term ‘ ‘deregulation, however, has differentmeanings and connotations when applied to differ-ent industries. For example, domestic air, rail, andtrucking deregulation recently has been enacted asquid pro quo for the reduction of antitrust immuni-ty while, in foreign ocean shipping, the legislativeconcept currently under consideration proposeslesser regulatory controls plus greater antitrustimmunity.

148 ● An Assessment of Maritime Trade and Technology—

Domestic waterway transportation has been reg-ulated historically by the same principles as domes-tic rail and motor carrier transportation. There aresome differences and anomalies:

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●

●

Where rail and motor carriers have been reg-ulated by one agency, domestic water carriershave been controlled by two agencies—theICC for Great Lakes, inland, and coastal; andthe FMC for noncontiguous areas. For allpractical purposes, there has been very limitedICC-regulated service because of the demiseof the coastal and intercostal liner carriageand the lack of Great Lakes package services.Inland waterway service generally has con-sisted of bulk carriage, which is exempt. In re-cent years, increasing levels of Alaska trailerand container traffic have moved under ICCtariff as substitute water-for-motor carriage.Recent court decisions also have permittedICC regulation of rail/water and motor/waterintermodal carriage in the offshore trades (e. g.,Puerto Rico),Regulation of domestic water carriers, whereit has been exercised, has been primarily inmaximum rate regulation, financial respon-sibility of passenger carriers, and in collectiveagreements, However, there are no confer-ences in the domestic trades. Historically,other domestic modes have been subjected toa higher degree of rate regulation, plus entryand abandonment regulation.Domestic water carriers are required by theJones Act to employ U.S.-built vessels,manned by U.S. citizen crews, and owned byU.S. citizens. This restriction does not applyto the same extent to domestic rail, motor, andair carriage.In terms of promotion, domestic water carriershave had the benefit of Government aid in har-bor improvement and aids to navigation. Sub-sidized vessels, however, are not allowed toserve the domestic trade except on waiver.Motor and rail carriers also have received sig-nificant Government aid in the form of high-way construction and maintenance and inoriginal land grants to railroads.The comparison of domestic water carrierswith domestic air carriers is less relevant be-cause the latter is engaged primarily in pas-senger transportation, while domestic water

carriers engage almost exclusively in cargobulk transportation. Historically, domestic aircarriers have been more closely regulated thandomestic water carriers, although the regula-tion of’ air carriers has been greatly reduced.

Regulation and promotion of the shipbuildingindustry can be compared with the aerospace andtransportation equipment industries. Generally,there are few differences in terms of regulation,albeit different agencies are involved in approvingthe safety of the products they produce. In the pro-motional area, both the aerospace and shipbuildingindustries benefit from military spending. The ship-building industry is unique in that it has been sub-sidized in the past through a construction differen-tial subsidy (CDS) awarded to operators to coverdifferences in cost between U.S. yards and com-petitive foreign yards. The U.S. shipbuilding in-dustry also is afforded a captive market by the JonesAct and benefits from other ‘‘buy America’ policiesnot prevalent in the other transportation equipmentindustries.

In the international sphere, U.S. ocean carriersare subject to the provisions of the Shipping Actof 1916 and regulated by FMC. In comparison withdomestic surface carriers, the U.S. international-ocean-carrier industry operates in an internationalmarket with unlimited entry, numerous state-owned or state-subsidized carriers, and a long his-tory of accepted traditions and business customs.

The U.S. international air carriers are similarto U.S. international ocean carriers in that theyoperate in an international market, but they aredissimilar in that their major concentration is inpassenger services as opposed to cargo services. Inaddition, international air carriers operate withina regime of bilateral agreements setting the rulesfor air commerce, while in shipping there are fewintergovernmentally agreed on rules of competition.

In comparing domestic-surface-carrier regulationwith U.S. international-ocean-carrier regulation,the differences have been primarily in the regula-tion of the entry of carriers and in rate regulation,with the domestic regulations being the more strin-gent. FMC has no authority to set or approve ratesof ocean carriers in foreign trade but does requirethe filing of tariffs. Relative to the international-air-carrier and domestic-surface-transportation in-

Ch. 6—U.S. Maritime Policies . 149

dustries, the U.S. international-ocean-carrier in-dustry has been comparatively unregulated.

U.S. Transportation RegulatoryConcepts v. an International Market

The principal point in comparing domestic andinternational regulation is that the regulatoryremedy for a domestic industry where all playerscan be regulated equally is completely differentfrom the international arena where most of the play-ers do not recognize American rules and usuallycannot be forced to comply. The area of antitrustprohibitions and rebates has been the most trouble-some. Even though the legislative history of the Actof 1916 shows that the framers of the act recognizedthe unique nature of international shipping andgave authority to the regulatory agency (i.e., FMC)to grant antitrust exemptions, the Justice Depart-ment frequently has fought the granting of such ex-emptions. Foreign carriers serving the U.S. tradesare more likely to receive immunity to collaborateand rationalize their services than U.S. carriers.Attempts to do so by U.S. carriers have been metwith stringent and frequent Justice Departmentprotests and Government-initiated and financedlitigation, as in the case of the attempted U.S.

Lines/R. J. Reynolds merger. Deferred rebating,a common practice in ocean shipping worldwide,is prohibited in the U.S. trades and stringently en-forced.

Prior to 1977, a number of U.S. and foreigncompanies allegedly engaged in illegal rebating ac-tivities within the established liner conferences ofthe time. FMC investigated these activities and,between 1977 and 1980, settled claims against 27liner operators (21 foreign and 6 U. S.) and againstalmost 100 shippers. The amount of the individualclaims ranged from about $5,000 to $4 million andtotaled $15.6 million. The claims settled with the6 U.S. liner operators totaled $7.4 million and withthe 21 foreign liner operators totaled $5.1 million. 12Many believe that this example illustrates the dis-parity of treatment of U.S. v. foreign operatorsunder U.S. law. Certainly, in this case, foreignoperators dominated the trade (by factors of twoto three times) and were suspected of a major shareof illegal rebating. Yet claims settled were muchless. The contention is that U.S. laws cannot beevenly enforced in such an international business,and U.S. operators have a resulting economic dis-advantage.

IZData on claims set~ed as of Dec. 31, 1980, obtained from the Fed-eral Maritime Commission, GeneraI Counsel’s Office.

.

U ..&

. . *

. . . .. .* . ,, ,

:-.. .m?s-?z!~ -,. ,

.- ’-%%--s--

Photo credit: Pori of New Orleans

A Greek-flag liner ship entering the Port of New Orleans

150 An Assessment of Maritime Trade and Technology.——

The other anomaly involving the application ofU.S. regulatory concepts is the existence and useof the Canadian and Mexican gateways. For in-stance, ocean carriers serving Montreal need notfile tariffs with FMC for U.S. origin or destina-tion cargoes and can form intercarrier agreementsas necessary to serve the U.S. trade without disclos-ing relationships or receiving FMC approval. For-eign-flag carriers serving the United States throughthe Canadian gateway have maximum flexibilityand have been able to charge differential rates, in-cluding marginal (noncompensatory) rates, to ship-pers in order to fill their ships. This same flexibili-ty is not available to U.S.-flag carriers competingout of U.S. ports. In the United States, rates canbe dropped immediately on filing, but rates can-not be increased without a 30-day filing notice.

Comparison of International Oceanand Air Regulation and Promotion

In comparing U, S.-flag international-ocean-car-rier regulation and promotion with international-aviation carriage, there are essentially four areasthat can be examined:

. rates and fares;

. mergers and acquisitions;

. entry requirements; and● promotion.

Rates and Fares. —Both the Civil AeronauticsBoard (CAB) and FMC require rate filing forscheduled service, and both recognize conference-type ratemaking, although CAB is backing awayfrom routine acceptance of International AirTransport Association (IATA) airline agreements.By law, both agencies may grant antitrust immuni-ty to ratemaking groups and in practice havegranted this immunity after a hearing and full dis-closure. CAB has authority to suspend or rejectrates that are unreasonable, although the Presidentmay override the CAB decision. CAB seldom sus-pends rates in international service. Also, there areprovisions in most bilateral air agreements thatallow the designated authority to reject rates. FMCcan find that rates are too high or too low and thusimpede the foreign commerce of the United States,and it can order the carrier to discontinue charg-ing that rate. However, it has rarely exercised thispower over rates in foreign trade. Under the Con-

trolled Carrier Act (CCA), FMC can suspend ratesthat it finds unreasonably low, and in fact has doneso in several instances involving the Far-EasternShipping Co., a Soviet-owned cross-trading ship-operating company. Both agencies (CAB andFMC) regulate against rebates, and law dictatesthat both air and ocean carriers must adhere to pub-lished tariffs. According to case law, ocean-carrierrates must cover fully distributed costs.

Mergers. —CAB is required to approve airlinemergers of U.S. airlines, but may be overruled bythe President where international routes are con-cerned. FMC may not approve U.S. ocean-carriermergers that are subject to antitrust laws.

Entry.— There is a basic difference in entryregulation in that U.S. ports are open to all shipsof all nations (with the exception of some securityconsiderations at some ports) that adhere to ourlaws. Air carriers, on the other hand, are subjectto bilateral agreements limiting the number offlights and carriers that can enter a country’s airspace and that are granted landing rights.

Promotion. —Promotion includes subsidy andother measures to assist LT. S. carriers. AlthoughCAB is authorized to provide direct subsidy to U.S.air carriers, as a matter of practice it does not, otherthan premiums on mail rates. The authorized air-carrier subsidy may be paid regardless of where theaircraft were built. On the other hand, most U. S.-flag ocean carriers are paid an operating differen-tial subsidy (ODS) directly by the Maritime Sub-sidy Board (as specified in the Merchant MarineAct of 1936) only on ships built in the United States.The subsidy is technically a contract in which thecarrier agrees to serve an assigned (i. e., ‘ ‘essen-tial’ trade route and observe other specific oper-ating constraints. However, MarAd is moving tophase out ODS by not granting new contracts andencouraging early termination of existing contracts.

As mentionied previously CDS has been paid toU.S. ocean-carrier operators to cover cost differen-tials for vessels built in U.S. shipyards. At the cur-rent time, no new construction subsidy awards arebeing made. There is no construction subsidy coun-terpart in the aviation industry.

Bilateral agreements reserving cargo also are con-sidered forms of promotion. Aviation bilateral

Ch. 6—U.S. Maritime Policies ● 151— . —

agreements usually limit competition to carriers ofthe two countries and selected third-flag carriersbut do not allocate market share. Equivalent com-petitive opportunities are afforded. In the maritimesphere, bilateral agreements tend to specify cargoshares to be carried by each trading partner. Bi-lateral agreements are the rule in international airtransport and are the exception in U.S. ocean trade.

U.S. Government-impelled cargo-reservationpolicies for U.S.-flag ships could also be comparedto Federal aviation policy, which requires all Gov-ernment personnel to use U.S. airlines wheneverpossible on international travel.

U.S. Coast Guard Safety Regulations

The U.S. Coast Guard (USCG) plays an impor-tant role in promoting safety in marine transpor-tation and has specific regulatory responsibilitiesin commercial vessel safety. Some of these safetyrequirements have been criticized by the maritimeindustry as putting undue burdens and excessivecosts on U.S.-flag operators that foreign-flag oper-ators do not have to comply with. Industry exam-ples of these requirements are different for new ves-sels built in U.S. shipyards than conversion of for-eign-flag vessels to U.S.-flag.

The most frequent complaint by the industry re-garding new vessels is the increase in costs of bothmaterials and labor associated with the applicationfor USCG approval. USCG has not required thatmany materials be different from that desired byan owner or required by a classification society orIndustrial Standard. However, the material con-trol costs have increased because USCG require-ments duplicated functions (i. e., certification andfactory inspections) provided by classification soci-eties or Industrial Standards, The net effect is that‘ ‘off-the-shelf’ components have cost more mere-ly because suppliers must provide evidence ofUSCG approval.

Other examples by the industry of burdensomesafety regulations relate to indirect restrictions ontheir choice of suppliers. Although not specificallyprohibited, less expensive foreign components maynot be accepted when USCG does not recognizeaffidavits from foreign manufacturers. Compliancewith USCG regulations has been shown to add ap-

proximately 3 to 4 percent to the construction costof a new vessel. 13

The cost impact associated with USCG regula-tions on the conversion of a foreign-flag vessel toU.S. flag appears to be even greater. Typical in-dustry claims are that some expenses are requiredsolely to comply with USCG regulations and notbecause of the quality or suitability of the existingvessel. Examples of reflagging requirements are thereplacement of all joiner work with approved ma-terials (to meet stringent fire-protection standards);the replacement of lifeboats and lifesaving gear; andthe replacement of electrical wiring. In many cases,new drawings requiring a lengthy approval processmust be prepared to obtain USCG approval. Ship-builders have estimated that USCG requirementscan add approximately 4 to 5 percent to the costof conversion of a relatively new foreign-flag vesselto U.S. flag.

In recent years, USCG has responded to con-cerns that their vessel-safety requirements are tooburdensome compared with other major maritimenations. For example, USCG now accepts theAmerican Bureau of Shipping (ABS) and other in-ternational classification societies’ plan review,material certificates, and onsite inspections for bothnew and reflagged ships. 14

USCG believes that the commercial vessel-safetyrequirements for U.S. ships are coming more inline with international standards, such as those ofthe International Maritime Organization (IMO).IMO, formerly known as the Inter-GovernmentalMaritime Consultative Organization (IMCO), wasestablished in 1958 through the United Nations tocoordinate international maritime safety require-ments. USCG has actively participated in IMOsince its existence and believes that its efforts in theinternational arena have resulted in bringing thesafety requirements of most other major maritimenations up to those imposed by USCG. The CoastGuard notes that some safety requirements in thepast resulted in overregulating, but those have beenreplaced and, in some instances, other shipping na-

— — —-—IJE, K, pentimonti, American President Lines, Ltd. , personal COrn-

munication, Mar. 21, 1983.I +Nat iona] Advisory Committee on Oceans and Atmosphere

(NACOA), Marine Transportation in the United States, January 1983,


tions (i. e., Norway) now have more stringent re-quirements than the United States.

A 1979 study for MarAd entitled “Cost Impactof U.S. Government Regulations on U.S.-FlagOcean Carriers, found USCG requirement coststo be smaller than generally perceived. In fact, theannual operating costs shown due to Coast Guardregulations were a small fraction of the vessels’ totaloperating costs. The report analyzed the increasedcosts of two different types of vessels and found theincrease to be less than 0.5 percent of the total cost.

Since the analysis was written in 1979, IMO hasimposed additional safety standards that may min-imize the cost differences further.

It appears that what was once perceived as a ma-jor competitive detriment for U.S.-flag carriers isbeing resolved. However, most of the safety re-quirements imposed by the U.S. Coast Guard arebased on statutory law, and if any changes to theexisting requirements are needed, they must bemade through legislation.

SUBSIDY POLICY

The Merchant Marine Act of 1936 has been thebase on which the succeeding 45 years of U.S. Gov-ernment maritime subsidy policy was built. Sec-tion 101 of the 1936 Act contains the following dec-laration of national policy:

It is necessary for the national defense and de-velopment of its foreign and domestic commercethat the United States shall have a merchant marine(a) sufficient to carry its domestic waterborne com-merce and a substantial portion of the waterborneexport and import foreign commerce of the UnitedStates and to provide shipping service essential formaintaining the flow of such domestic and foreignwaterborne commerce at all times, (b) capable ofserving as a naval and military auxiliary in timeof war or national emergency, (c) owned and oper-ated under the U.S.-flag by citizens of the UnitedStates insofar as maybe practicable, (d) composedof the best-equipped, safest, and most suitable typesof vessels, constructed in the United States andmanned with a trained and efficient citizen person-nel, and (e) supplemented by efficient facilities forshipbuilding and ship repair.

To implement this policy, direct construction andoperating subsidy programs, based on U.S./foreigncost differentials, were established through the CDSand ODS programs. Direct cash payments fromthe Federal Government were to be provided toqualified applicants to defray the higher costs ofshipbuilding and operation in the United States.The law required that subsidized vessels be manned100 percent by U.S. citizens, while on nonsubsi-dized vessels the licensed crew had to be 100 per-

cent U.S. citizens, and the nonlicensed crew 75 per-cent U.S. citizens.

An integral part of the ODS program was theconcept of essential trade routes. Subsidy was pro-vided only for vessels operating on assigned routesand observing assigned minimum and maximumsailings in services determined to be essential to thepromotion of U.S. foreign commerce, regardlessof whether these routes were profitable to the lines.

The 1936 Act also included a variety of other eli-gibility, monitoring, and reporting requirementsas a condition for receiving subsidy. These consistedmainly of requirements of corporate financial dis-closure, as well as domestic trading activities,foreign shipownership, and other facts relevant tosubsidy eligibility. Another provision precludedpayment of subsidy in support of any service incompetition with another U.S. carrier except incases where service inadequacy could be demon-strated.

In addition to the direct subsidy aids providedunder the CDS and ODS programs, the act alsoincluded two indirect assistance programs. First,earnings placed in Capital Reserve Funds (annualcontributions were required) for new vessel con-struction were relieved of income tax liability andcould therefore be used to reduce taxation. Second,the Government’s lending program for ship con-struction, which had previously existed, was reac-tivated. Today, the mechanism used is not directGovernment lending but Government guarantee


of commercially placed loans. This authority, con-tained in title XI, was added in 1938.

A variety of defense and security provisions alsowere incorporated. Subsidized vessel designs wereto be submitted to the U.S. Navy. Any noncom-mercial design features recommended by the U.S.Navy were to be paid for by the U.S. Government.Subsidized ships were subject to Government re-purchase, and provision was made for Governmentrequisition of privately owned merchant ships underemergency conditions. Finally, MarAd was re-quired to undertake an annual survey of U.S. ship-building capacity with the U.S. Navy to assure theadequacy of the shipbuilding mobilization base.

In the late 1960’s, a comprehensive overhaul ofthe Merchant Marine Act was planned, and on Oc-tober 21, 1970, the President signed into lawamendments to the 1936 Act, known as the Mer-chant Marine Act of 1970. In general, it was a reaf-firmation of the national policy of Federal supportfor the merchant marine. The fundamental policiesremained the same, although several program ad-justments were made in the interest of increasingeffectiveness of the program. A specific pledge ofGovernment support for a 10-year, 300-ship con-struction program was made.

Authorization was made for payment of CDSdirectly to yards, rather than to ship purchasersonly. 15 This was intended to encourage greater ship-yard participation in vessel design. It was hopedthat this would lead to greater shipyard productiv-ity.

Negotiated contracts between shipyard and pur-chaser were allowed for the first time. Previously,competitive bidding was required. It was hoped thatshipbuilding costs would be reduced by eliminatingexpenses associated with bid preparation and thatyards would be encouraged to develop standardmarket designs.

Declining CDS rates (i. e., subsidy as a percent-age of total cost) were imposed as objectives for allCDS awards. The goals were a 45-percent CDSrate in fiscal year 1971 with a reduction in the ceil-ing of 2 percentage points a year until a level of35 percent was reached in fiscal year 1976. These

Is u s, Ocem PO1lCY in the 1970 ‘s: Status and Zssues (WashiwwD.C. :“ U.S. Department of Commerce, October 1978), p. V-38.

rates were required for negotiated contracts, whilethe Secretary of Commerce could waive them incompetitively bid contracts.

A major innovation was the attempt to encouragethe construction and operation of bulk carriers. Al-though CDS construction of bulkships had beenauthorized since 1952, no bulk vessels had beenbuilt with subsidy as of 1970. The major changewas that bulkships could be granted ODS. Also,subsidy-eligibility restrictions pertaining to U.S.owners who also owned foreign-flag vessels wereliberalized to allow bulk operators to replace foreigntonnage with new U.S. ships within a specified pe-riod. Also, restrictions on foreign-to-foreign tradingwere liberalized for subsidized bulkships becauseof the differences between liner and bulk operations.

The 1970 Act also revised the wage-subsidy pro-vision of the 1936 Act to minimize operating sub-sidy and encourage collective bargaining. A wageindex was developed, and wage increases in excessof those allowed by the index were not subsidizable.

The 1970 Act extended eligibility to establish tax-deferred Capital Construction Funds (CCF) to mostU.S. operators, including nonsubsidized carriers.Previously, only ODS recipients had been eligible.Although operators could make use of CCFs, tax-deferred funds could be withdrawn only for con-struction or reconstruction of vessels in U.S. ship-yards for deployment in U.S. foreign commerce,the Great Lakes trades, noncontiguous domestictrades, or fisheries.

The only other major provision was raising thetitle XI guarantee ceiling from $1 billion to $3billion. Subsequently, it has been raised severaltimes, most recently to $12 billion.

The 1970 Act was not successful in achieving fleetgrowth. Rather than 300 ships built under the CDSprogram as envisioned in 1970, 80 were built, withanother 56 converted or reconstructed with CDSfunding.

CDS and ODS were intended to close the gapbetween U.S. and foreign costs. In the recent past,they have not been able to accomplish this. Aftera propitious start in the early 1970’s, when CDSrates on average did fall to the 35 percent goal, ratesbegan to rise again (reflecting both the U.S. infla-tion rate and the depressed state of the industry

25-417 0 - 83 - 11 QL 3


worldwide). As pointed out previously, even a 50-percent rate—the highest level allowed by law—isinsufficient to close the current differential. (A ratecloser to 65 to 70 percent would be required basedon some recently quoted foreign constructionprices.)

On the operating cost side, the wage index sys-tem, implemented by the 1970 Act in an effort to

reduce costs and encourage efficiency, has meantthat wage differentials are not covered totally. Fur-ther, maintenance and repairs have not been rou-tinely included in recent ODS contracts. Finally,fuel cost, which increased dramatically in the late1970’s to the point where it is a large percentageof total operating cost, is not a subsidizable expense.

Thus, despite substantial expenditures, CDS andODS have not made the U.S. foreign-trade fleet

competitive. Table 40 shows outlays for the two

programs over time.

Shortly after the present administration took of-fice, an interagency task force was set up to examine

current maritime policies and to make specific rec-

ommendations for changes. The first major stepwas the curtailment initially and then the cutoff ofCDS funding. For fiscal year 1982, no CDS fundswere requested ($49.5 million in carryover fundswere made available), compared with an averageannual request of $132 million in the previous 4years. It was announced that this was intended asa phasing out of the CDS program and that in thefuture no funding would be made available. Tem-porary authority (for 1 year) was granted for thebuilding of subsidized vessels abroad.

On May 20, 1982, Secretary of TransportationDrew Lewis announced the initial elements of a newprogram. He stated the administration’s intent tohonor existing ODS contracts, and other matters(see app. A). At this time he also announced thatthe administration would seek support of an exten-sion of temporary authority for subsidized U. S.-flag operators to construct or acquire vessels out-side the United States and still receive ODS.

In August 1982, the Secretary of Transportationagain stated that the Government would honor ex-isting ODS contracts, but that no new contracts

Table 40.–Maritime Subsidy Outlays–1936-60

Fiscal year CDS Reconstruction subsidy Total ODS Total ODS and CDS

1936-55 . . . . . . . . . . . . . . . . . . . $ 248,320,942a

195W0 . . . . . . . . . . . . . . . . . . . 129,806,0051961 . . . . . . . . . . . . . . . . . . . . . 100,145,6541962 . . . . . . . . . . . . . . . . . . . . . 134,552,6471963 . . . . . . . . . . . . . . . . . . . . . 89,235,8951964 . . . . . . . . . . . . . . . . . . . . . 76,608,3231965 . . . . . . . . . . . . . . . . . . . . . 86,096,8721966 . . . . . . . . . . . . . . . . . . . . . 69,446,5101967 . . . . . . . . . . . . . . . . . . . . . 80,155,4521968 . . . . . . . . . . . . . . . . . . . . . 95,989,5861969 . . . . . . . . . . . . . . . . . . . . . 93,952,6491970 . . . . . . . . . . . . . . . . . . . . . 73,528,9041971 . . . . . . . . . . . . . . . . . . . . . 107,637,3531972 . . . . . . . . . . . . . . . . . . . . . 111,950,4031973 . . . . . . . . . . . . . . . . . . . . . 168,183,9371974 . . . . . . . . . . . . . . . . . . . . . 185,060,5011975 . . . . . . . . . . . . . . . . . . . . . 237,895,0921976 b . . . . . . . . . . . . . . . . . . . . 233,826,4241977 . . . . . . . . . . . . . . . . . . . . . 203,479,5711978 . . . . . . . . . . . . . . . . . . . . . 148,690,8421979 . . . . . . . . . . . . . . . . . . . . . 198,518,4371980 . . . . . . . . . . . . . . . . . . . . . 262,727,122

Total ... ... ... ... ... ... .$3,135,809,321

$ 3,286,68834,881,409

1,215,4324,160,5914,181,3141,665,087

38,1382,571,566

932,11496,70757,329

21,723,34327,450,96829,748,07617,384,60413,844,951

1,900,5719,886,024

15,052,0727,318,7052,258,4922,352,744

$202,007,125

$ 251,607,830164,687,414101,361,086138,713,23893,417,20978,273,41086,135,01072,018,07681,087,56696,086,29394,010,17895,252,247

135,088,321141,698,479185,568,541198,905,452239,795,663243,712,448218,531,643156,009,547200,776,929265,079,866

$3,337,816,446 C

$ 341,109,987644,115,146150,142,575181,918,756220,676,665203,036,844213,334,409186,628,357175,631,860200,129,670194,702,569205,731,711268,021,097235,666,821226,710,926257,919,080243,152,340386,433,994343,875,521303,193,575300,521,683341,368,236

$5,824,021,842

$ 592,717,817808,802,560251,503,661320,631,994314,093,894281,310,254299,469,419258,646,433256,719,426296,215,963288,712,747300,983,958403,109,418377,365,300412,279,467456,814,532482,948,003630,146,442562,407,164459,203,122501,298,612606.448,102

$9,161 ;838;288%cludes $131.5 mllllon CDS adjustments covering the Wortd War II period, $105.8 million equivalent to CDS allowances which were made in connection with the Mariner

Ship Construction Program, and $10.8 million for CDS in fiscal years 19!M and 1955.blncludeg totals for fl~al year 1978 and the transition qua~er ending SePt. 30, 1976.clnclude~ approximately $~ Miilion in CDS outlays repaid to the Federal Government as of Sept. 30, 1980. Nearly $25.3 million of this total rePresents subsidy 9rant~

In tha construction of the tanker Stuyvesarrt.

SOURCE: U.S. &f8rWrne Adrn/n/stratlon 7960 Annual f?epoti (Washington, D. C.: Maritime Administration, U.S. Department of Commerce, July 1961), p. 61.


would be signed, and that the fiscal year 1982-83moratorium on new CDS contracts would be con-tinued.

Maritime subsidy policy clearly has been changeddrastically through budgetary reductions and tem-porary legislative authority over the past 2 years.Strong industry opposition, especially by the ship-builders, has occurred while U.S. liner operators,who could benefit from build-foreign provisions,have applauded the changes. Legislation has beenintroduced to restore construction subsidy funds forsupport of the U.S. shipbuilding industry, and thedebate undoubtedly will continue.

In 1982, one subsidized operator, U.S. Lines,and the U.S. Government negotiated the termina-tion of an ODS contract on some ships in returnfor a short-term ODS contract on other ships. Sincethen, other ODS operators have expressed interestin so-called ‘‘subsidy buy-outs’ or the termination

of their ODS contracts in return for a lump sumpayment. One application was filed but later re-jected by MarAd in early 1983. While the presentadministration has considered such a buy-out pro-gram as one method to use to phase out operationalsubsidies, and DOT has considered the develop-ment of guidelines, no policy on this subject hadbeen announced as of September 1983.

It appears that after 45 years, the U.S. maritimesubsidy program will soon end. Many argue thatnew policies are needed to take its place, but nonethat has been proposed has broad support. Pros-pects for shipbuilders and ship operators who havedepended on the subsidy program are unclear,Most industry spokesmen would like to see futuremaritime policies include some new forms of in-dustry support, such as indirect incentives designedto promote U.S.-flag shipping and U.S. shipbuild-ing. Unsubsidized U.S. competition with the restof the world in a free and open market system isa worthy goal but does not appear feasible for ourmaritime industries under any likely future scenar-io, particularly in light of both direct and indirectsubsidies provided foreign builders and operatorsby their governments.

Ship Financing Guarantees

The Federal Ship Financing Guarantee programwas established in 1938 pursuant to title XI of the

Merchant Marine Act of 1936. It provides for afull faith and credit loan guarantee by the U.S.Government. Prior to the 1970’s, the program grewonly moderately, and at the end of fiscal year 1970there were only $1 billion in contracts in force.

The program was overhauled in 1972 and is nowa financing guarantee program (rather than a mort-gage insurance program) under which the Govern-ment guarantees shipbuilding obligations sold toinvestors. Such guarantees may be provided by theFederal Government covering up to 75 percent ofthe construction cost of vessels built with CDSassistance, and 87.5 percent of the construction costof nonsubsidized vessels. Vessels to be used in boththe foreign and domestic trades are eligible for titleXI aid. They must be U.S.-flag and built in U.S.shipyards. Cargo, passenger, and cornbkationships, tankers, tugs, towboats, barges, dredges, fish-ing vessels, floating drydocks, and oceanographicresearch and pollution-abatement vessels are alleligible. In addition, mobile offshore drilling rigshave been interpreted by MarAd as eligible, al-though recently the administration has sought tocurb use of the authority for rigs.

The importance of the program can be seen bythe amount of commercial shipbuilding using theprogram (see table 41). The percentage of commer-cial shipbuilding and conversion work financedthrough title XI increased from 16 percent in 1970to 63 percent in 1981.

Table 41 .—U.S. Shipyard Orders, 1970-81, FinancedUnder Title Xl Program

Title Xl orders

Year Amount ($ millions) Percent of total private

1970 . . . . . . $ 193 16.11971 . . . . . . 358 29.51972 . . . . . . 849 55.11973 . . . . . . 1,241 35.71974 . . . . . . 1,539 34.31975 . . . . . . 971 19.31976 . . . . . . 1,045 25.41977 . . . . . . 1,198 31.91978 . . . . . . 552 18.81979 . . . . . . 1,087 37.01980 a . . . . . 1,338 42.91981a . . . . . 1,350 62.8

Totals . . $11,721 32.6

aEstimated.

SOURCE Compiled by the U S. Maritime Administration, Office of Policy andPlans, from MarAd Title Xl data and the Shipbuilders Council ofAmerica, Artnua/ ffeporl, 1981


Substantial growth in the program has occurredduring the past decade. From 1938 to 1970, $1billion in guarantees was issued, while between1970 and 1982, $10 billion was issued. Among thefactors that influenced this expansion were the Mer-chant Marine Act of 1970, which stimulated tankerand liquefied natural gas (LNG) tanker construc-tion; Alaskan oil trade, which also stimulated tankerconstruction; and 1972 amendments to title XI,which stimulated inland tug-barge construction.

As of July 1983 the following guarantees wereoutstanding:

Oceangoing merchant ships . . . . . . . . . . . . . . . . $4.8 billionOffshore oil rigs . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 billionInland river vessels . . . . . . . . . . . . . . . . . . . . . . . 1.6 billionMiscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 billion

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.0 billion

For most of its history, title XI has been non-controversial. It has been self-supporting throughfees paid by participants. These fees are placed inthe Federal Ship Financing Fund, from which allMarAd operating costs associated with the admin-istration of the. program and guarantees, in theevent of default, are honored. The program has ex-perienced only 17 defaults since its inception, re-sulting in a combined pay-out from the fund of$248.2 million. Of this amount, $50 million wasassociated with the 1978 bankruptcy of a subsidizedliner operator. Of the $248.2 million, it is antici-pated that $155 million ultimately will be recoveredby the Government.

Recently, the pace of defaults has increased.Thus far, five companies have defaulted in fiscalyear 1983, resulting in Fund losses of $55.7 million.Advances of $31 million also have been made to17 companies. As of July 1983, the Ship Financ-ing Fund had assets of $190 million. It is anticipatedthat there could be another $60 million in defaultsthis year (before any recovery by the Government,which would reduce the exposure substantially).Overall, the risk to the Government could total$500 million to $600 million ultimately if all com-panies currently in shaky financial position wereto default.

These facts have caused concern within the ad-ministration, and all advances from the Fund mustbe approved by the Office of Management andBudget.

One current legislative initiative that would re-form the title XI program is H.R. 3399 recentlyintroduced by Congressman Biaggi. Under the bill,an Industrial Redevelopment Bank would be es-tablished. The Bank would handle financing, co-financing, or refinancing of vessel construction orreconstruction. It would subsume the title XI loanguarantee program but would have considerablybroader authority than now exists. The Bank couldeither invest directly in the form of equity participa-tion or guaranteed loans, or indirectly through long-term guarantees of obligations secured by shipmortgages, leases, or stock pledges.

In addition to financing vessel acquisition, theBank would have authority to contract directly forthe construction or reconstruction of vessels in U.S.yards. This authority is pursuant to the provisionsof Title VII of the Merchant Marine Act—the‘ ‘build and charter’ authority.

Provisions of the bill would encourage construc-tion of generic vessels in series production and in-creased shipyard efficiency. A primary element ofthe Bank’s responsibility would be to allow for thedomestic production of replacement vessels in theU.S. liner fleet that would be suitable for nationaldefense support. Some provision would be avail-able for foreign construction of subsidized vessels,but such permission would be restricted in orderto protect the shipyard mobilization base. The Bankwould have authority to set up R&D consortia withprivate sector participants who would be eligiblefor substantial tax benefits.

The Bank would be provided with a $2-billionline of credit ($1 billion in direct guaranteed loansand $1 billion in revolving authority in the formof interim construction financing); it also wouldhave $2 billion in investment guarantee authoritythrough the restructuring of existing credit pro-grams.

Eventually, the responsibilities of the Bank wouldbe turned over to the private sector. Initially, Fed-eral seed money would be provided. A sunset pro-vision in the bill would, after 10 years, eitherdissolve the Bank or sell it to financial institutions,export trading companies, or union pension funds.This proposal probably will be debated in the com-ing months as a promising alternative to direct sub-sidy programs.

Ch. 6—U.S. Maritime Policies ● 157- — . —

MARITIME REGULATORY POLICY

It may be possible to enhance competition in cer-tain segments of the industry if the”U. S. Govern-ment focuses attention on enabling the U.S. ship-ping industry to operate in a regulatory frameworksimilar to that of foreign operators. Along thoselines, a bill to amend the Shipping Act of 1916(regulating liner operations) has been passed by theSenate and was pending in the House as of Sep-tember 1983. As passed by the Senate and intro-duced in the House, this bill contains almost thesame provisions as similar proposed legislationwhich has been debated in Congress for at least 4years. 16 The bill’s passage is also supported by theadministration.

FMC is the Government agency charged withoversight of U.S. shipping regulations. The basisfor U.S. regulatory policy on shipping is the Ship-ping Act of 1916 as amended. The act imposes strictrequirements on the competitive practices of allocean common carriers in both foreign and domes-tic commerce while permitting approved antitrustimmunities to shipping conferences. Prior Govern-ment acquiescence is required for all anticompeti-tive conference agreements, such as rate-setting,pooling agreements, or interconference agreements.Conferences in U.S. trades are required to be opento any carrier that wishes to join.

A number of practices are prohibited. One con-cerns the giving of deferred rebates, a practicewhereby ship operators agree to return a portionof the total freight paid for services in an earlierperiod to a “loyal’ shipper who has shipped all ofhis cargoes with the carrier or conference in ques-tion. This practice is common in foreign confer-ences. A second prohibited practice is the use of‘‘fighting ships, whereby a carrier or conferencesets one or more ships, operating at extremely lowor predatory rates, in head-to-head competitionwith a competitor in order to drive the competitorout of the trade. Losses on the operation of fightingships are shared by all members of the conference.A third practice outlawed is discrimination againstshippers as punishment for nonpatronage. Section14 of the Shipping Act included a more general pro-

‘GSee ‘ ‘The Difficulty of Introducing Meaningful U.S. MaritimeLegislation, by Paul Richardson, October 1980.

hibition against unjust or unfair discriminationamong shippers. All common carriers must offertheir services on equal terms to all shippers.

The Shipping Act was revised substantially in1961 with the passage of Public Law 87-346. Sec-tion 14 was amended to allow approved loyaltyagreements in the form of dual-rate contracts, withthe following limitations: penalties that could be im-posed on shippers for contract violation were limitedto single damages, and the maximum exclusive pa-tronage discount was set at 15 percent.

Section 15 also was amended to restrict the con-ferences’ ability to control membership. Previous-ly, any conference agreement could be disapprovedif it was considered unjustly discriminatory or un-fair among carriers. Public Law 87-346 specifiedthat agreements could be approved only if theyallowed open access to all carriers which could andwould provide regular liner service on a given trade.

Carrier agreements also could be disapproved iffound to be “contrary to the public interest. ” Sub-sequent case law, affirmed by the courts, requiredcarriers to “bring forth such facts as would dem-onstrate’ that the agreement was required by aserious transportation need, necessary to secure im-portant public benefits, or in furtherance of a validregulatory purpose of the Shipping Act. The prin-ciple, known as the Svenska test, after the FMCcase of that name, is considered by carriers as amajor impediment to conference approval, primari-ly because it is difficult to define the concept of“public interest”- therefore, application (i. e., ap-proval of agreements by FMC) is uneven and un-predictable. Pending legislation (the Shipping Actof 1983) would eliminate this ‘‘public interest’standard in most versions, but the House JudiciaryCommittee has favored retaining the standard.

Conferences in the U.S. trades are substantial-ly weaker than their foreign counterparts. Membersmust receive FMC approval to organize pools, ra-tionalize service, and limit sailings. They cannotlimit membership, and they cannot encourage ship-per loyalty through such mechanisms as deferredrebates. Independent operators can easily enterU.S. liner trades. A conference’s inability to con-trol access to the trades, whether within or outside

158 . An Assessment of Maritime Trade and Technology. —

the conference structure, means that attempts torationalize service—even if approved by FMC—are likely to be unsuccessful. The U.S. trades suf-fer from chronic overcapacity. Rate wars have oc-curred in both the North Atlantic and Pacific tradesrecently. These are devastating to the weaker, high-cost conference members (which tend to be U.S.flag).

U.S. carriers also face a more significant prob-lem than do foreign carriers in the same tradesbecause, while theoretically all of the restrictionsapply equally to all conference members, it is easierfor FMC and the Department of Justice to monitorthe actions of U. S. carriers, whose financial state-ments and business practices are open to close scru-tiny.

The open conference system, as it exists in U.S.trades, is an anomaly in world shipping. The in-dustry is constrained by Government regulationwhich forces on it some, but not all, aspects of com-petition. Conferences set rates and schedule serv-ices. But any joint planning must be approved byFMC, and direct negotiation with shippers’ groupsdoes not have antitrust immunity. Overtonnaginghas detrimental effects, such as an increase in unitcosts resulting in higher rates.

There are two economic alternatives to the cur-rent situation. Debate on the merits of each has con-tinued for years, both inside and outside the FederalGovernment. One is price competition. Under idealconditions, price competition would reduce prices,remove excess capacity, and create a healthier bus-iness climate for firms remaining in the industry.Each firm would determine its profit-maximizinglevel of output and produce accordingly. Becausedemand would not be sufficient to support all car-riers currently operating, carriers would have toreduce prices and operate at higher capacity levelsto minimize or eliminate short-run losses. Ineffi-cient and financially weak firms would be forcedout of the industry.

A study by the Department of Justice in 197717

concluded that the Nation would benefit from amore competitive environment in ocean-liner ship-ping markets and recommended repeal of, or

‘7’ ‘The Regulated Ocean Shipping Industry, ” a report of the U.S.Department of Justice, January 1977.

amendment to, the 1916 Shipping Act to increasecompetition. This philosophy also has been es-poused by some opponents to the present proposedlegislation who claim that the 1983 Shipping ActAmendments are inconsistent with the trend towardderegulation.

It is not clear that shipping competition couldbe achieved easily. Significant barriers do exist andwould continue. These include the major capitalrequirement to enter shipping, high fixed costs,worldwide cargo-reservation schemes, and productdifferentiation. On a practical level, achievementof such competition could result in decimation ofthe U.S.-flag fleet because many foreign carrierscontinue to receive direct and indirect subsidies aswell as antitrust immunities which could carry overinto their U.S. operations.

At the other regulatory policy extreme is theclosed conference system combined with the elim-ination of independent carriers, thus effectively clos-ing the trades. The economic argument for permit-ting closed conferences is that they could rationalizetrade, reducing the misallocation of resources andending costly service competition. Excess tonnagewould be reduced. The result, however, likelywould be higher freight rates. The degree to whicha conference would face outside competition woulddetermine how much control it would have overrates. Given a choice between reducing costs to in-crease profits and raising rates to accomplish thesame goal, there might not be sufficient incentiveto do the former. Shippers, and ultimately consum-ers, would be the probable victims under such asystem. A survey of shippers taken by the GeneralAccounting Office (GAO) indicated that shippersbelieve the highest liner rates and greatest declinein service quality would result under a closed con-ference system (the other choices were open com-petition, restricted conference, and “other’ ’).

Changes in U.S. regulation of ocean-liner opera-tions in the U.S. foreign trades are being consideredin the proposed Shipping Act of 1983, which would

laTestimony on S. 47 by Allen Ferguson, Chairman of the NationalInstitute of Economics and Law, before the Senate Commerce Com-mittee, 1983.

lgchages jn Feder~ Maritime Regulation &n Increase Eficien -cy and Reduce Costs in the Ocean Liner Shipping Industry, Report—GAO/PAD-82-l 1 (Washington, D. C.: U.S. Government AccountingOfXce, July 1982), pp. 20-21.


replace the existing regulatory framework under theShipping Act of 1916. The proposed legislation re-tains the open conference system for U.S. tradesbut clarifies and strengthens the carriers’ immunityfrom U.S. domestic antitrust laws.

U.S. liner operators in international trades con-tend they have been at a disadvantage relative totheir foreign competitors due to U.S. regulation ofthe industry. While in theory all operators in theU.S. foreign trades are subject to regulation underthe Shipping Act 1916, foreign operators in manyinstances are, in effect, beyond the reach of U.S.regulatory and judicial control. The intent of theproposed Shipping Act of 1983 is to provide a moreequitable regulatory environment for the U.S. oper-ators by limiting their exposure to U.S. antitrustlaws.

The legislation now being considered in Congressis based on a compromise achieved during the 97thCongress between the interests of ocean carriers andshippers. Under the compromise, carriers wouldbe assured that agreements to form conferences,set rates, and rationalize service within the confer-ence framework, which were effective under thenew act, would be immune from U.S. domesticantitrust laws. To balance the strengthened con-ferences that would result, provisions were includedto stimulate competition, such as the mandatoryright of conference members to set rates independ-ently under certain conditions and the authoriza-tion of loyalty and service contracts which couldprovide lower rates and improved service for cer-tain shippers. While the proposed legislation ex-plicitly expands the scope of agreements that maybe formed only by including intermodal activities,the removal of the threat of penalty under antitrustlaws would, in effect, give the carriers freedom toform stronger agreements,

In the compromise package, the greater certaintyof antitrust immunity was to be provided primari-ly through two major regulatory changes. The firstwould be the removal of general competitive stand-ards of review historically used by FMC in approv-ing liner conference agreements. Instead, prohib-ited acts would be clearly specified. Potential viola-tions of the act would be limited to those listed pro-

hibitions, and agreements would not be exposedto subjective interpretations of broad ‘ ‘public in-terest criteria.

As of September 1983, amendments to the pro-posed legislation by the House Judiciary Commit-tee would weaken the antitrust immunity envi-sioned in the original compromise proposal by re-taining a general standard of review to be used byFMC in addition to the specified prohibited actions.

The second element of certainty would be theconsolidation of jurisdiction over ocean-liner ship-ping activities in FMC, subject solely to the Ship-ping Act. Agreements that become effective underthe act would not be subject to review or penaltiesby other Government agencies, notably the Depart-ment of Justice, Similarly, agreements or conductwhich were found to be in violation of the act wouldbe subject to suspension, modification, or penaltiesonly by order of FMC.

Additional substantive changes made by theHouse Judiciary Committee include the expirationof the antitrust immunity conferred by the bill 2years after the study commission (on Deregulationof International Ocean Shipping, to be establishedby the bill) files its report, or December 31, 1988,whichever is earlier, and the elimination of filingand FMC enforcement of tariffs. Most carriers,shippers, and FMC have supported the existingtariff filing requirements, claiming that they en-hanced stability and facilitated enforcement of anti-rebating laws. However, others, including the pres-ent administration, some large shippers, and theFederal Trade Commission (FTC) oppose tariff fil-ing and enforcement on the grounds that it is un-necessary Government intervention in the market-place and hampers competitive flexibility in settingrates. Under the Judiciary Committee amendment,carriers still would be required to publish theirtariffs in a manner easily accessible to shippers andother interested persons.

The final passage of the Shipping Act of 1983,with or without recent House Judiciary amend-ments, is not certain. It appears, however, that anacceptable compromise is close.

160. An Assessment of Maritime Trade and Technology

U.S. SHIPPING TAXATION POLICIES

An important aspect of U.S. shipping competi-tiveness versus foreign-flag fleets is this Nation’staxation policies. The following discussion will ad-dress the tax rules that apply to the taxation of theshipping income of U.S. domestic and U.S.-ownedforeign corporations. The United States generallysubjects to tax the worldwide income of a U.S. do-mestic shipping company even if the income is sub-stantially foreign source income (determined undercomplex sourcing rules based on property and timespent inside and outside the United States). In mostcases, the United States will allow a credit againstU.S. tax liability for foreign taxes paid on foreignsource shipping income. In general, shipping istreated similarly to other industries, although a fewtax benefits are unique to the shipping industry.These tax benefits allow U.S. citizens owning orleasing eligible vessels that are U.S. built to obtaintax benefits through the maintenance of CCF andConstruction Reserve Funds (CRF) to be used toconstruct qualified vessels. These tax-deferral pro-visions, authorized by the Merchant Marine Actof 1936 as amended are considered by many to bethe most important provisions of the act.20

If the goal of the U.S. maritime policy is to pro-mote U.S.-flag shipping and to assure fairness forthe Nation’s shipping industry, then tax policiesmust be designed to ensure tax parity with othernations. If direct Government subsidies to U. S.-flag ship operators are discontinued, as the presentadministration proposes, then tax parity with for-eign operators takes on added significance. A ma-jor reason for the existence of huge fleets ownedby U.S. interests and registered in countries suchas Liberia and Panama is that those countries of-fer an exemption of shipping income from taxa-tion.21 Similarly, other major maritime countriessuch as Greece and Japan, which are not consideredflags of convenience, offer significant tax advan-tages to shipping when compared to their domesticindustries. In fact, many nations consider their in-

*“James Gallagher, “Maritime Tax: The Capital Construction Fundof the Merchant Marine Act of 1970, Journal of Maritime Lawsand Commerce, p. 105.

*lThe council of American-Flag Ship Operators, ‘‘Analysis of pro-

posal to Impose Tax on CCF, ” March 1982.

ternational shipping as offshore enterprises and pro-vide special tax concessions.

In 1962, Congress specifically exempted U. S.-controlled shipping income when it enacted the so-called ‘‘subpart F’ provisions amending the In-ternal Revenue Code. These provisions requiredthat certain types of tax-haven income of foreignsubsidiaries of U.S. companies be taxed current-ly, rather than when the income is distributed tothe U.S. parent. The shipping income exclusionfrom ‘‘subpart F’ was primarily for nationaldefense reasons. It was believed by Congress thatthe shipping exclusion would encourage a U. S.-owned (controlled) maritime fleet.

In 1975, to achieve some parity in the taxationof shipping income of U.S. domestic and U. S.-owned foreign corporations, Congress generallyended the ‘‘subpart F’ exclusion for shipping in-come except to the extent the shipping income ofthe foreign subsidiary was timely reinvested intothe shipping business. Congress believed that thereinvestment rule was appropriate because of thecompetitive nature of foreign-flag shipping opera-tions and in order to continue to encourage a signifi-cant U.S.-owned (controlled) maritime fleet.

In May 1983, the Internal Revenue Service(IRS) issued final regulations for Americanstockholders of foreign-based companies that gen-erate shipping income. These regulations amendthe Income Tax Regulations and implement the1975 Tax Reduction Act and 1976 Tax ReformAct. These regulations were first proposed in Au-gust 1976. The new regulations state that if less than90 percent of the earned income is classified as‘‘subpart F’ income, all of it is subject to taxation .22The previous regulation stated that if more than70 percent of the income was ‘‘subpart F, all ofit was considered exempt.

Thus, today, U.S.-owned foreign shipping cor-porations, such as those “U.S. effective-controlled”fleets under Liberian or Panamanian flag, haveavailable to them a vehicle for deferring taxeson income but only if it is reinvested in shipping

**See Feder~ Register, May 19, 1983, P. 22512.

and only if at least 90 percent of the corporation’sincome is from shipping. Some bulk operators ofsuch foreign-flag fleets have claimed that the in-tent of the 1975 Act—to encourage investment inU.S.-owned ships—has not been realized becauseinvestment decisions are based not on deferred taxesbut on much more significant market and price fac-tors. Other operators—particularly in the linertrades—believe that such tax benefits are impor-tant to the future viability of the industry. Thesearguments require careful analysis if the overall sub-jects of tax parity and tax incentives for the ship-operating industry are addressed by Congress.

Certain forms of tax deferrals also have been putinto effect as a means of encouraging investmentin the U.S.-owned, U.S.-flag fleet. In 1970, Con-gress adopted a tax measure for the U.S.-flag fleetwhich instituted the CCF program. This programgenerally allows U.S. shipping companies to enter

into agreements with MarAd to establish CCFS forthe replacement or addition of vessels for use in theU.S.-flag merchant marine. U.S. owners or char-terers of U.S.-constructed U.S.-flag vessels oper-ated in the U.S. foreign or domestic commerce candefer taxation of the net earnings derived from suchvessels by depositing the earnings into the CCF toprovide for replacement or additional vessels to beoperated in the U.S. foreign, Great Lakes, or non-contiguous domestic trade. Vessels operated incoastwise or intercostal trade are not qualified.Federal income tax on such earnings (as well as in-vestment income of the CCF) is deferred until thefunds are withdrawn from the CCF for a purposenot permitted under the agreement with MarAd.Deposits of tax depreciation of vessels and net pro-ceeds from the sale of vessels also may be made.Theoretically, the tax deferral can continue on in-come deposited in the CCF as long as the fund-holder continues to acquire, construct, or recon-

162 ● An Assessment of Maritime Trade and Technology— . — . —

struct qualified vessels. The tax basis (cost) of avessel generally is reduced to the extent the vesselis purchased by a qualified withdrawal from a CCF.

The CCF program is authorized by section 607of the Merchant Marine Act, as amended in 1970.Prior to the 1970 amendment, only subsidized shipoperators were eligible for tax-deferred funds, re-ferred to as Capital Reserve Funds and Special Re-serve Funds. Today, both subsidized and nonsub-sidized operators are eligible for the CCF program,and the old Capital Reserve Fund has been phasedout. The CCF program is believed by U.S.-flagoperators to be the key element that could placeU.S.-flag ships on a tax parity with that of U. S.-owned, foreign-flag ships under ‘‘subpart F’ of theInternal Revenue Code and foreign-flag, foreign-owned competitors. 23 presently, however, U.S.-flag, foreign-built ships are neither “qualified” forCCF withdrawals nor “eligible” to make CCF de-posits.

The CRF is another tax benefit to U.S. ship-owners. The CRF is authorized under section 511of the Merchant Marine Act as amended and allowsU.S. shipowners operating vessels in foreign ordomestic commerce of the United States to deferthe gain attributable to the sale or insurance pro-ceeds from the loss of a vessel. The moneys depos-ited in the fund must be used to construct, recon-struct, or acquire vessels of U.S. registry built inthe United States. Although any gains on thesetransactions are not recognized for income tax pur-poses if the deposits are properly expended for avessel, the basis for determining depreciation of thevessel is reduced by the amount of any such gains.The ability to defer gain on certain transactionsthrough deposits to the CRF applies only to vesselowners.

A comparison of other nations’ shipping tax pol-icies is also relevant to gaining an understandingof U.S. shipping tax parity. In Greece, for instance,no tax is levied on shipping income, only a ton-nage tax similar to those imposed by Liberia andPanama. In Britain, shipowners are able to sheltercurrent income from taxes by the use of free de-preciation (1 year), or by registering in a Britishcolony such as Bermuda or Hong Kong. In Nor-

way, the tax on current income is reduced substan-tially by a combination of accelerated depreciationand the use of tax-deferred replacement and repairfunds. In France, tax deferral results from a com-bination of accelerated depreciation and the absenceof any tax on operations carried on outside thecountry. Worldwide, most countries impose verylittle tax, if any, on shipping income.24

Recently, DOT outlined proposed changes to theMerchant Marine Act of 1936, necessary to imple-ment a number of the administration’s maritimepolicy initiatives. One major change proposes thatexisting and newly deposited tax-deferred moneysin the CCF program could be used to acquire, con-struct, or reconstruct U.S.-flag, foreign-built ves-sels. This proposal was also proposed and rejectedby the 97th Congress in the conference report onthe Maritime Administration authorization bill of1982. This recent proposal will now be consideredby Congress in the form of a legislative package.

Another recent proposal also supported by DOTand a similar proposal submitted as H.R. 2381 byCongressman Gene Snyder calls for a repeal of the50-percent ad valorem duty on foreign parts andrepairs made to U.S.-flag vessels abroad. H.R.2381 differs from the DOT proposal by requiringthe 50-percent duty be deleted only for ships thatremain away from U.S. ports for 2 or more years.This proposal, as well as the use of CCF moneysto construct or acquire foreign vessels is, as ex-pected, being opposed by U.S. shipbuilders. In astatement on behalf of the Shipbuilders Council ofAmerica, President Lee Rice explained, “the ef-ficacy of maritime programs to provide militarycapability required by this Nation is being erodedby the programs put forth by the administrationto allow tax-deferred CCF moneys to be used forforeign building and by the elimination of the AdValorem Tariff on foreign repairs. ” However, forthe U.S.-flag vessel operator, these proposals arewarmly welcomed, especially in light of the absenceof future CDS funds.

Other tax issues affecting the U.S. merchantmarine are taxation of vessel lease and lease/pur-chase and purchase/lease-back agreements. Theseagreements have become more common as the cap-

ZgMarjtjme subsidies (Washington, D. C.: U.S. Department ofTransportation, Maritime Administration, February 1983), p, 158. Z4The Journ~ of Commerce, Aug. 10, 1979, p. 1.

Ch. 6—U.S. Maritime Policies ● 163— — — — —— . .

ital requirements involved in ship purchasing havesoared. Essentially, a financial institution or otherorganization with ample capital reserves and signifi-cant income needing tax shelter becomes the ownerof record for a new ship. The vessel is then bare-boat chartered to the company or person who ac-tually wants the ship. The operator makes leasepayments to the financial institution, which takesadvantage of all the tax benefits available, such asinterest deductions, and depreciation.

Recently, the U.S. Navy, through MSC, has in-augurated a program to acquire merchant vesselsthrough leasing. These ships, 13 special-purposeRO/ROs under the T-AKX program and 5 prod-uct carriers under the T-5 program, will be time-chartered to MSC for a 5-year period with an op-tion for renewal, to a total of 20 to 25 years. Thevessel owner of record receives tax benefits throughthe accelerated cost recovery (ACRS) and invest-ment tax credits (ITC) provisions, while the U.S.Navy receives a favorable long-term lease of thevessels. The issue of whether the Government,through leasing programs such as the U.S. Navy’s,is actually losing revenue through less taxes has notbeen resolved.

More recently, a bill, H.R. 3110, was introducedto revise these tax benefits. The bill, titled the“Governmental Leasing Tax of 1983, ” would denycertain tax benefits for property used by govern-ments and other tax-exempt entities. Under the bill,the ITC would be denied (as is generally the ruleunder present law) and ACRS depreciation alsowould be denied for property used by tax-exemptentities. Therefore, the legislation extends toagreements by foreign governments and corpora-tions to lease American capital goods. This aspectis of concern to the U.S.-flag operators who haveoften built and charted vessels to foreign govern-ments and corporations, utilizing these tax benefits.In the past, these tax benefits have been of great

importance to the U.S. bulk fleet, and certain in-dustry spokesmen have urged that the tax conceptsin the bill be analyzed further.

Another issue is taxation of offshore wages ofcrew and staff. In many countries (e. g., Norway),these are treated as personal income derived undera foreign jurisdiction and are not taxed. The re-sulting savings in crew and staff wage costs (as wellas fringe benefits, which are usually a proportionof gross wages) can be as much as 50 percent.

Accelerated depreciation of ships and equipment,and particularly containers, is also an importanttax concession granted by many countries. U.S.tax policies for depreciation of ships are based ona 14,5- to 21.5-year depreciation rate for U.S.-flagships that entered service prior to 1981, and a 5-yeardepreciation rate for U.S.-flag ships entering serv-ice in 1981 and after. Also, the 10-percent ITC isgenerally permitted with respect to the cost basisof a new investment in a U.S.-flag vessel operatedin the U.S. domestic or foreign commerce. In thecase of a vessel purchased with CCF funds, Con-gress has specifically authorized that one-half of theITC be allowed (notwithstanding the CCF cost-basis reduction rule mentioned earlier). Availabilityof the other half is subject to dispute by the IRS,which has won and, more often, lost court caseson the issue.

In summary, the major tax provision that pro-vides tax parity to U.S.-flag ship operators is theuse of the CCF. Due to the absence of a shipyardCDS program in the United States, it is unlikelythat the CCF will be useful in the future unlessamended to permit construction of U.S.-flag shipsin shipyards abroad. Further study in innovativetax policies is clearly needed to ensure that theexisting tax parity of U.S.-flag ship operators withother competitive shipping nations is not eroded.

CABOTAGE POLICIES

The Merchant Marine Act of 1920, and more ferred to as the “Jones Act. ” Basically, section 27specifically section 27 of the Act, is commonly re- requires that all U.S. domestic trade be carried on


vessels that are under U.S. registry, built in theUnited States, and manned by U.S. citizens. Spe-cifically, section 27 states:

No merchandise shall be transported by water,or by land and water, . . . between points in theUs. . . . in any other vessel than a vessel built inand documented under the laws of the U.S. andowned by . , . citizens of the U.S. . . .

Cargo reservation for American domestic ship-ping was first outlined in 1817 by the First Con-tinental Congress. The First Continental Congressapproved the Cabotage Law of 1817 to prevent for-eign-flag carriers from entering the American do-mestic market. This policy has continued unbrokento the present. Over the years, many suggestionsto change this policy have been proposed, but theyhave been largely unsuccessful .25

The preamble of the Merchant Marine Act of1920 states the intent of Congress at that time:

It is necessary for the national defense and forthe proper growth of its foreign and domestic com-merce that the United States shall have a merchantmarine of the best equipped and most suitable typesof vessels sufficient to carry the greater portion ofits commerce and serve as a naval or military aux-iliary in time of war or national emergency, ulti-mately to be owned and operated privately by citi-zens of the United States; and it is to be the policyof the United States to do whatever may be neces-sary to develop and encourage the maintenance ofsuch a merchant marine . . . .

The Jones Act “Fleet”

The Jones Act “fleet,” as it has come to beknown, consists of those vessels eligible to engagein domestic trade, whether it be inland waters,coastwise, noncontiguous, or intercostal. Eligiblevessels are those built in the United States underAmerican ownership, registered in the UnitedStates, and receiving no CDS or ODS fromMarAd.

Currently, Jones Act vessels account for slight-ly under 50 percent of the total number of vesselsin the U.S.-flag fleet and approximately 60 percentof the total U.S. deadweight tonnage. As detailedin chapter 3, 94 percent of the tonnage in the ac-

ZSNACOA, op. cit., p. 35.

tive Jones Act fleet is in tankers. Tankers used inthe transport of Alaskan oil alone constitute almost30 percent of the active domestic fleet and nearlyone-half of the total domestic fleet’s deadweighttonnage.

There is no conference system operating in thedomestic trade; operations are either independentor on ships owned by corporations for their ownbusiness use. The domestic fleet provides liner aswell as tramp service and includes bulktankers, conventional and containerships,barge systems.2G

Advent of Alaskan Oil

Shifting trade patterns and a new area

carriers,and tug-

for ship-ping investments followed the production of largeoilfields on the North Slope of Alaska in themid-1970’s. As detailed in chapter 3, by 1978 pro-duction from the North Slope reached 1.1 millionbarrels of oil per day and exceeded the west coast’sdemand for it. Substantial new tanker tonnage wasneeded to move the oil to the gulf and east coastmarkets. During the 1970’s, 19 newJones Act tank-ers with deadweights in excess of 100,000 tons werebuilt to serve the Alaskan trade. Today, Alaskanoil production has reached 1.6 million barrels perday with projections that production will peak by1988 and decline through 2000.

It is generally accepted that without future U.S.oil and gas discoveries, a substantial surplus oftankers will exist by 1995. Lease sales followed byexploration drilling in promising Alaska and Cali-fornia areas are scheduled for the next few yearsand should determine potential production levels.If new oil discoveries in these areas are made, thelarge market for domestic tankers would improve.

Exceptions, Waivers, and SuspensionsAllowed Under the Jones Act

Over the years, circumstances have resulted inexceptions and waivers to the Jones Act. Trade withthe U.S. island possessions of Guam, Tutuila,Wake, Midway, and Kingman Reef may be car-ried on foreign-built, U.S.-flag vessels. The U.S.Virgin Islands are exempt from all Jones Act re-quirements as amended in the Merchant Marine

zbIbid.


Act of 1936. This has been an especially importantexemption for the Virgin Islands since the discoveryof Alaskan oil. Alaskan crude oil is now shippedto refineries in the Virgin Islands on foreign-flagships and then to the U.S. mainland, again most-ly on foreign-flag vessels, even though U.S.-flagtug-barge units are also employed moving refinedproducts to the U.S. mainland.

Other important exceptions to the act specificallyapply to Alaska. These exceptions, currently receiv-ing wide attention, are the third and fourth provi-sos to section 27. They are discussed in greaterdetail later in this chapter.

Individual waivers to the Jones Act also havebeen provided through private bills passed by Con-gress. In 1978 and 1981, Congress passed bills thatpermitted two passenger ships built in the UnitedStates, the Independence and the Constitution, toreflag as American ships and reenter the domesticmarket after having served for awhile under foreignflag.

Suspensions allowed under the Jones Act, al-though not common, do exist. One suspension, sec-tion 506 of the 1936 Act, gives the Secretary ofTransportation the power to suspend the Jones Actto allow subsidized U.S.-flag ships, intended forforeign trade, to enter the domestic market for upto 6 months in any 12-month period. In 1980, sevensubsidized U.S.-flag tankers received waivers toenter the Alaskan oil trade for up to 6 months. Theoperators were required to pay back a proratedshare of their CDS based on the amount of timespent in the Alaskan trade. Another suspensionallows the Secretary of the Treasury to grant astatutory or discretionary waiver for foreign-flagvessels on the basis of national defense needs. The1936 Act also permits liner vessels receiving ODSto carry domestic cargoes in the Hawaii, Guam,and Puerto Rico trades with very modest paybackof the subsidy.

Construction Differential Subsidy Payback

A very controversial provision of the MerchantMarine Act of 1936 allows MarAd to permit sub-sidized vessels built for foreign trades to enterdomestic trades permanently, in exchange for therepayment of a vessel’s CDS plus accumulated in-terest. A 1977 MarAd decision permitted the Sea-

train Shipbuilding Corp. to repay the CDS on anew tanker, the Stuyvesant, and to enter thedomestic oil trade permanently. At the time, theworldwide tanker market had collapsed and therewas a need for domestic tankers to transportAlaskan oil. Faced with a possible default by Sea-train on loans with title XI guarantees (amountingto about $120 million)27 on two new supertankers,and no likely foreign market for the vessels, MarAdagreed to allow the CDS repayment on one of them,the Stuyvesant.

The tanker operators already in service in Alaskasued to prevent this transfer. Under a 1980 Su-preme Court ruling (Seatrain Shipbuilding Corp.,et al. v. Shell Oil Co., et al.), MarAd’s decisionwas upheld. The Court held that the broad authori-ty of the act gave the Secretary the power to fur-ther the general goals of the act, making such trans-fers legal.

The Justice Department’s antitrust division, ina review of the case, recently urged Transporta-tion Secretary Dole to adopt changes in maritimesubsidy rules and allow the total payback of con-struction subsidies so that a large group of thesevessels could enter domestic trades.

Although a decision by DOT on whether to im-plement the rule to allow subsidy paybacks is notexpected until late 1983, the controversy betweenboth sides grows larger every day. The issues ofthe controversy have been debated not only amongindustry groups but within DOT itself. The issuesdebated include: projections of future Alaskan oilproduction; levels of risk to the Government frompossible title XI loan defaults; levels of direct andindirect subsidies to different sectors; levels of ac-tual shipping costs, as well as hypothetical charterrates; and effects of surplus capacity in varioustrades.

At present, according to MarAd, there is grow-ing overtonnaging in the domestic tanker fleet. Of40 Jones Act tankers presently laid up, 28 are ex-pected to be scrapped, and 26 of those employednow are likely scrap candidates because of newtanker-safety requirements. When this occurs, theremaining Jones Act fleet in the Alaskan trade will

ZTSee Fe&r~ Register, Jan. 31, 1983, ‘ ‘DOT, CDS RepaymentNotice of Proposed Rulemaking.

166 ● An Assessment of Maritime Trade and Technology. — —

consist of a smaller number of larger and newerships than is evident from today’s data.28 Therefore,allowing subsidized vessels to enter the domestictrade will have the greatest impact on the remain-ing portion of the Jones Act fleet, which is inde-pendently owned and consists of comparativelylarge, newer vessels. New tankers could be requiredin the domestic fleet beyond 1990 if substantialfuture Alaskan oil prospects are proven. On theother hand, an administration-backed proposal toallow Alaska to export oil would substantially lowereven that demand for new Jones Act tankers.

Current Jones Act tanker operators claim theyhave made huge ship investments on the basis ofJones Act guarantees which would be negated ifforeign-trade-subsidized owners were permitted toenter domestic trades. If the larger subsidizedtankers are permitted to enter the Alaskan trade,serious overtonnaging would continue at leastthrough the decade. Current Jones Act operatorshave estimated that one-quarter of the domesticindependent tanker fleet is now surplus and thatif CDS paybacks are allowed, the entire independ-ent fleet in the Alaskan trade would become surplus.

Some subsidized operators, however, claim thattheir new, more efficient, tankers would decreasethe cost of shipping Alaskan oil to U.S. refineries.They believe that by leaving their subsidized tank-ers in an idle market the Government may face sub-stantial defaults of federally guaranteed loans. 29 Itwas because of a pending default on the Stuyve-sant’s mortgage in 1977 that MarAd allowed thattanker to enter the domestic trade. Current JonesAct tanker operators claim, however, that the Gov-ernment would face even greater prospects of titleXI loan defaults if the subsidized tankers enter thetrade.

Such a suspension of the Jones Act for subsidizedtankers could bring about a short-term lowering ofshipping rates. However, overcapacity would be in-evitable and would result in a loss of business toowners who built more costly ships for the domestictrade because Federal policies required that ap-

28U. S, Mari[ime Administration comments on ‘ ‘Draft RegulatoryImpact Analysis for CDS Repayment Regulation, ” June 10, 1983.

Zgcomments submitted by Apex Marine Corp. to the Departmentof Transportation on proposed rulemaking for CDS repayment, May2, 1983.

preach. This would result in fewer U.S.-flag shipsbeing operated.

Other Proposed Changes to the Jones Act

The advent of Alaskan oil and the passage of aFederal law barring the sale of Alaskan oil in foreignmarkets are significant factors concerning the statusof the U.S. domestic fleet. Many recent proposalsto amend the act apply specifically to Alaska. TheState of Alaska has a great deal at stake if certainamendments to the act are adopted.

As mentioned earlier, two exceptions to the act,the third and fourth provisos, applying specifical-ly to Alaska, are currently receiving attention. Thethird proviso was adopted 60 years ago to facilitatethe movement of U.S. freight around the GreatLakes area. This provision permits the use of aforeign-flag vessel during a domestic movement ifsomewhere along the route a Canadian railroad isused. The proviso has been rarely used, and tworecent attempts to do so were unsuccessful.

The Alaska Navigation Co. had proposed to takeadvantage of the third proviso rule. They had hopedto operate two West German-flag ships manned byWest German crews between Vancouver, BritishColumbia, and Seward, Alaska. This applicationwas later withdrawn. The Fairbanks TruckingService also filed an application which was later re-jected by ICC because of deregulation of part of thedomestic route. A bill, H.R. 1076, repealing theprovision, passed the House in June 1983. Sucha repeal would protect U.S.-flag liner operators inthe Alaskan trade from foreign-flag competition.

The fourth proviso states that section 27 shall notbecome effective on the Yukon River until theAlaska Railroad is completed and the ShippingBoard finds that proper facilities are provided fortransportation by U.S. citizens. In 1977, the Treas-ury determined that the railroad was completed,but it is up to the Secretary of Transportation tomake the finding that would make the proviso in-operative. As of September 1983, the Secretary ofTransportation had not made that finding; there-fore, in theory, the fourth proviso still exists.

Future proposals to modify the Jones Act will de-pend on many factors and will be debated widely.In view of strong support for policies inherent in


the act, efforts to have it rescinded in the near futuremay be difficult. In the long run, however, debatesabout costs and benefits of very restrictive provi-sions in the Jones Act could serve to clarify the na-tional interest. One change that has been discussedbut has not reached any legislative proposal is thatof reducing or rescinding ‘ ‘buy America’ require-ments. Some in the shipping industry believe thatif owners were allowed to build or purchase theirdomestic trade ships from foreign sources, enoughsavings could be realized to either reduce freightrates or permit substantial gains for U.S. operatorsin new markets. U.S. shipyards have strongly op-posed such views, but if current policies supportunrealistically high capital costs, as claimed, theyshould be carefully evaluated.

‘ ‘Buy America” provisions in several U.S. mar-itime laws and regulations are shown in table 42.It can be seen that the existing requirements fortitle XI-built vessels (where foreign-built machinery

is prohibited) are somewhat more restrictive thanfor Jones Act ships built without title XI. However,also as shown, MarAd has proposed changes tosome of the title XI prohibitions.

Alternative suggestions to modify Jones Act “buyAmerica” provisions have taken a number of ap-proaches. It would be necessary to accommodateconflicting goals of supporting a U.S. shipyard basewhile lowering ship capital costs closer to worldmarket levels. It may be possible to do this by pro-viding some level of construction subsidy in com-bination with incentives for shipyards to improveproductivity and freedom to purchase equipmentand components from lowest price suppliers world-wide without duty. Some have also proposed ap-plying CCF to Jones Act construction .30 Anotherconsideration in any proposed changes to Jones Act

gos~c c, H i]tzheimer, statement before House Merchant MarineSubcommittee, hearings on H.R. 3156, July 21, 1983.

Table 42.—” Buy America” Comparisons

Integralcomponents of the Other machinery

hull and outfit, etc. Percent of vesselsuperstructure (permitted to be cost to be Definition of

(steel, etc.) Main machinery foreign) domestic vessel cost Waiver provisionsMarAd Titie IFForeign prohibited Foreign d None

prohibited

MarAd Titie XPForeign prohibited Foreign None

prohibited

USCG (Jones Act vessels~Unimproved foreign Foreign

steel plates orshapes permitted

MarAd Titie Xi (proposed)Foreign prohibited Foreign

permitted Up to 50°/0 of thecost of foreignitems other thanintegralcomponents ofthe hull andsuperstructure

permitted Up to 50°/0 ofvessel componentmaterial cost

100 ”/0

loo ”/oe

Subject to otherlimitations

Subject to otherlimitations

Material, labor,overhead

Material, labor,overhead

Direct materialonly. No laboror overhead

Direct materialonly. No laboror overhead

Yes, except forsteel and integralcomponents ofhull andsuperstructure

Yes1) nonavailability2) unreasonable

delivery

None

None

ag 5135 of the Merchant Marine Act, 45 U.S.C. g 1155 (construction differential subsidies).bhot required by statute, but imposed by regulation (46 CFR 298.11)c~ 27 of the Merchant Marine Act, 1920, 46 US C. 863, and Vessel Documentation Act 46 CFR 67.09.dA Padial waiver has been granted for slow. speed diesels built under license in the United States which incorporate a significant number Of fOreign Componentsevessels covered by title X1 financing may incorporate foreign components and materials, However, the value of these components and materialS will nOt be included

in the determination of actual-cost title Xl financing guarantees.

SOURCE J Hotaling, Division of Engineering, Maritime Administration, personal communication, August 1963,


provisions is that existing ship operators have madeinvestment decisions based on assurances that cur-rent policy would continue. Modification of thosepolicies could unfairly affect their ability to con-tinue a viable business. However, if changes weremade gradually over some reasonable period oftime, the industry may be able to plan and adjustwithout undue hardship. This consideration arguesfor selective changes such as allowing a limitednumber of U.S.-subsidized ships or foreign-pur-chased or foreign-built ships to enter certain tradesover set intervals-particularly where demand forshipping is rising.

One trade where Jones Act restrictions have beenclaimed to be economically detrimental is theAlaskan trade. In a 1982 study for the AlaskaStatehood Commission, effects on the Alaskan—

Slsimat, Hel]ieson, k Eichner, Inc., ‘‘The Jones Act and Its Im-pact on the State of Alaska, Vol. II: Final Report, ” prepared for theAlaska Statehood Commission, July 1982.

economy of using foreign-flag v. U.S.-flag ships inthe Alaskan trade were analyzed. The report esti-mated that differentials for U.S.-flag v. foreign-flagtotal shipping costs would range from about 10 per-cent (in the liner trade with the west coast) to 40percent (in oil product shipments from west coastrefineries). While the study did not analyze possi-ble savings from using foreign-built or purchasedU.S.-flag ships v. U.S.-built, U.S.-flag ships, thefigures indicate a much lower range of savings forthis case (roughly 2 to 10 percent). Whatever thesavings, the net effect on the national economy andthe maritime industries is much more difficult toevaluate but must be considered when Jones Actmodifications are considered.

SUMMARY

Four keyare subject

elements of U.S. maritime policy whichto current debate have been analyzed

above. These are:

. subsidy policy,● regulatory policy!● taxation policy, and● domestic trade restrictions (Jones Act).

In addition, this chapter presented an overalldiscussion of how present U.S. policies developedover the years, what changes are currently proposedand how future policies should respond to chang-ing future conditions.

Direct-subsidy policies of the past (the CDS andODS programs) have been aimed at industry pro-motion and made the assumption that different sec-tors of the industry (i. e., shipbuilding, liner oper-ators, bulk operators) could be helped by the samemedicine. This has not proved to be the case, andthe current administration appears to be directingits attention toward support of the liner operatorswithout concurrent attention to shipbuilders orother segments of the industry. Promotion of cer-

tain U.S. liner interests is possible with indirect in-centives, and this type of approach appears to beconsistent with other administration policies.

Indirect subsidies such as loan guarantees to U.S.operators (the title XI program) appear to havebeen more successful in promoting investment inmodern vessel technologies, produced at competi-tive prices and covering broad sectors of the mari-time industry. Future policies concerning industrysupport, if in the national interest, should thereforeinclude consideration of which maritime sectors canbenefit from each type of promotional effort andhow Federal support can encourage high produc-tivity and efficiency.

The resolution of the regulatory policy debateappears to be near with congressional considera-tion of the Shipping Act of 1983. Passage of someform of regulatory changes are clearly in the in-terest of the major U.S. liner operators, Proper con-sideration of U.S. shipper interests and the broadergoals of enhancing U.S. trade in the future areequally important, U.S. participation in world mar-

Ch. 6—U.S. Maritime Policies ● 169—

itime trade and shipping likely will depend on howwell our regulatory policy both protects the nationalinterests and allows for effective competition inter-nationally.

Taxation policies for U.S. shipping interests alsoare based on sometimes conflicting goals of pro-viding equivalent advantages to industries that mustcompete in the international market and of assur-ing fairness and equity among U, S. businesses. Pasttaxation policies (e. g., the CCF) have sought to en-courage investments in new ships and to strengthenthe U.S. merchant marine’s competitive position.Future taxation policies require careful analysis ofthe many approaches available and in use to en-sure that targeted industry sectors will receive thebenefits.

In the future, certain domestic shipping (JonesAct) policies undoubtedly will be challenged bythose who consider that present costs of U.S. do-mestic shipping should be reduced to the benefitof consumers. Whatever changes are proposed (i. e.,allowing foreign construction of. Jones Act ships),

certain industry sectors will be affected adversely.Policy makers will need to weigh costs and benefitscarefully over the long range, clearly including thenational interest involved with maintaining certainparts of the industrial base, such as the shipbuildingbase.

Finally, future policy formulation needs a morecomprehensive approach. Industry incentives maybe possible to devise for most maritime segmentswithout tying subsidies for one to subsidies foranother, as in the past. For example, certain taxa-tion incentives and foreign purchase allowancescould be devised to apply to shipbuilders and shipoperators without necessarily making one depend-ent on another. Also, incentives probably shouldbe tied to support for the most productive elementsof the industry and to the elimination of inefficien-cies. Also, the incentives discussed in this chaptershouid be integrated with other policies, includinginternational trade and cargo policies discussed inchapter 7.

25-417 0 - 83 - 12 QL 3

Photo credit: U.S. Department of Agriculture

Contents

PageOverview . . . . . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . + . . . . . . . . . . . . . 173

Trade Policies. . . . . . . . . . . . . . . . . . . . ● **** *,. **. .*. .*. *.*. .*. *.e **e**. 174International Trade Policy, 1945-75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174Present International Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175U.S. Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176The Enforcement of Fair Trade Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Maritime Cargo Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182Cargo Preference in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182Bilateral Cargo-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185UNCTAD Liner Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193Other UNCTAD Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195Inclusion of Service Industries Within GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198Financing International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....6.... . . . . . . . . . . . . . . . . . . 200

TABLES

Table No. Page

43. Cargo-Preference Policies of 15 Largest U.S. Trading Partners . . . . . . . . . . . . 18544. U.S. Waterborne Foreign Trade Liner Service, Origin/Destination

Country, Calendar Year 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18645. Potential U.S. Liner Trade Gain Under Bilateral Agreement . . . . . . . . . . . . . . 189

Chapter 7

International Trade and Cargo Policies

OVERVIEW

Trade and cargo policies related to internationalshipping are often considered separately, both with-in U.S. Federal agencies and among internationalorganizations. However, general trade rules affectthe level and nature of world trade which in turninfluences the prospects for the shipping industry.This chapter discusses the status and trends of thosepolicies that may have an impact on future inter-national trade and the participation of the U.S.shipping industry in that trade.

Common perceptions often overlook the fact thatshipping is a derived demand and an integral com-ponent of international trade. When the volumeof world commerce goes up, the demand for ship-ping services increases and the need for efficient,high-volume shipping increases. Unfortunately,many people in the industry regard shipping as anend in itself rather than a means to an end.

International shipping financiers Paul Slater(Chairman, Pelican Finance Corp. ) and JohnClarke (Citibank N. A.) are quoted, respectively,in the March 1983 Seatrade. Paul Slater observed:

The shipping industry has lost sight of the reali-ties of its own existence—it exists to serve worldtrade. . . . In the future, owners would have tolook at trades, not just ships.

John Clarke of Citibank echoed this:

The key to success is cargoes, rather than ships.There must be more emphasis on putting deals to-gether with shippers, and the packages must bemore creative.

It is, therefore, highly relevant to examine maritimeissues within the framework of trade and cargo pol-icies in both the national and international forums.

The international organization most concernedwith trade policies among major trading countriesis known as the General Agreements on Trade andTariffs (GATT). The United States was one of theworld leaders in the development of GATT throughthe endorsement of free and open trade principles.

The U.S. Congress has, at the same time, intro-duced trade laws that are intended to guard againstunfair trading practices of other nations. The statusof GATT and the U.S. policies toward GATT arediscussed in this chapter.

The principal organization that has concerneditself with multilateral agreements on maritimecargo policies is the United Nations Conference onTrade and Development (UNCTAD). In responseto initiatives of the developing countries, UNCTADpromulgated a multilateral “Code of Conduct forLiner Conferences” which is a cargo-sharing agree-ment. This code has been ratified by the requisitenumber of countries to enable it to go into effectin October 1983. The United States has, however,refused to ratify the UNCTAD Code. Like manyother nations, the United States does have cargoreservation policies encompassing Government-financed and Government-impelled cargoes. It alsohas several bilateral cargo treaties in force—spe-cifically with the Peoples Republic of China(P. R.C.), Brazil, and Argentina—which were ne-gotiated following unilateral actions by the othernations.

The current debate between those advocatingcompletely free trade or free access to cargoes andthose advocating degrees of government interven-tion to protect domestic industries undoubtedly willcontinue. For example, the national value of a do-mestic industry can sometimes convince govern-ments to provide certain levels of protection. Eventhough industries and governments publicly statetheir opposition toward protectionism, they oftendo not apply those principles to themselves. In ad-dition, reaction to other governments’ policies oftenwill bring restrictions on trade. The growing in-volvement of governments and international orga-nizations in trade and shipping policies and grow-ing protectionism worldwide requires the UnitedStates to develop clear trade policies that serve thenational interest and can remain consistent over thelong term (10 years or more) that many interna-tional issues require for resolution.

173


TRADE POLICIES

International Trade Policy, 1945-75

The importance of international trade for theU.S. economy has increased markedly in the pasttwo decades. Although the U.S. ratio of exports togross national product (GNP) is still below that ofother industrial countries,l it stood in 1980 at 8.5percent, almost double that of 1970. Imports alsodoubled between 1970 and 1980, rising to 9.5 per-cent of GNP.

The increased interdependence of the U.S. econ-omy with the international economy is graphicallyreflected in the fact that over 5 million workers aredependent on foreign trade for their livelihood, andthat 80 percent of all new manufacturing jobscreated in the late-1970’s were linked to exports.In addition, 1 out of every 3 acres planted by Amer-ican farmers produces crops for exports. 2 This in-terdependence is expected to continue to grow, withsome estimates putting U.S. exports at 15 percentof GNP in 1990.

For the industrialized countries of the Organiza-tion for Economic Cooperation and Development(OECD) as a whole, exports accounted for 16 per-cent of GNP in 1980, up from 9 percent in 1962.The developing countries, especially the newly in-dustrializing countries ,S also increased their par-ticipation in international trade in the past 10 years,with their share of the value of free world exportsincreasing from 20 to 30 percent between 1970 and1980. South Korea, for example, increased its ex-ports of goods and services from 3 percent of GNPin 1960 to 34 percent in 1977, while Taiwan wentfrom 11 to 59 percent in the same period.4

I In 1980, for example, Japan exported 12.2 percent of its GNP,while West Germany’s export share was 21.8 percent. U.S. TradeRepresentative, Twenty-Sixth Annuaf Report of the President of theUnited States on the Trade Agreements Program, 1981-82 (Wash-ington, D. C.: Office of U.S. Trade Representative, 1983), p. 2.

‘Ibid., p. 1.‘In 1979, OECD included Brazil, Greece, Hong Kong, South

Korea, Mexico, Portugal, Singapore, Spain, Taiwan, and Yugoslaviain its seminal analysis on the subject. The Impact of the Newly In-dustrializing Countries on Production and Trade in Manufactures:Report by the Secretary General (Paris: Of!ice of U.S. Trade Repre-sentative, 1979).

4Figures cited in U.S. Trade Representative, Twenty-Sixth Report,op. cit., pp. 2-3.

Much of the economic growth in the postwar pe-riod has been the result of international trade. Re-cent studies have demonstrated that when econo-mies of OECD countries grow by more than 1.5to 2 percent per year—the situation during the post-war period until recently —nonoil imports tendedto grow three times as fast.5 The same studies showa similar negative relationship, with zero growthin OECD economic activity resulting in a 5 per-cent drop in nonoil imports. G

The present constriction of economic activity andinternational trade is especially significant becauseit may very well represent a watershed for the in-ternational trading system. The commitment of theindustrialized countries, and especially the UnitedStates, to free and open trade, is being brought intoquestion as economic activity stagnates and unem-ployment continues at historically high rates. Thisis a departure from the 25-year period between 1950and 19.75 during which the industrialized countriesexperienced historically high average economicgrowth rates of over 4 percent and average annualgrowth rates of over 8 percent in merchandise trade.

Much of the post-World War 11 growth rate hasbeen attributed to the progressive reduction of tradebarriers in successive rounds of trade negotiationssince 1948 under GATT’. The first five rounds wereconcerned solely with tariff reductions, while thelast two have sought to reduce both tariff and non-tariff barriers to trade. After the seventh and latestround of Multilateral Trade Negotiations (MTN),the Tokyo Round (1974-79), average tariff ratesare only 4.4 percent in the United States, 4.7 per-cent in the European Economic Community (EEC)and 2.8 percent in Japan.7 The Tokyo Round alsoresulted in the establishment of codes of behaviorfor such nontariff barriers as customs valuation andsubsidies.

5C. Fred Bergsten and William R. Cline, Trade Policy in the 1980’s(Washington, D. C.: Institute for International Economics, 1983),p. 14.

bIbid.7The Tokyo Round of Multi faterd Trade Negotiations: 11 Sup-

plementary Repofi (Geneva: General Agreements on Trade and Tar-iffs, 1980), p. 33, cited in Bergsten and Cline, Trade Policy in the~980’s, op. cit., p. 15.

Ch. 7—Infernational Trade and Cargo Policies ● 175

Although the United States was the main forcebehind these trade liberalization efforts, in 1946 theU.S. Congress refused to agree to the establishmentof a much stronger multilateral body, the Interna-tional Trade Organization (ITO). ITO, which was

armed with strong enforcement powers and slatedby some to become the economic arm of the UnitedNations, had an ambitious charter that was in-

tended to prevent trade wars similar to those of the1930’s, which many believe worsened the depres-sion and created the economic conditions thathelped bring about World War II. ITO was con-

sidered to be overly ambitious and tco ‘ ‘entangl-ing” by Congress. The industrialized countries,however, agreed to the establishment of GATT,which provides rules of conduct for internationaltrade and relies on negotiation and internationalcooperation, rather than supranational enforce-ment, to effect the reciprocal reduction of trade bar-riers, and ensure respect for international traderules with respect to trade in goods.

GATT is thus a loosely structured internationalorganization which serves as the principal forumin which countries can discuss trade problems andcooperate to reduce trade barriers. * Its body of rulesis based on the most-favored-nation principle thatgoverns U.S. conduct in international trade.

Throughout the 1950’s and 1960’s, one politicalobjective of U.S. foreign policy was the economicreconstruction of Europe and Japan. The benefitsof Marshall Plan assistance were acceleratedthrough the progressive dismantling of internationaltrade barriers and capital controls. By the late1960’s and early 1970’s, the economic reconstruc-

“As of September 1982, GATT consisted of 87 member countries(“Contracting Parties”) and 30 other countries, to whose territoriesGATT had been applied and which, as independent states, maintaina de facto application of GATT rules. These countries represent four-fifths of the world’s trade. Of the Eastern bloc countries, onlyCzechoslovakia, Poland, Romania, and Yugoslavia belong. In addi-tion to being the forum for periodic multilateral trade negotiations,GATT has, as part of its normal business, annual sessions of the Con-tracting Parties to establish overall objectives and guidelines for theorganization’s work program, and periodic meetings of the Council,to which all Contracting Parties belong, to discuss and try to settletrade concerns and disputes. The GATT Secretariat, which is head-quartered in Geneva, Switzerland, consists of 200 personnel headedby a Director General and prepares documentation requested by themembers. International Trade, 1981/82 (Geneva: General Agreementson Trade and Tariffs, 1982) and U.S. Senate Committee on Finance,Report to Accompany H.R. 4537, Trade Agreements Act of 1979,Report No. 96-249, 96th Cong. 1st sess., 1979, p. 2.

tion of Europe and Japan was completed, and thesecountries were in position to begin to share withthe United States responsibility for the managementof the international economic system. Tensionsarose in part, however, over the unwillingness ofJapan and Europe to assume fully the shared re-sponsibility that their new economic strength war-ranted. Persistent requests by succeeding Americanadministrations to lower trade barriers further andimprove capital flows went unheeded. To improvethe political climate and economic coordinationamong the seven leading industrial countries (theUnited States, West Germany, France, the UnitedKingdom, Italy, Canada, and Japan) annual eco-nomic summits at the heads of state level were in-stituted in 1975. The major factors that have ledto a changed attitude toward free trade that car-ries through to today were the economic events ofthe mid- 1970’s—resulting principally from the oilprice increases of 1973-74.

Present International Trade Policy

Some analysts call the present phenomenon“New Protectionism, while others call it ‘ ‘man-aged trade. With tariffs no longer providing anyeffective protection, countries have begun to influ-ence the direction and volume of their trade throughthe use of voluntary export restraints and orderlymarketing agreements to limit exports, and throughthe subsidization of exports and other forms of gov-ernmental intervention designed to capture exportmarkets unfairly. While the initial trade responseto the inflation of 1973 was trade liberalization, ex-emplified by the elimination of U. S. quotas on steel,oil, meat, and sugar imports, by 1977 protectionismwas once again on the rise.

Although each successive year has brought newprotectionist measures in all the industrialized coun-tries, these measures have not resulted in any fur-ther reduction in world trade beyond that whichmost attribute to the world economic recession.These protectionist tendencies, which have soughtto avoid the painful restructuring of uncompetitiveindustry or agriculture by insulating the domestic

aBergsten and Cline, Trade Policy in the 1980 ‘s, op. cit. , p. 15.“’The Drift to Managed Trade, ” Financial Times, Feb. 15, 1983,

p. 12.

176 ● An Assessment of Madtime Trade and Technology

economy from international competition, generallyhave been balanced by counter pressures, such asinflationary concerns, the growing importance ofexports to all countries, and the need to mute tradedisputes for foreign policy reasons, all of whichfavor free trade.

The United States and its major trading part-ners, faced with the same economic conditions ofhigh unemployment, economic slowdown, andgrowing export dependency, are caught up insimilar balancing acts between these protectionistand liberalizing tendencies. Recently, for example,the trade officials of Japan, Europe, the UnitedStates, and Canada reiterated, upon completing thethird quadrilateral meeting of high-level trade of-ficials, their determination to fight jointly againstrising protectionism. 10 At the same time, each ofthese countries has continued to (‘ manage’ itstrade. For example, the Europeans recently forcedthe Japanese to agree to limit their exports of video-tape recorders to Europe in 1983, after the Frenchrequired that all such recorders pass customs in thesmall town of Poitiers. Europe’s Common Agri-cultural Policy, aimed at protecting the politicallyimportant farmers, has set domestic prices on thebasis of the costs of the least efllcient producer, andthe resultant excess production is exported with sub-sidies. As a result, although EEC had been a netimporter of grains, sugar, dairy products, and beefin the early 1970’s, it is now a net exporter.

The opening of Japan’s domestic market to for-eign agricultural products such as citrus and beef,and high-technology items such as computers,automobiles, and telecommunications equipment,which Japan exports, has been the main agendaitem for U.S. and European trade negotiators. Ja-pan has a network of nontariff barriers such as ad-ministrative guidance and burdensome customsevaluation procedures (which the French sought toemulate at Poitiers). Trade liberalization in Japanhas evolved so slowly that only the January 1983visit of the Japanese Prime Minister to the UnitedStates persuaded U.S. policymakers to delay anynew import restraints. One analyst, however, ar-gues that the current undervaluation of the Japa-nese yen resulting from exchange rate misaline-

1O’’IndustriaJ Powers Agree to Fight Protectionism, ” Jourmf ofCommerce, Feb. 14, 1983.

ments ‘‘is a more potent cause of trade friction thanovert and covert protection in Japan. ’11

The United States is not immune from criticismabout its protectionist measures. Steel, automobiles,and textiles all enter the United States under someform of voluntary restraint arrangement. On thewhole, however, these arrangements are not asrestrictive as the European program, although oneobserver wryly noted that it was the United Statesthat, in fact, originated many of the restrictive prac-tices it finds fault with in its trading partners. Itwas the United States that first insisted on a GATT’waiver for protection of certain agricultural prod-ucts—which set a precedent for similar Europeanrequests—and it was the United States whichpushed in the early 1960’s for the first internationaltextile arrangement. The developing countries havealso implemented protectionist policies. Many ofthese nations, as they attempted to improve theirinternational trading posture, found it difficult tobreak into markets that historically had been dom-inated by developed countries. Their inability tobe competitive has lead to a number of direct andindirect protectionist schemes.

U.S. Trade Policy

Since 1976, the merchandise trade balance hasbeen in deficit, and the economic rebound in theUnited States is expected to lead to a record 1983trade deficit. Although the current account, whichincludes trade in services and investment remit-tances as well as trade in goods, may be a bettermeasure of U.S. competitiveness, the trade defi-cits—due to a large degree to imports of autos, steel,and textiles—have provided the fuel for inward-looking trade policies. Nevertheless, the UnitedStates continues to exert strong leadership withinand without GATT in favor of free trade. It con-tinues to use GATT as its principal forum for theresolution of trade disputes. GATT, as a body, doesnot have any enforcement mechanism, and majortrading countries have ignored unfavorable rulingsof GATT panels of experts. GATT’s utility in theresolution of trade disputes is therefore dependent

1 IG~V R . saxonhouse} “The Micro and Macroeconomics of For-eign Sales to Japan, cited in Bergsten and Cline, Trade Po~icy inthe 1980’s, op. cit., p. 28.

Ch. 7—international Trade and Cargo Policies ● 177

on either the willingness of its members to acquiesceto its jurisdiction, or on political deals made out-side the institution.

The rise in the number of interest groups seek-ing import protection is attributable to the increasedinterdependence between the U.S. and world econ-omies, and to the inability of certain industries tocompete favorably with foreign industries. The re-sultant high unemployment in labor-intensive in-dustries such as autos, textiles, and steel, togetherwith a growing frustration with what appears to bethe slow pace of trade liberalization in Europe andJapan, have punched large holes in the broad post-war consensus in support of free trade. This break-down is particularly manifested in the recent in-troduction of new legislative proposals addressingtrade policies. These proposals share certain com-mon characteristics: they are designed to increaseemployment in the United States either by plac-ing restrictions on foreign imports or by improv-ing the ability of U. S. exports to compete in foreignmarkets. They all involve some form of governmen-tal intervention, which would result in increasedbudgetary costs and market inefficiencies.

During the 97th Congress, several bills callingfor trade reciprocity were introduced. These billssought to give the President retaliatory powers todeny access to the U.S. market of products fromcountries that did not grant similar U.S. products‘‘substantially equivalent’ access to their markets.Although the conventional usage in trade policy ofthe term ‘‘reciprocity’ has connoted for the last60 years unconditional most-favored-nation treat-ment, the present usage implies a willingness todiscriminate among suppliers by providing importprotection against a single country. Furthermore,while ‘ ‘reciprocity’ traditionally involved a balanc-ing of benefits and access across the total trade spec-trum, with the direction of trade based on the lawsof comparative advantage, the new usage wouldjudge whether trade in individual product sectorswas balanced.

Other proposals have sought to increase U.S.employment by curbing imports and would requireforeign automobile manufacturers to incorporateprescribed amounts of U.S. labor and U.S.-man-ufactured components into cars sold in the UnitedStates. The “local content” bill had its most re-cent origin in 1980 as layoffs in the auto industry

started to mount in the face of increased Japaneseautomobile imports.

President Reagan opposed this bill, saying thatit would destroy more jobs than it would save andthat it would invite retaliation. He did not men-tion that such ‘‘local content’ regulations are oneof the main nontariff barriers that U.S. exportersface in other countries, especially in the develop-ing countries. As a possible reaction to congression-al concerns, the Japanese recently have agreed tocontinue for another year their ‘ ‘voluntary exportcurbs, which limit their auto exports to the UnitedStates and thus enable U.S. automakers to increasetheir market share.

Improving the competitiveness of U.S. exportsis the rationale behind certain proposals before Con-gress this year to renew the charter of the Export-Import Bank. The Eximbank, as it is known, aidsin financing exports of U.S. goods and servicesthrough the provision of direct loans, loan guar-antees, and insurance. While the Bank must baseits rate structure on its average cost of money, italso must meet the policy mandate that its financ-ing be provided at rates and on terms that are com-petitive with financing provided by the UnitedStates’ principal foreign competition. In recentyears, however, high interest rates and the increas-ing tendency of foreign governments to subsidizeexport financing heavily have placed U.S. exportersat a competitive disadvantage. This has put pres-sure on Eximbank to provide subsidized financingto counter the export financing subsidies of theother countries.

While the administration would prefer to haveCongress renew Eximbank’s charter without anychanges, Senator John Heinz is sponsoring a billto establish a special fund, ‘‘a war chest, thatwould give Eximbank increased authority to pro-vide subsidized loans to U.S. exporters to counter‘ ‘predatory’ export credit practices of other na-tions. However, the recent drop in interest ratesmay remove the need for heavily subsidized exportcredits12 and thus make the debate over a ‘ ‘warchest academic.

IZone Obsewer dates the first subsidized Eximbank Ioa to as recent-ly as June 1979, when Eximbank’s funding costs moved above theaverage interest rate charged on its loans. Patricia E. Barrett, ‘‘Ex-imbank Must Be Seen in Global Perspective, ‘Journal of Commerce,Jan. 26, 1983.


Export Trading Companies

As world trade has become more important tothe American economy, both business and govern-ment have looked for ways to boost U.S. exports.One frequently noted fact is that only a very smallpercentage of all U.S. companies are even involvedin foreign trade. Studies by the Department ofCommerce and others estimate that more than20,000 small- to medium-sized U.S. firms makeproducts that would be highly competitive over-seas. 13 But their small size, low amounts of capital,and lack of foreign experience have left them eitherunable or unwilling to take on the risks and costsinvolved in operating abroad. The Export TradingCompany Act of 1982 (ETCA) is designed to helpdeal with this problem.

Trading companies have long existed in theUnited States and elsewhere. But prior to the newlaw, most American trading companies fell into twocategories— companies set up by major corpora-tions for the purpose of handling their own exporttrade or narrowly focused companies engaged pri-marily in arranging export services. 14

But the 1982 law envisions something more—knowledgeable and well-financed companies thatcan provide a wide range of services to U.S. firms.This model, as in so many other cases, has beenthe Japanese. Their very successful trading com-panies —the Sogoshoshas— link goods to foreignmarkets. Possessing both a large overseas commer-cial network and special financing by banks thatbelong to the same Kiretsu, or business combine,as the trading company itself, this type of organiza-tion can provide a wide range of services to a com-pany that wants to export. These services includethe development of foreign markets, market intel-ligence and research, financing, transportation serv-ices, and generally handling a variety of the uncer-tainties and risks associated with exporting.

ETCA was passed to encourage the formationof this kind of broad, multiservice company. It doesso by changing the law in two areas: banking andantitrust.

lssee for instance, Senate Report 92-27, May 18, 1981, PP. 2-3.I+ Betty JO Christian, “Export Trading Companies: New Vehicle

for Growth for American Business, ” Flow to Use Export TradingCompanies to Penetrate Foreign Markets, a symposium presented bythe Baruch College of the City University of New York, Dec. 9, 1982,p. 8.

The act allows banks, within certain limitations,to buy into existing trading companies or to estab-lish their own trading company subsidiaries. It isbelieved that this new provision will help create thekind of unique relationship that exists between Jap-anese banks and trading companies and will, in par-ticular, bring in the capital needed to finance ex-ports. Banks are also seen as having the necessaryknowledge, expertise, and overseas network to pro-vide comprehensive export services.

Another provision of the new legislation clarifiedthe Webb-Pomerence Act of 1918. That law ex-empts U.S. exporters, under certain conditions,from U.S. antitrust laws. The 1982 act does not,in fact, change any U.S. antitrust law. Instead, itestablishes a ‘ ‘certification system’ by which firmsseeking to form an export trading company can geta formal Government opinion on whether their ac-tion does or does not violate existing antitrustpolicy. The system thus provides preclearance anda guarantee against possible antitrust actions by theGovernment. Given that present uncertaintiesabout antitrust policy seem to deter many Americanbusinessmen, the act’s authors hope that the certi-fication process will lead to more cooperationamong firms.

Under the new act, just about anybody can forman export trading company, Banks can, as notedabove. Large corporations that already have expe-rience overseas can offer their services to otherAmerican firms, Transportation companies andeven port authorities and State development boardscan start them.

Ship operators in particular may want to con-sider forming export trading subsidiaries. Giventheir great experience in foreign trade and their ex-tensive overseas networks, many ship operators arein an ideal position to offer expanded services toU.S. exporters. Some observers also hope that the1982 law will provide more antitrust immunity thanthe 1916 Shipping Act, although changes in the1916 law might further the process. In particular,allowing service contracts between a shipper andan ocean common carrier or conference might helpcreate longer term, more flexible cargo arrange-ments. 15

“William J. Coffey, “Export Trading Companies and Ocean Car-riers, ” How to (Jse Export Trading Companies, symposium, Dec.9, 1982, p. 31.

Ch. 7—international Trade and Cargo Policies 179

Since ETCA is so new, it is too early to assessits impact. Much will depend on how Federal anti-trust officials implement the new legislation, andin particular how broadly and quickly they grantantitrust certificates. Much also depends on the at-titudes of American banks; they historically havebeen very risk-averse and may not wish to get intothe export trading business. Yet in any event, the1982 law is a major change in American public pol-icy towards exports and the role of American com-panies, including American shipping companies,in the export business.

Reorganization of Federal Trade Agencies

In addition to substantive legislation, there hasbeen continuing interest in reorganizing the variousFederal trade agencies. Proposals range from es-tablishing a Department of Trade, which wouldbring together the Off Ice of U.S. Trade Represent-ative (OUSTR), Eximbank, and other agenciesunder a new Cabinet-level department, to moremodest proposals that would fold either OUSTRinto the Commerce Department or merge the In-ternational Trade Administration (ITA) of Com-merce into OUSTR. Although these sweeping pro-posals deal with the management of trade policy,they are principally motivated by concern for thecontinued deterioration of the U.S. trade position,the loss of both American and foreign markets toforeign competition, and the perceived unwill-ingness of our trading partners to open theirmarkets to our exports. As Senator Roth recentlysaid in support of his reorganization bill, ‘‘[1] wouldassign the new Secretary of Trade the responsibilityof retaliating against ‘illegal’ quotas or other un-fair practices used by trading partners. “16

At the end of April 1983, the Reagan administra-tion presented a trade reorganization plan of itsown— a proposal to create a new Department ofInternational Trade and Industry (DITI). The cur-rent administration, like others, claims that traderesponsibilities within the Government should bemet by one voiceissue.

Is’ ‘Trade Bill Praisedmerce, Feb. 2, 1983.

on this increasingly important

by Commerce Official, ” JournaJ of Com -

It is true that Federal trade programs are spreadout over a wide range of departments and agen-cies. They include:

●

●

●

●

●

●

●

●

●

U.S. Trade Representative (USTR), a Cabi-net-level official in the White House who rep-resents the United States in both GATT andbilateral trade negotiations;Department of State, which has fewer traderesponsibilities than it once did but which stillis involved in trade negotiations;Department of Commerce, which administersexport controls and assists American exportersthrough its Foreign Commercial Service andother programs;International Trade Commission (ITC), anindependent Federal agency that investigatescharges that other governments have engagedin such unfair trade practices as dumping andimproper subsidies;Department of Agriculture (USDA), whichmaintains the Foreign Agricultural Service(FAS) and has the main responsibility for agri-cultural trade policy;Department of the Treasury, which helps setinternational economic and monetary policy;National Security Council (NSC) and Depart-ment of Defense (DOD), both of which playan active role in export control policies;Maritime Administration (MarAd) and Fed-eral Maritime Commission (FMC), both ofwhich are concerned with the international roleof the U.S. shipping and shipbuilding indus-tries; andother agencies that provide assistance to ex-porters: including the Eximbank, the SmallBusiness Administration (SBA), the OverseasPrivate Investment Corporation (OPIC), andUSDA’s Commodity Credit Corporation(ccc).

The DITI proposal would combine some but notall of these programs into the new department.Under the proposal, the Department of Commercewould be abolished. Many of its present parts wouldbe included in the new department—ITA; the eco-

17For detai]s see Raymond Ahearn and David Driscoll, ExecutiveBranch Organization to Formulate and Zmplement U.S. Foreign Tradeand Investment Policy, Congressional Research Service Report No.81-143 E, Aug. 25, 1981.


nomic affairs programs (Bureau of Economic Anal-ysis, Bureau of Industrial Economics, and tech-nology policy, but not the Census Bureau); the Pat-ent and Trademark Office; the Travel and Tour-ism Administration; and the National Telecom-munications and Information Administration.Other parts of Commerce would either be madeindependent or integrated into other agencies. 18

Also included in DITI would be OUSTR, theEximbank, and OPIC. A new Cabinet-level coun-cil, headed by the President, would be establishedin the White House to coordinate overall Govern-ment trade policy. The council would have a smallWhite House staff and be similar to NSC.19

The main argument for the new department isthat the executive branch too often simply reactsto events—either in Congress or abroad—and failsto plan ahead or speak with one voice. In particular,the administration says, the separation of OUSTRand the Commerce Department splits policymak-ing from policy implementation and confuses every-one; no one knows whether the Trade Represent-ative or the Secretary of Commerce speaks for theUnited States. In the words of the administration,DITI would ‘ ‘bring together the analysis, negotia-tion, regulation, and implementation aspects oftrade policy. ‘’20 Commerce Secretary Baldrige, theplan’s main proponent, says that such consolida-tion is important as trade becomes increasinglynecessary to the U.S. economy.

The DITI proposal does not lack critics, how-ever. The Senate Finance Committee and HouseWays and Means Committee are worried about los-ing jurisdiction over OUSTR. Other critics specifythree main objectives. First, this proposal will notactually solve the fragmentation problem. It willcombine OUSTR and Commerce, but USDA willstill handle agricultural trade, and State and De-fense will continue their roles. If fragmentation isthe problem, DITI is not a full solution. Second,DITI may in fact add to fragmentation. Today,OUSTR serves not only as our negotiator but also

Ie~ {statement by the President, June 1, 1983. See also: ‘‘Depart-ment of International Trade and Industry: Joint Statement by Am-bassador Brock, Secretary Baldrige, and Senator Roth, ” and “Depart-ment of International Trade and Industry: Factsheet.

‘gIbid.‘“Ibid.

as interagency coordinator. However, DITI, likethe present Commerce Department, is likely to bemore an advocate of U.S. business interests thanan impartial balancer of competing trade views.Thus, the interagency function will fall to the newWhite House trade council, a group likely to lackthe expertise and stature of OUSTR. In fact, anearlier trade reorganization debate in 1979 led tostrengthening OUSTR, because of problems of in-teragency coordination, and a perceived need toimprove our competence in negotiations. Third,critics ask what is the ‘ ‘real’ purpose of the reor-ganization. They are afraid that the new reorga-nization will weaken the efficiency and independ-ence of OUSTR and shift policymaking power tothe more protectionist-minded Commerce Depart-ment. Secretary Baldrige disagrees, saying that thenew DITI could be pro-free trade or pro-protection,depending on who is put in charge. But the criticsnote that the Commerce Department’s main con-stituency are the very businesses that now seek relieffrom imports.21

As with other reorganization plans, political pow-er is a factor. Questions arise as to who will benefitand lose politically if the reorganization proposalis adopted. In the case of DITI, business intereststhat seek further protection probably would gainin policymaking influence. Consumers who benefitfrom the free importation of low-price foreign goodsmight lose. Service industries, like shipping, mightnot be affected because the Commerce Departmenthas always been more oriented toward manufac-turers than service industries.

President Reagan would like to see Congressadopt the DITI proposal this year. At the present,its prospects are unclear. In the final analysis,though, the debate over DITI is best seen as partof the larger U.S. debate over trade policy in gen-eral. With many American industries facing in-creasingly stiff foreign competition, the UnitedStates now faces two key questions. First, what isour goal-genuinely freer trade, including moreopen foreign markets; more protection for ailingU.S. industries; or freer trade plus some concertedU.S. industrial policy to make American companiesmore competitive? And, second, if our goal is freer

zlFor a Sumlmav of the criticisms of the administration proposalsee “Trade,” The Economist, Apr. 30-May 6, 1983, pp. 28-33.

Ch. 7–international Trade and Cargo Policies ● 181

trade, what tactics should we use in seeking it—con-tinued patience in negotiations or retaliation againstthose whose markets are more closed than ours?Until we know what kind of trade policy we advo-cate, debates over trade organization are likely toremain intense and frequent.

These reorganization proposals are not new; thesame arguments were used in 1979-80 when a sim-ilar debate culminated in a compromise reorganiza-tion of the trade agencies and functions. The com-promise gave OUSTR, who is the President’s tradeadviser and chief international negotiator, widertrade policy leadership, while the Commerce De-partment was given the day-to-day operationalresponsibility for the Government trade functions.However, this reorganization did little to improvethe weak trade promotion activities of the U.S.Government, which involve a host of other con-siderations.

The Enforcement of Fair Trade Laws

While changes in U.S. trade laws may providea long-run approach to improving the enforcementof U.S. trade rights, the administration also en-forces its rights by permitting aggrieved U.S. par-ties to seek relief on a case-by-case basis under theU.S. Fair Trade Laws. The Countervailing andAnti-Dumping Statutes protect U.S. manufacturersfrom foreign subsidies and sales at less-than-fair-value in the U.S. market. Cases involving itemssuch as steel, bicycles, metal castings, certainchemicals, and textile products have been processedin 1982 by the Commerce Department; and theUnited States has concluded an agreement withEEC within the past year in response to findingsof export subsidies under the U.S. countervailingduty law, setting limits on exports Of major Steelproducts to the U.S. market.

The United States also has decided to use U.S.export subsidies as a trade weapon for the first time.As a challenge to EEC agricultural policies thathave turned Europe from a net wheat importer,through heavy subsidization, to a net exporter,USDA has subsidized the sale of 1 million metrictons (tonnes) of wheat flour to Egypt, which pre-viously had been supplied principally by theFrench. There are also indications that U.S. ex-

ports of butter and poultry products maybe similar-ly subsidized.

The most sweeping powers to retaliate againstthe unfair trade practices of foreign governmentsare found in section 301 of the Trade Act of 1974,as amended. Under section 301, the President cantake ‘‘all appropriate and feasible action’ withinhis power—including quotas, or any other traderestrictions—to obtain the elimination of any acts,policies, or practices deemed to be unjustifiable,unreasonable, or discriminatory and which burdenor restrict U.S. commerce. This provision of law,although on the books since 1974, was hardly usedduring the Tokyo Round of Trade Negotiationsand only since its completion has OUSTR under-taken a significant number of investigations. Dur-ing fiscal year 1982, OUSTR initiated 10 section301 investigations, which constituted nearly one-third of the total investigations initiated under theprovisions of the section since 1975.22

Four section 301 cases concern European agri-cultural subsidies, one concerns Argentina’s exportrestrictions on cattlehides, and five concern do-mestic subsidy practices of five countries produc-ing specialty steel. In this context, OUSTR hasbeen actively utilizing the international dispute set-tlement procedures of GATT and the SubsidiesCode. U.S. Government officials have expressedsome disappointment, however, at the fact that withdeadlines missed and one consultation request evenrefused, these procedures have not always workedto U.S. satisfaction. Nevertheless, OUSTR is con-tinuing this approach and has not yet sought otherforms of retaliatory relief.23 The U.S. Governmentsubsidization of the wheat sale to Egypt has esca-lated tensions with EEC and may have actuallyovershadowed the significance of the 301 proceed-ings in GATT. Nevertheless, since EEC has alsobrought the U.S. subsidy case to GATT, some res-olution within the terms of the Subsidies Code isexpected to occur, a fact which, in its own right,has precedential significance for GATT.

220~ce of u.s. Trade Representative, Report of the OUSTR to

the Congress on the Status of Section 301 Cases, unpublished, July29, 1982.

231 bid., p. 2.


The present administration appears to be follow-ing the approach of exhausting the internationaldispute settlement procedures before consideringany retaliation. This is a very delicate maneuver.The international settlement approach has not yetserved to eliminate any foreign unfair trade prac-tices and will not be continued ad infinitum withoutsome successful resolution of cases. The complain-ing industries and Congress are closely watchingthe administration’s enforcement of these section301 cases. The administration will need to receiveconcessions from U.S. trading partners to avoid the

necessity of actually retaliating under section 301.There is already some question in Congress aboutthe need for changes in section 301 “to expand thescope of this law, authorize the use of a broaderrange of retaliatory devices, such as countersub-sidy programs or regulatory action, and revise ad-ministrative procedures, including time limits. ’24

Z4L ‘The Honorab]e Sam M. Gibbons (D-Fla. ), Chairman, SubCOrn-mittee on Trade, Committee on Ways and Means, U.S. House ofRepresentatives, Announces Hearings on Trade Remedy Laws, ”House Ways and Means Subcommittee on Trade, Feb. 15, 1983, p. 2.

MARITIME CARGO POLICY

Introduction

Shipping policies tend to mirror trade policies.As might be expected, increasing protectionism intrade has spawned a variety of restrictive and pro-tectionist policies in the maritime area—unilateral,bilateral, and multilateral.

Historically, all maritime nations have protectedtheir national maritime interests through the im-plementation of some forms of cargo policy, gen-erally by reserving some or all of the carriage ofcertain commodities for their own national carriers.In the case of established maritime countries, thisis sometimes achieved through closed conferences,which are able to assure national lines of full or“fair” participation in their trade. In the case oflesser developed countries, more overt governmentintervention is usually involved.

The practice of cargo preference can be director indirect. In some cases, a country mandates thata certain percentage of its imports or exports mustbe carried on its national-flag vessels. Provision maybe made for bilateral or multilateral cargo-sharing,often on a 50/50 or 40/40/20 basis, with the largershares reserved for the national flag lines of thetrading partners. (These agreements will be dis-cussed later in this paper. ) Indirect cargo preferencecan be accomplished by a government mandate re-quiring imports to be purchased on an f.o b.-basisand exports on a c. if. -basis. In addition, varioustax deductions and other fiscal incentives are fre-quently granted to importers and exporters that uti-lize their national-flag carriers.

Cargo Preference in the United States

The United States has enacted several cargopreference laws which concern the movement ofGovernment-impelled and Government-financedcargoes. These are the Cargo Preference Act of1954, Public Resolution (Public Res. ) 17 and theMilitary Transport Act of 1904. An economicallysignificant U.S. cargo policy is cabotage, which isprovided for in the Merchant Marine Act of 1920,commonly called the Jones Act. Although not usu-ally categorized as cargo preference, this act re-quires that all domestic waterborne trade be car-ried on U.S.-built, U.S.-flag vessels. Chapter 6explores the Jones Act and its impacts.

The Cargo Preference Act of 1954 mandates thatat least 50 percent of any U.S. Government-impelled cargoes must be carried on privatelyowned U.S.-flag vessels. It applies to Governmentcargoes shipped for U.S. Government account(e.g., military support cargoes) and to any cargoesshipped under Government grant or subsidizedloan such as cargoes shipped by the U.S. Agencyfor International Development (AID).

Public Res. 17 requires that 100 percent of anycargoes financed by loans made by the U.S. Gov-ernment to foster exports must be carried on U. S.-flag ships. This primarily concerns commoditiesbacked by Eximbank loans. There is provision forwaiver of the law by MarAd so that up to 50 per-cent of such shipments may be carried on the flagvessels of the recipient nation.


The Military Transport Act of 1904 requires thatall supplies shipped for use of the U.S. ArmedForces must move on U.S.-flag ships, This law in-teracts with the Cargo Preference Act with the resultthat one-half of all such military shipments mustmove on privately owned U.S. vessels. This meansthat the Military Sealift Command (MSC), the pri-mary vessel charterer for the military, can ship only50 percent or less of its cargoes on Government-owned or controlled vessels.

Currently, only Government-impelled cargoesare covered by cargo preference laws. A bill, H.R.2692, introduced by Congressman Walter B. Jonesin April 1983, seeks to clarify and consolidate theexisting U.S. cargo preference laws. Over the pastdecade, a number of other bills have been intro-duced in Congress proposing extension of cargoreservation to certain commercial cargoes, notablybulk commodities. Among such legislative initia-tives were measures that called for cargo preferenceon 50 percent of all U.S. oil imports (1972), 30 per-cent of U.S. oil imports (1974), 9.5 percent of U.S.oil imports (1977), 40 percent of dry-bulk imports(1981, 1982), and 20 percent of dry-bulk exportsand imports (1982, 1983). Only one—the 1977 oilcargo preference bill—passed both Houses of Con-gress. It was pocket-vetoed by President Ford. Abill calling for 20 percent of dry-bulk exports andimports to be carried on U.S.-built, U.S.-flagvessels by 1998, was introduced by CongresswomanLindy Boggs in February 1983 and is pending. Re-lated bills have been introduced in the Senate. Thereason for these attempts is not difficult to discern.As discussed in chapter 3, the U.S.-flag foreigntrade liquid- and dry-bulk fleets are very small. Lessthan 3 percent of U.S. oil imports is carried onU.S.-flag ships, and less than 1 percent of U.S. dry-bulk trade.

There also have been attempts to limit or reducethe impact of current cargo preference legislation.A bill was introduced in the 97th Congress thatwould have exempted dry-bulk cargoes from theprovisions of the Cargo Preference Act of 1954 andPublic Res. 17; another bill called for preferencecargoes to be shipped only on vessels deliveringcargo at the lowest landed cost; a third bill dealingwith interest rate “buy downs’ on loans for agri-cultural purchases by foreigners stated that thecargo preference laws would not apply. In the cur-

rent Congress, Senator Boshwitz has introducedlegislation that would exempt from cargo preferenceagricultural commodities shipped under the blendedcredit program. Congresswoman Virginia Smithintroduced another bill in the current session thatwould exempt shipments of agricultural productsfrom the cargo preference laws.

The debate about cargo preference has continuedover the past decade. Opponents argue that signifi-cant economic cost and inefficiency result fromcargo preference requirements. In general, U. S.-flag ships—especially bulk ships—cost substantiallymore to build and operate than equivalent foreign-flag ships (see ch. 3). In addition, since the U. S.-flag bulk fleet is small and has limited capabilities,a number of preference cargoes (especially underthe Food for Peace Program) must move on U.S.liner ships which are even more expensive thanforeign-flag bulk carriers. Since agricultural com-modities are sold on the basis of landed cost, usuallyat world spot prices, higher transportation costswould either reduce income to the U.S. farmers or,where AID pays the bill, reduce the amount of theproduct that is exported. Thus, in effect, incomeis diverted from the U.S. agricultural sector to theshipping industry. 7.5 Other criticisms of cargo pref-erence are that overtonnaging in a given trade canresult, and that direct cost to the Government oc-curs when an agency must pay higher U.S. rates.Less export cargo can then be shipped for a givenbudgetary allotment.

Proponents of cargo preference hold that whileU.S.-flag bulk rates are higher than foreign rates,this is not true in the liner industry, where ratesare set by conferences and are the same for all flagcarriers. Of course, agreed upon rates don’t applywhen rates are ‘ ‘open’ as may often be the casefor agricultural commodities. Virtually all Exim-bank cargoes are liner shipments moving at con-ference rates. The primary and compelling argu-ment for cargo preference is that it is one of theprices paid to assure that the United States has anational-flag merchant fleet. The fleet is needed forstrategic military reasons and must be supportedeither directly or indirectly by the Government

25 See ‘ ‘Cargo Preference Requirements Add to Costs of Title 11Food For Peace Programs, GAO Report-GAO/PAD-82-3 1, August1982,


because it is unable to compete on a purely com-mercial basis. Proponents further argue that oneshould not calculate the cost of cargo preferenceitself, only that cost as compared to the cost of otherpromotional schemes that would have to be insti-tuted in its absence. They also claim that cargopreference requires no direct Government outlays.(This is not entirely true, however, in cases whereFederal agencies’ budgets must bear the cost ofU.S.-flag shipping.)

The importance of cargo preference to the U.S.maritime industry is significant. In 1980, revenuefrom the carriage of preference cargoes totaled $1.1billion for all U.S. operators. Liner operatorsreceived 16 percent of all revenues under the pro-grams. However, the overall figures do not reflectthe impact of preference carriage on individualoperators. For some liner operators, it amounts to30 to 40 percent of total revenue. About $536 mil-lion in revenue was generated from shipments ofbulk preference cargoes in 1980, about 10 percentof total revenue. The U.S. dry-bulk fleet-thoughvery small—is particularly dependent on preferencecarriage and might cease to exist in foreign tradeswithout it. However, preference laws to date havenot resulted in improvements in the quality or sizeof this fleet, largely because of the uncertaintyassociated with cargo preference trades. U.S. shipoperators will not make long-term investments inmodern, efficient vessels without a more consistentand coordinated approach toward cargo preferencepolicies by all Federal agencies involved.

A number of studies have been conducted tomeasure the costs of various cargo preferencemeasures. A recent analysis of the cost of existingcargo preference laws was prepared by MarAd onApril 11, 1983. MarAd used cost estimates gener-ated by AID, (Because Eximbank cargoes are 95to 98 percent liner and move at conference rates,no differential for these cargoes was calculated. ) ForAID cargoes, the total 1982 differential was $138million. The program which consistently had sig-nificant volumes of cargo moving at differentialrates was the Food for Peace (Public Law 480, TitleI) program. U.S.-flag vessels had a 50. l-percentshare of carriage at a rate differential per tonaveraging $52.57, The total cost of moving thesecargoes on U.S.-flag ships instead of on foreign-flag ships was $97.7 million.

Various estimates of the costs of cargo preferenceproposals have been generated during debate onthe proposals. However, it is difficult to measurethe potential impact of the proposals because thecost estimates vary widely, depending on thesource. For example, estimates of the cost ofpreference under the 1977 oil preference legislation,which called for 9.5 percent of U.S. imports to becarried on U.S.-flag, ranged from O. 1 cent pergallon at the pump to 1 cent. General AccountingOffice (GAO) estimates were 0.15 cent to 0.23cent, 2G or from 3.7 to 6.2 percent in the landed priceof Saudi oil.27 Critics claimed that the impact wasunderstated because GAO assumed only a 10 per-cent rate premium for U.S.-flag carriage.

In congressional testimony on H.R. 4627 (dry-bulk preference bill), a proponent of the legislationclaimed that 20 percent U.S.-flag carriage of U.S.coal exports would raise its cost by only 40 centsper ton or 0.6 percent. An opponent testified that40 percent carriage of U.S. dry-bulk trade wouldcost $28 to $45 per ton more (depending on thecommodity), an increase of 70 percent over foreigncarriage.

In the final analysis, there really is no argumentabout whether the present U.S.-flag bulk servicecosts are higher than foreign-flag or that, withoutsubsidies, many of the U.S.-flag liner operatorshave higher costs compared with their foreigncounterparts. The question is whether nationalpriorities require the existence of a merchant fleetwhich cannot compete in a free market under pres-ent conditions. * If so, it must be determinedwhether cargo preference is the most desirable wayto provide a needed subsidy.

While most maritime nations practice cargopreference, the terms of their laws and regulationsvary widely. In some cases, only governmentimpelled cargoes are covered—as is the case with

2G’’Costs of Cargo Preference, ” GAO, Report of the ComptrollerGeneral of the United States, Sept. 9, 1977.

zTReu&n Kyle III ad ~urence Phillips, ‘‘Maritime protectionism:A New Call for Cargo Preference, Department of Transportation,undated.

● See chapter 6 for a discussion of possible approaches to makingthe U.S. fleet competitive. The approaches include allowing foreignpurchase of ships, utilizing tax incentives more freely, reducing crewsize, allowing foreign nationals in crews, and other practices to equalizeU. S.- v. foreign-flag rules of conduct.

Ch. 7—lnternationa/ Trade and Cargo Policies 185

the United States. In others, 100 percent of all car-goes are included. However, such stringent reser-vation is usually practiced only in theory. A numberof countries have in place bilateral maritime agree-ments with trading partners. These are usually dir-ected toward the liner trades only. These typicallydivide cargo on a 50/50 or 40/40/20 basis, and theUnited States is a party to several bilateral cargo-sharing agreements (most notably with Brazil andArgentina).

Appendix B summarizes the cargo preferencepractices of many foreign nations. The list was com-piled by MarAd in early 1982, and revised by OTAin early 1983. Table 43 summarizes some cargopreference practices of the leading U.S. tradingpartners. It can be seen from both table 43 and ap-pendix B that those countries that trade most ac-tively with the United States have a wide range ofcargo-reservation approaches. Some are compara-tively unrestrictive in reserving cargo for their na-tional fleets while others are most restrictive. Itshould be noted that most of these nations are eithersignatories of the UNCTAD Liner Code or haveindicated that they intend to sign it in the nearfuture. The variety of international trade philoso-

phies thus represented requires careful analysis anda flexible response from U.S. policy makers.

Bilateral Cargo-Sharing

A number of bilateral cargo-sharing agreementshave been negotiated between countries that aresubstantial world traders. These countries regardsuch agreements as a mechanism to achieve greaterparticipation in the carriage of their own trade. Forexample, in 1981, developing countries accountedfor 12.5 percent of world shipping tonnage, whilethey generated over 40 percent of waterborne car-goes traded (exports and imports together). Intrades between less developed countries (LDCS) andthe United States, the United States currently car-ries about a 30-percent share on average (althoughin some trades the total is over 40 percent), whilethe LDCS’ average share is 21 percent. It shouldbe noted that while the primary impetus for negotia-tion of bilateral agreements has come from develop-ing countries, the developed countries of the Westhave found this mechanism useful in regulatingtheir trades with Communist countries. Communistnations frequently use their merchant fleets as

Table 43.—Cargo-Preference Policies of 15 Largest U.S. Trading Partners

Signatories ofBilateral with Members UNCTAD CodeUnited States of GATT (April 1983) National cargo preference laws

Japan . . . . . . . . . . . . . . . . No Yes No Government/industry cooperation in allshipping

United Kingdom . . . . . . . No Yes No Minimal—except military cargoSaudi Arabia . . . . . . . . . . No No No 5 percent oil exports reserved for

Saudi flag; other preferences ineffect

West Germany . . . . . . . . No Yes Yes Minimal—except for bilateralFrance . . . . . . . . . . . . . . . No Yes No Substantial cargo reservation for

energy imports and bilateralVenezuela . . . . . . . . . . . . No No Yes Legislation for 50-percent reservation

to Venezuela flagNigeria . . . . . . . . . . . . . . . No Yes Yes Bilateral under negotiationNetherlands . . . . . . . . . . No Yes Yes MinimalItaly . . . . . . . . . . . . . . . . . No Yes No Minimal—some bilateralSouth Korea . . . . . . . . . . No Yes Yes Substantial reservation lawsBrazil . . . . . . . . . . . . . . . . Yes Yes No Substantial reservation lawsHong Kong . . . . . . . . . . . No — — (U.K. Territo~)Belguim . . . . . . . . . . . . . . No Yes No MinimalAustralia . . . . . . . . . . . . . No Yes No MinimalIndonesia. . . . . . . . . . . . . No Yes Yes Substantial Government rules favoring

Indonesian flag

NOTE Countries are listed in order of the value of their trade (from 1982 International Monetary Fund Yearbook) with the United States. Canada and Mexico are excludedbecause their trade is mostly nonmaritime. See app. B for country detail.

SOURCE Off Ice of Technology Assessment

25-417 0 - 83 - 13 QL 3


political tools rather than as commercial entities,making it difficult or impossible for private opera-tors to compete with them on a commercial basis.Thus, a bilateral agreement maybe the best or onlyway a Western country can protect its privatelyowned fleet in trading with an Eastern bloc country.

Table 44 shows the U.S. share of bilateral linercargoes carried by country. To date, the U.S. policyon bilateral cargo agreements has been to negotiateonly where necessary to protect our interests (e. g.,where a country has already taken unilateral ac-tion to reserve cargoes for its own ships, and U. S.-flag ships could be excluded from the trade if noaction were taken). The agreements now existingbetween the United States and other countries were

negotiated on a government-to-government basis.In some cases the carriers in the trade have beenempowered to negotiate specific pooling arrange-ments following general conditions in the govern-ment agreements.

Currently, the United States has bilateral agree-ments with three of its trading partners: the P. R. C.,Argentina, and Brazil. A bilateral agreement withthe U.S.S.R. expired in 1981 and has not beenrenewed.

Both the expired LT. S.-U. S.S. R. agreement(signed in 1975) and the accord with the P.R.C.(signed in 1980) gave each country’s merchant shipsaccess to the other’s major ports and the opportuni-

Table 44.–U.S. Waterborne Foreign Trade Liner Service, Origin/Destination Country, Calendar Year 1981

Total U, S.-flag share

$ value – $ valueCountry Tonnage (million) Tonnage Percent (million) Percent

Japan . . . . . . . . . . . . . . . . . . . . . .................8,321,052Taiwan . . . . . . . . . . . . . . . . . . . . . ................3,605,829West Germany. . . . . . . . . . . . . . . . . . . . . . .........3,258,880South Korea. . . . . . . . . . . . . . . . . . . . . . ...........2,655,178United Kingdom . . . . . . . . . . . . . . . . . . . . . ........2,337,773Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,142,515Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,936,655Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807,944France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,764,379Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737,599Hong Kong. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,568,489Saudi Arabia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476,931Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,234,514Venezuela. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,214,544South Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,193,400Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,161,050India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003,018Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,449Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 944,816Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923,238Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830,145People’ sRepublic of China . . . . . . . . . . . . . . . . . . . 814,835Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668,740Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668,411Ecuador . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586,823Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571,663Peru . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 557,563Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555,060Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534,354Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524,778New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501,914Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,979Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,163Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,778Canada (Total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392,953

(Translates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,941Dominican Republic . . . . . . . . . . . . . . . . . . . . . . . . . . 351,213Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337,929

$28,80410,2559,0886,7256,8814,0354,2203,2935,1884,4645,9384,2893,1823,0562,2761,6661,323

9661,7441,884

8821,9402,6181,630

7981,2391,0531,154

9021,8301,1401,0631,099

551347124524820

1,803,050869,257742,466681,646826,127562,374884,833496,243549,673464,665508,447108,870350,170344,185224,246446,045616,410

34,759276,141328,746450,770182,473154,427298,814175,067157,808196,843124,703253,010

95,941134,383145,960167,57371,733

120,40072,391

126,09363,987

2224232635264627312732

72828193862

42936542223453028352248182729341831393619

$7,3763,5441,9162,1611,9701,1721,8641,0771,4081,0413,212

3371,020

880512485800

87556811452513528694301333417198368245272242361165

7549

193199

2634213229294433272354

83229222960

93243512620423827401741132423333022393724


Table 44.—U.S. Waterborne Foreign Trade Liner Service, Origin/Destination Country,Calendar Year 1981 (Continued)

Total U.S.-flag share

$ valueCountry

$ valueTonnage (million) Tonnage Percent (million) Percent

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,337 ---

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Yugoslavia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Honduras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Surinam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Jamaica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ivory Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.S.S.R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .United Arab Emirates . . . . . . . . . . . . . . . . . . . . . . . . .Trinidad/Tobago . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Costa Rica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Netherland Antilles . . . . . . . . . . . . . . . . . . . . . . . . . . .Kuwait . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .El Salvador . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ireland. ...,... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Labia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Sudan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Haiti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Zaire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Kenya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Bolivia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Nicaragua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Zambia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Algeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ghana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rhodesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Somalia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cameroon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Virgin Islands (British) . . . . . . . . . . . . . . . . . . . . . . . .Bermuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Uruguay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .East Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Liberia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .French Pacific Islands . . . . . . . . . . . . . . . . . . . . . . . .Tunisia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Bahrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

309,315294,775292,404286,603272,417256,154234,987234,263229,419227,933213,419211,727206,249204,335202,193195,835172,597170,271169,653164,859154,255149,794146,091144,091136,305128,847118,930118,367115,913108,901103,540102,14096,86196,84392,02591,23186,46779,82679,54077,70373,42172,36271,65067,89967,46666,33965,42062,27860,93659,26858,83654,24754,99653,367

4261,414

5094833615981285553153517683093715511647713512811443516383821402602835235746151666201882363212161931022691561342631191598329

10310111614453

104956979

129150142

38,14582,43652,24617,05732,635

115,246267

49,806105,95649,60221,51176,39166,78744,62424,62820,286

7,04569,15868,6696,6583,802

56,85075,24742,563

108,46548,51820,543

54695,705

2,22689,63546,12712,635

7435,18079,41925,05411,01834,14716,74721,697

1,3619,846

68,33016,74010,275

1,11832,8603,742

45,84636,753

6,2975,554

59713,24311.370

1227186

11

; ;

4522

93632221210

44040

42

375029753616

181

28245

; ;36862813432128

2

; :2515

250

686621110

12521Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,153

aL~~~ than O.s L)’Srcent.

934021366564

3801

1051989449

135132115478016

134611818

1144954

222158

761

1394

12396

; ?79786617384024

318242114

186

87846

4162

6534

222827131864

11963276

4436212910

44842

53

3035217830

; ;84

16541

; ;41762411281520

22283

614

160157548

620

24324—

bLess than $500.NOTE: &additional countries have trade with the United Statesof less than 50,000 tonnes each.

SOURCE: U.S. Maritime Administration, Officeof Policy and Plans.


ty to carry at least a third of the bilateral ocean tradebetween the two nations. Although generally sim-ilar, the two agreements differ on several points.In the agreement with the U. S. S. R., certain ports(40 U.S. and 20 U. S. S. R.) of each are open on a4-day advance notice basis. Access to other portsrequires 14 days notice. Implementation of thecargo-sharing agreement was spelled out in greatdetail because it was felt that the Soviet ability tocontrol its own cargoes required specific com-mitments on their part to guarantee U.S.-flag vesselparticipation in the trade.

In the U. S.-P. R.C. pact, the United States hasallowed 55 U.S. ports to be open to P. R. C.-flagships on 4 days notice, while the Chinese haveopened 20 of their ports to U.S. ships on a 7-daynotification. The United States retains the right toclose any port for national security reasons. Theagreement is generally more flexible than theSoviet’s agreement was. This agreement also spe-cifically recognizes the right of either party to im-plement legislation to regulate the activities of cross-traders in their own foreign trades. The Chineseagreement expires in September 1983, and its re-newal is currently under negotiation. It appearsfrom the U.S. standpoint that more specific terms(similar to the expired U.S.S.R. agreement) wouldbe preferable in any future U. S.-P. R.C. pact andU.S. negotiators are making efforts toward thatend.

The U.S. bilateral agreements with the govern-ments of Argentina and Brazil are also similar inthat they set very general terms for cargo-sharingand then specify that the two sets of national-flagcarriers implement the pact and negotiate specificshares of total cargo which lines serving the tradesare entitled to carry.

The 1978 agreement with Argentina consistsmerely of an exchange of letters implementing amemorandum of understanding between the gov-ernments. It provides that the national-flag carriersof each country carry a 40-percent share of thebilateral trade with the balance of 20 percent avail-able to cross traders. Actual shares are to be ar-rived at by commercial negotiations among all thelines serving the trade, with arrangements subjectto approval by the two governments. In implement-ing such agreements, the governments have agreed

to grant equal access to carriers of the other partyto government-impelled cargoes. In effect, the spe-cifics of the agreement are contained in poolingarrangements among the carriers of United Statesand Argentina. They are up for renewal at the endof 1983.

The 1970 agreement with Brazil (a memoran-dum of consultation between the governments andsubsequent exchange of letters since) provides thatthrough the mechanism of commercially negotiatedrevenue pools, the national-flag carriers of each ofthe parties are granted equal access to the govern-ment-controlled cargoes of the other. The UnitedStates has agreed to a blanket waiver to the re-quirements of Public Res. 17. This waiver permitsBrazilian-flag carriers to carry up to 50 percent ofall export-import cargo moving in the trade. Bra-zilian-flag carriers are also entitled, under the agree-ment, to participate in the carriage of reserved linercargo moving under the Cargo Preference Act of1954.

The Brazilian Government has granted a blanketwaiver in favor of U. S. -flag carriers for participa-tion in the carriage of all Brazilian Government-controlled cargo. The result is that the carriers ofeach country are entitled to carry up to 50 percentof the government-controlled cargo of the other.Equal access to government-controlled cargo isgranted only where pooling agreements exist. Non-government controlled cargoes are not covered bythe agreement, but are subject to allocation by com-mercial negotiation, subject to the approval of gov-ernment authorities. The Brazilian agreement isalso up for renewal at the end of 1983.

One result of both the Brazil and Argentina car-go-allocation practices (i.e., a 40/40/20 split in cargoshares) is that Brazilian and Argentinean carriershave insisted in specifying the carriers who areallocated the 20 percent “cross-trades’ share. Ineffect, half of that 20 percent has thus been allocatedto Brazil for Argentina trades and to Argentina forBrazil trades. This has worked toward the disad-vantage of U.S. carriers, In addition, many U.S.shippers claim that poor service and high rates areprevalent in these trades and are a result of the in-efficiencies promoted by the pooling agreements.

Up to 25 countries have indicated interest in ne-gotiating bilateral agreements with the United

Ch. 7—/nternational Trade and Cargo Policies . 189

States—including South Korea, Bangladesh, Gua-temala, Ecuador, Dominican Republic, Algeria,Mexico, Philippines, Ivory Coast, Nigeria, Ghana,Taiwan, India, Pakistan, Indonesia, Sri Lanka,Turkey, Spain, Australia, New Zealand, Venezue-la, Colombia, Peru, Chile, and South Africa.

Table 45 shows the potential gain or loss in car-riage that U.S. liner operators would incur underbilateral agreements with the above countries, as-suming cargo allocation on a 40/40/20 basis (basedon 1981 trade data).

The State Department stated that as of July 1983the Philippines and Venezuela are most activelyurging the United States to negotiate bilateral.

Discussions between the United States and Ven-ezuela were held in 1983, and the U.S. Govern-ment made a proposal similar to that offered to thePhilippines. These talks were suspended in mid-1983 and, because of Venezuela’s economic prob-lems, there does not appear to be much urgencyto resume negotiations.

A Philippine Government order in July 1982mandated that a pooling agreement be negotiatedby Philippine- and U.S.-flag carriers within 30

days, Without such agreement, the Philippinedecree stated that Philippine carriers are entitledto carry 40 percent of the cargoes in the Philippine-U.S. trades, while the vessels of all other nations,including the United States, may compete for theother 60 percent. In August 1982, the PhilippineGovernment agreed to delay implementation. TheU.S. Government has begun negotiations with thePhilippines and has made a counter offer of a lim-ited cargo-sharing agreement covering governmentcargoes. As of mid- 1983, the direction or outcomeof these negotiations was unclear.

The Government of Indonesia, through a de-cree—Presidential Instruction 18-82, April 12,1982—reserves all export and import government-owned cargoes for national-flag vessels. The decreeaffects over 60 percent of Indonesia’s foreign trade,including 40 percent of westbound and 50 percentof eastbound U.S.-Indonesia trade.

A second decree provides that the shipment ofnonoil and nongas exports will be primarily throughfour Indonesian ports and that the freight rates forinternational shipping must be equal to or lowerthan the rates prevailing for the nearest foreign port(i.e., Singapore, whose rates are very low), Its pur-

Table 45.—Potential U.S. Liner Trade Gain Under Bilateral Agreement (based on 1981 trade data)

Total trade U.S. share Current U.S.-flag share Gain (loss) at 40°/0 shareCountry (tonnes) (tonnes) (“/0) (tonnes)

Korea . . . . . . . . . . . . . . . . . .Taiwan . . . . . . . . . . . . . . . . .Philippines. . . . . . . . . . . . . .Indonesia . . . . . . . . . . . . . . .Australia. . . . . . . . . . . . . . . .New Zealand . . . . . . . . . . . .Bangladesh , . . . . . . . . . . . .India . . . . . . . . . . . . . . . . . . .Pakistan . . . . . . . . . . . . . . . .Sri Lanka . . . . . . . . . . . . . . .Mexico . . . . . . . . . . . . . . . . .Guatemala . . . . . . . . . . . . . .Ecuador . . . . . . . . . . . . . . . .Dominican Republic. . . . . .Venezuela . . . . . . . . . . . . . .Colombia . . . . . . . . . . . . . . .Chile . . . . . . . . . . . . . . . . . . .Peru . . . . . . . . . . . . . . . . . . .South Africa . . . . . . . . . . . .Ivory Coast . . . . . . . . . . . . .Nigeria . . . . . . . . . . . . . . . . .Ghana. . . . . . . . . . . . . . . . . .Algeria ., . . . . . . . . . . . . . . .Turkey . . . . . . . . . . . . . . . . .SDain . . . . . . . . . . . . . . . . . .

2,655,1783,605,829

944,8161,161,0501,737,599

501,914170,271

1,003,018234,263118,367227,933395,778586,823351,213

1,214,544496,163571,663557,563

1,193,400211,727

1,001,44977,70379,540

294,775923,238

681,646869,257276,141446,045464,665134,38368,669

616,410105,95695,70521,51171,733

175,067126,093344,185167,573157,808196,843224,24666,78734,75921,69716,74752,246

328.746

25.724.129,238.426.726.840.361.545.280.9

9.418.129.835.928.333.827.635.318.831.5

3.527.921.117.735.6

380,425573,075101,78518,375

230,37566,383

(561)(215,203)

(12,251)(48,358)

69,66286,57859,66214,392

141,63330,89270,85726,182

253,11417,904

365,8219,384

15,06965,66440,549

SOURCE: Office of Technology Assessment


pose is to facilitate the export of Indonesian prod-ucts. These decrees have not been fully imple-mented, but the Indonesian Government has in-dicated its intent that they will be. At issue cur-rently is a shipment of U.S. products financed withEximbank loans. MarAd is currently weighingwhether to grant a waiver to Public Res. 17. Sucha waiver is opposed by the Eximbank on thegrounds that Indonesian shipping practices are dis-criminatory. Actual negotiations for a bilateralagreement have not taken place, but the State De-partment believes that Indonesia wants a 40/40/20cargo split in its U.S. trades.

South Korea has in the past tried to negotiatea bilateral agreement with the United States. In1979, South Korea unilaterally declared that Ko-rean-flag vessels would have the first right of refusalfor all cargoes in their trade except where a foreigncarrier obtained a special waiver. The waiver pro-vision involves two steps—first, an application ismade to the Korean Shipping Association and sec-ond, to the government. This unilateral cargo-res-ervation scheme raised protests, especially from theU.S. State Department, and was later modified sothat all countries (including the United States) withmost-favored-nation status could obtain automaticwaivers. Many believe these moves on the part ofSouth Korea are a preamble to more pressure fora U.S. bilateral agreement. South Korea has signedan UNCTAD-Code-type of cargo-sharing agree-ment with Taiwan and has pressured some Euro-pean countries to sign similar cargo-sharing agree-ments.

In addition, some U.S. carriers reportedly havenot been permitted to bid for carriage of some bulkcargoes —notably rice—purchased by the Govern-ment. An increasingly protectionist posture bySouth Korea is causing concern both in the UnitedStates and in Europe that their vessels will be largelyexcluded from the South Korean trades.

Nigeria was one of the first countries to sign theUNCTAD Liner Code and has indicated its desirethat all shipping lines trading with Nigeria enterinto bilateral 40/40/20 cargo-sharing agreements.Nigeria has presented this point of view to thegovernments of France, Germany, Austria, Den-mark, Canada, and the United States. To date, noaction with any of the countries listed has takenplace.

Recent statements by U.S. Government spokes-men indicate that the present administration willcontinue to disapprove bilateral treaties in general.Ambassador Brock recently reiterated the admin-istration’s policy of free trade unfettered by pro-tectionism. There are instances, however, wherethis policy has been modified to accommodatecertain industries. Federal Maritime Commission(FMC) Chairman Alan Green has said:

No matter what laudable social and political ob-jectives are pursued in establishing an arrangementthat reduces competition in a trade, the bottom lineis that U.S. foreign commerce can be harmed. Putsimply, these situations can reduce U.S. foreigntrade. . . . Furthermore, by sheltering the tradefrom the constructive forces of competition, we riskpromoting inefficiency and unresponsiveness in theface of a dynamic and evolving trade environment.

The Bilateral Debate

Bilateral shipping agreements have been claimedby some as preferable alternatives to such multi-lateral arrangements as the UNCTAD Liner Code,particularly in the case where the U.S. Governmenthas the opportunity to negotiate with another gov-ernment on equal terms and with an equal voice.Whether some kind of bilateral can be beneficialand to whom has been the subject of considerableinternational debate. The United States has clear-ly stated its opposition to the UNCTAD Code, buthas not established conditions under which bilateralagreements would be acceptable or unacceptable.

Several studies have attempted to evaluate thenet effects of existing bilateral agreements betweenthe United States and some trading partners. A1977 study by Manalytics, Inc. for MarAd inves-tigated the impacts of the 1970 U.S.-Brazil bilateral(through analyses and a shipper survey) and drewconclusions about ‘ ‘bilateralism ‘‘ in general fromthis case analysis. The conclusions were that bilat-eral agreements had not adversely affected tradeflow, costs, or service, but had benefited U.S. car-riers and would be a viable option for the UnitedStates in the future. Z8

Critics of this view (including shippers in thetrade) have claimed that the trades reviewed have

2* Manalytics, Inc. , ‘‘The Impact of Bilateral Shipping Agreementsin the U.S. Liner Trades, prepared for the Maritime Administra-tion, U.S. Department of Commerce, May 1979.


suffered from lack of competition and, in fact, arecharacterized by high prices and poor service. A1983 study by Kearney Management Consultantsfor an association of Danish, British, Norwegian,and Swedish shipowners compared U.S.-Braziltrades with conventional conference trades and, notsurprisingly, concluded the reverse of the 1977Manalytics study, citing that shipping rates wereoften much higher in the U.S.-Brazil trade thanin other U.S. trades and that shippers surveyed con-sidered the service to be worse than other trades.2g

One problem with analyses of the U.S.-Braziltrades is that this one case may or may not be typ-ical of future bilateral arrangements. The questionof bilateral has been raised by other OECDcountries who have acceded to the multilateralUNCTAD Code but with reservations that are in-tended to keep a portion of the cargo flow open tointernational shipping competition. The claimagainst Brazil-type bilateral is that they wouldallow no outside access (thus competition) to car-goes covered; however, an opposing view is thatbilateral could specifically include cross-carriage,encourage independents, and provide mechanismsto reward improved service.

The United States can attempt to influence manyof these international decisions about cargo reser-vation but probably cannot stop the trend towardmore intergovernmental agreements by countriesconcerned with how their trading operates. Withso many countries (including South Korea, thePhilippines, and Venezuela) seeking bilateral cargo-sharing agreements with the United States, it wouldseem advisable for the United States to establishvery specific guidelines for negotiating bilateraltreaties, including a minimum degree of competi-tive access to cargo in the trade, limits on govern-ment intervention, cross-trader access, standardsof service and price, and reciprocity whenever for-eign shipping practices put U.S. operators or ship-pers under unfair conditions.

Countertrade

‘‘Countertrade, also known as barter, has re-cently developed into a common practice which

ZgK~~~~ey Management Consultants, ‘ ‘The Impact of BilateralShipping Agreements: An Analysis of Service, Rates and ShipperResponses, ” January 1983.

sometimes could be considered a form of bilateraltrade arrangement. Countertrade includes a rangeof commercial and financial practices in which theexporter is required to buy some product in returnfrom the purchaser. It is an increasingly used prac-tice and one that does restrict U.S. access to worldmarkets. 30 31

While countertrade occasionally occurs just be-tween companies, almost all of it involves govern-ments. For instance, the importing country’s gov-ernment may require a product manufacturer tobuy certain goods or commodities in return. Evenmore common are state-to-state agreements, inwhich the governments arrange a direct exchangeof goods between them. Communist countries al-most always use this approach, and increasingly sodo other countries, especially LDCS. LDCS havesought to improve their economies through rapidindustrialization planned and implemented by thecentral government. Since many of the developingsectors need imports, central governments havebecome very involved in international trade. More-over, Communist and LDC governments also usecountertrade arrangements for a financial reason:often capital-poor, countertrade permits these coun-tries to trade without using scarce capital. Goodsare simply exchanged for other goods.

The two most common forms of countertrade arecompensation arrangements and counterpurchasearrangements. The former-the most rapidly grow-ing type of countertrade—requires exporters ofhigh-technology machinery, industrial facilities, andtechnical know-how to accept payment in the formof the goods produced with their equipment or tech-nical expertise. Such arrangements are also knownas buy-back agreements, or industrial cooperationagreements. (The latter term is used to describetrade deals between Communist and Western coun-tries. ) Compensation agreements are most commonamong nonmarket economies and are of growingimportance in trade with Communist countries .32

30U. S. Intemation~ Trade Commission, Analysis of Recent Trendsin U.S. Countertrade (Washington, D. C.: USITC, March 1982), p. 1.

SIR. Michael Gadbaw, The Implications of Countertrade Underthe General Agreement on Tariffs and Trade, unpublished paperprepared for the Interface IV Conference, Philadelphia, Pa., oct.15-16, 1982, p. 3.

3ZU. S. Department of Labor, OffIce of Foreign Economic Research,Report of the President on U.S. Competitiveness, September 1980,pp. v-43 to v-45.


One of the biggest compensation arrangements isOccidental Petroleum Corp. $20 billion counter-trade package with the U.S.S.R. Under one con-tract, Occidental is buying Soviet ammonia fromplants it helped to set up in that country. Undera parallel agreement, it is shipping phosphate fer-tilizers to the Soviets from the United States .33

An older form of countertrade is the counterpur-chase agreement. This requires exporters of ma-chinery, expertise, and advanced manufactures toaccept payment in unrelated products. While coun-terpurchases are nominally cash transactions, thetwo parties in effect exchange goods of equivalentvalue. CounterPurchase agreements are also knownas countersales, offset trading, parallel trading,reciprocal trading, or counterdeliveries. 34 Recent-ly, an Italian shipyard has become involved in thisform of countertrade. Iraq is buying frigates worth$1.5 billion from Italy’s state-owned Italcantieri.In payment, Italy’s state oil company is taking Iraqicrude. 35

Economic conditions over the past 10 years havegiven strong impetus to the growth of countertrade.The sharp rise of oil prices after 1973 came at atime when many developing countries were in themidst of ambitious economic development plans,and the price rise worsened the already tight foreignexchange requirements involved in purchasingWestern technology and manufactured products.Furthermore, these Western products became moreexpensive as inflation in the industrialized coun-tries increased significantly during the latter halfof the 1970’s. The external debt of these countries,based on the loans that had financed many of thesepurchases, also contributed to a “cash crunch’ inthe developing countries. The external debt of theLDCS more than tripled between 1974 and 1980—from $142 billion to an estimated $416 billion.3G

All of these factors led “cash-short” developingcountries to resort more and more to countertradeas a way to finance new purchases. In fact, there

$~Busjness Week, J u l y 19, 1982, P. 118.S+U.S. Depafiment of Labor, OfIice of Foreign Economic Research,

Report of the President on U.S. Competitiveness, September 1980,pp. v-43 to v-45.

sJBusjness Week, July 19, 1982, pp. 118-123.S6U S, ]ntemation~ Tra& Commission, Analysis of Recent Trends

in U.S. Countertrade (Washington, D. C.: USITC, March 1982),pp. 13-14.

is some evidence that they were pushed in that di-rection by Western banks, which began to advisetheir clients to use countertrade as a way of increas-ing the prospects for the eventual repayment ofsome loans.

While there is much anecdotal information aboutcountertrade, there is relatively little hard data onthe actual value of trade affected by countertrade.One Commerce official believes that it may equal20 percent of world trade.37 38 In its recent study,the International Trade Commission (ITC) esti-mated that total U.S. imports resulting from coun-tertrading arrangements were approximately $279million in 1980, which represented more than athreefold increase over the 1974 estimate of $98million. (It should be noted, however, that mostof these imports were the product of trade withCommunist countries. ) Because many respondentsto the ITC survey viewed such information as pro-prietary information, ITC believes that the abovetrade data understates the full dollar importanceof U.S. countertrade. Despite this increase, it ap-pears that, among the developed nations, theUnited States has the smallest percentage of coun-tertrade, almost all of which involves private com-panies that find countertrade the only way to dobusiness in certain places.

Although precise data are not available on theuse of countertrade by other countries, it is usedextensively. Western Europe has increased its coun-tertrade with the LDCS, and even some 10 percentof trade among Western countries is thought to becountertrade. Moreover, roughly one-half of allEastern European trade with developing countriesis now through countertrade .39

While it assures supplies of scarce goods, marketaccess to producers, and generally provides predict-ability to those involved, countertrade discriminatesagainst outside actors. Exporters unwilling orunable to enter into countertrade may be excludedfrom some markets. Countertrade is, in effect, a‘‘closed deal’ between two parties—third parties

371bid.SeThis Wou]d put the value of Countertrade at about $400 billion.

John W. Dizard, “The Explosion of International Barter, ” Fortune,Feb. 7, 1983, p. 89.

ggDepa~ment of Labor, op. cit., p. V-44. Also see ‘‘Bartering,Industry Week, Mar. 28, 1977.

Ch. 7—international Trade and Cargo Policies ● 19.3

are excluded from these markets. As a result ofcountertrading arrangements, many Americancompanies do not even have a chance to bid forprojects and open new markets for their goods orservices.

Aside from being often economically inefficient,countertrade poses major problems for an AmericanGovernment that still wants to adhere to open trade.It also directly affects large segments of U.S. in-dustry, including ship operators who compete in-ternationally. However, no direct analyses havebeen done on how the growing use of countertradeaffects the U.S. shipbuilding and operating indus-tries. The effect on shipbuilding is probably smallsince the United States does not export major mer-chant ships. It may, however, affect yards that buildoffshore oil equipment, tugs, supply boats, andsmall warships where some export market exists ormay exist in the future. Countertrade may even-tually have a significant impact on U.S. shipoperators to the extent that countertrade deals in-clude shipping provisions and therefore further closeaccess to foreign trade cargo. Again though, noquantitative estimates of these effects are present-ly available. Future policy development would ben-efit from more data and analysis on countertradetrends and effects.

UNCTAD Liner Code

Not only is cargo reservation a unilateral and in-creasingly a bilateral phenomenon, but, by October1983, it became a multilateral phenomenon whenthe UNCTAD Code of Conduct for Liner Opera-tions came into force.

UNCTAD was established as a permanent organof the U. N. General Assembly on December 30,1964. One of its principal purposes is to promoteinternational trade, particularly with a view tospeeding the economic development of developingnations. It includes all members of the U.N. as wellas eight other countries. UNCTAD is comprisedof six main committees which deal with specificareas of trade and development. Included is a Com-mittee on Shipping.

In 1974, UNCTAD voted to accept a liner codeas the standard for conference liner shippingworldwide. The adoption of the code was the result

of several years of efforts on the part of LDCs—originally known as the Group of 77—to exert con-trol over significant shares of their own nation’smaritime cargo. The major complaints against theexisting liner conference system were the refusalby conferences to admit shipping lines from LDCSas members, the inability of governments and ship-pers from LDCS to obtain information on the proc-ess of freight rate determination or to participatein this process, inequitable levels and changes inrates, inadequacy of service and a lack of a generallyaccepted dispute settlement mechanism.

The need for reform was first considered withinthe Committee on Shipping. At its third session in1972, UNCTAD requested the General Assemblyto convene a conference of plenipotentiaries toadopt a code of conduct for liner conferences. Thecode was adopted in Geneva in April 1974. Thecode would not come into force, however, untilratified by at least 24 nations controlling 25 per-cent of the world’s tonnage. This was accomplishedin early 1983. * The code, therefore, came into forcein October 1983.

The code calls for closed conferences open to andcontrolled by the carriers of trading partners (withthird-party carriers admitted to the conferences onlywith trading-partner member consent), formationof shippers’ councils, mandatory time intervals be-tween general rate increases, and prescribed disputesettlement arrangements to resolve differences be-tween shippers’ councils, conferences, and carriers.One of its most significant provisions is its cargoallocation principle, which ,guarantees any nationalshipping line the right to participate in any con-ference that serves its country and that reserves anequal share of the total trade between two signa-tories to the national-flag lines of each trading part-ner with ‘‘a significant share, say 20 percent’ madeavailable to third-flag vessels, agreed to by the na-tional shipping lines. Therefore, while the code reg-ulates only conference behavior, in effect, all LDCliner trades would likely be covered.

The reaction of the major shipping nations wasoriginally opposition to the code. The liner tradesamong these countries are established and member-

● By April 1983, 58 countries representing 28.6 percent of the world’sliner tonnage (measured in 1973) had accepted the UNCTAD Code.


ship in conferences (except in U.S. trades) is closed.In addition, vessels of some of the major shippingnations operate extensively as cross-traders (notablythe Scandinavian, British, Dutch, and Greek fleets),whose business could be adversely affected underthe UNCTAD scheme.

The U.S. Government has opposed the codesince it was proposed, and the present administra-tion boycotted the recent UNCTAD meetings (late1982) concerning a bulk code. Many U.S.-flag lineroperators and U.S. owners of the ‘‘effective con-trolled fleet” have strongly supported the ad-ministration in its opposition to the UNCTADLiner Code. These operators believe that when thecode is adopted, it will effectively restrict U.S. ac-cess to liner cargoes. They also claim that it willpromote shipping inefficiencies due to extensivegovernment intervention, as appears to be the casewith some bilateral agreements now in effect. It isurged, however, that the United States must active-ly pursue an alternative shipping policy frameworkwith our major trading partners to keep liner ship-ping markets open and competitive.40

Some of the opponents who have studied theUNCTAD Liner Code have argued that its adop-tion will lead to much more ominous consequencesthan a quick reading of the intent and major pro-

41 For example, the code wasvisions would indicate.first proposed partly because developing nations feltthat the closed European and Japanese conferencesvictimized them with unreasonable rates. However,the code supports provisions such as closed con-ferences and anticompetitive activities which leadto similar results of unreasonably high rates andpoor service. The UNCTAD Code is vague, whichcould lead to ambiguous definitions and applica-tions of its provisions. Many believe that con-ferences operating under the code will evolve intoclosed trades without the benefit of independent car-riers (which are not given any status) to competi-tively force efficiency. In addition, the code provi-sion to allow cross-traders ‘‘if any’ to carry a shareof ‘say 20 percent’ appears to be designed to elim-

inate cross-traders whenever possible. Finally, thecode is criticized for not having any provisions orrewards for carrier efficiency, and if closed tradewith revenue pooling is practiced as indicated, in-efficiency will produce the greatest reward to car-riers.

Some have argued that U.S. accession to theUNCTAD Liner Code may be—on balance-ben-eficial to U.S. interests. At a December 1982 Sea-trade Seminar, it was suggested that ‘‘traditionalcompetition in our maritime liner trades no longerexists’ and that ‘‘our (liner) cargoes are being car-ried increasingly by foreign-flag vessels of state-owned, Soviet-bloc fleets. ’42 It was further con-cluded that a combination of passage of ShippingAct amendments, U.S. access to cargo through theliner code, and the use of U.S. financial incentivescould lead to encouraging foreign (and U. S.) in-vestment in liner shipping. The Seafarers Interna-tional Union (SIU) also has voiced strong supportfor U.S. participation in the UNCTAD Code. Theunion’s support is based on a conviction that thecargo allocation schemes in the code will come intoeffect among all other major trading countries whilethe United States continues to lose access to cargo,and, at the same time, a viable shipping industry .43

The EEC Council eventually responded by au-thorizing its members to ratify the code with reser-vation. This response appears to be an attempt tolimit the potential damage of the code while com-ing to grips with the need to recognize the legiti-macy of the rights of their LDC trading partners.The EEC reservation (or Brussels package), as itis called, exempts from the provisions of the codeall intra-OECD trade. It also opens to all membersof OECD that portion of the bilateral trade of amember and an LDC other than the LDC shareunder the code. (In other words, 60 percent of anyliner trade between an OECD country and an LDCis available to all OECD nations. ) The effect of thereservation would be to substantially reduce the im-pact of the code on world trade. It also would elim-inate the cargo-reservation benefits that some pro-ponents of the code seek. In 1979, the value of all

40 See Proceedings, ‘ ‘The UNCTAD Code of Conduct for LinerConferences, U.S. Maritime Resource Center, May 1982.

41See: Leslie Kanuk, “The UNCTAD Code: Impending Disasterfor World Commerce, proceedings of a seminar, ‘ ‘The UNCTADCode of Conduct for Liner Conferences, U.S. Maritime ResourceCenter, Kings Point, N. Y., May 5, 1982, pp. 14-18.

.42H, Clayton Cook, “Seatrade Seminar Financing Ships in a Dif-

ficult Market, ” Foreign Owemship Under the U.S. Hag, Dec. 1, 1982.‘gSee !jIU-Dee, 1982 Press Release—’ ‘Drozak and SIU go 100Yo

for 40/40/20. ”


international trade between developing countriesaccounted for 6.1 percent of total trade worldwide.Thus, the EEC reservation, if all developed coun-tries accepted it, would exempt a large portion ofworld liner trade from the code.

The United States has held a number of discus-sions with European and Japanese trading partnersin 1982 and 1983 regarding implementation of theUNCTAD Liner Code. Some U.S. experts believethat the EEC reservation to the code could havethe effect of forcing U.S. carriers out of some trades.Based on this concern, U.S. negotiators, in a De-cember 1982 meeting, stated that unless there isgenuine reciprocity between the United States andits European allies in the form of legally bindingcommitments to keep European liner trades opento U.S.-flag carriers as cross-traders, the UnitedStates could not keep U.S. liner trades open to Eu-ropean cross-traders.

During March 1983, additional meetings onUNCTAD matters were held among Europe, theUnited States, and Japan. At that time, Japan an-nounced its intention to ratify the code without theEEC reservations. If it does so, the EEC reserva-tion fails to address U.S. participation in the tradebetween OECD nations when both the Europeansand the Japanese are code signatories. The finaloutcome of all these negotiations is not clear.

Unfortunately, while it appears that the UnitedStates and its major trading allies of Europe andJapan share similar goals in the area of shippingpolicy, no mutually acceptable strategy has beendeveloped. The U.S. response to the UNCTADLiner Code has been to deal on a bilateral basiswith those countries that threaten to close theirtrades to the United States without such agree-ments. U.S. carriers also have indicated a fear thatEurope will shut them out of their trades withLDCS. This seems to be based on their belief thatother governments, including those of our tradingpartners, are more supportive of their carriers thanis the United States. Because of this, some carriersfear that even though 60 percent of the trades maybe theoretically open to lines from all OECD na-tions, in fact U.S. operators would not be allowedto participate. interestingly, our trading partnershave expressed similar fears with regard to U.S.policies in regard to bilateral. In actual effect, some

bilateral agreements the United States has negotiated are generally more restrictive than theUNCTAD Code would be with the EEC reserva-tion. Bilateral can cover all trade, not just linerconference trades. 1t should be noted, however, thatUNCTAD has begun discussions on the adoptionof a code for bulk trades,

The potential loss of cross-trading opportunitiesby U.S.-flag carriers under the code is a majorthreat to some carriers. Sea-Land Service, Inc.,Delta Lines, American President Lines, and U.S.Lines receive significant percentages of their reve-nues from cross-trading on itineraries involving thecarriage of U.S. foreign commerce. These U. S.-flag carriers would incur almost all of the costs theynow incur even if they did not carry foreign-to-for-eign cargoes. The result would be either increasedrates or reductions in the profits of the U.S.-car-riers.

Other UNCTAD Initiatives

The nonliner trades have grown faster than theliner trades since World War 11. Much of thegrowth has been in basic commodities such as oil,grain, coal, and ores. Some of the growth, however,has come at the expense of the liner trades in such‘‘neobulk’ commodities as forest products, steel,and vehicles.

The distinction between liner and nor-diner oper-ations is becoming blurred more quickly in the non-U.S. than in the U.S. trades. The major differencebetween the two types of service relates almost en-tirely to the common carrier nature of the liner serv-ice: a willingness to carry any cargo offered by anyshipper between stated berths on a scheduled serv-ice with published rates. The same ship can offerliner and nonliner capacity on the same voyage.That is happening already in the U.S. trade (e. g.,Blue Star Line, Ltd. carries nonliner forest prod-ucts outbound and containerized products inbound,and ABC Containerline N,V. carries nonliner oreand containerized products inbound on the sameleg of its round-the-world service).

Bulk Cargo Shipping Code

The UNCTAD Shipping Secretariat is investi-gating a bulk cargo-sharing code structured along


Photo credit: Navlos Corp.

Both of these bulk carriers are Liberian flag, foreign built, and U.S. owners

Ch. 7—lnternat/onal Trade and Cargo Policies 197

the lines of the liner code. The initial focus has beenon iron ore, bauxite, alumina, and phosphates;other ores and grains probably will follow. How-ever, with united OECD opposition and with theSecretariat structuring what it considers an extremeposition for the LDCS, it is unlikely that a docu-ment embodying such a position will be availablefor ratification in the near future.

In 1980, UNCTAD requested a group of expertsto study any problems faced by developing coun-tries in the carriage of bulk cargoes. In 1981, thatgroup conducted a survey of major importers andexporters of iron ore, phosphate, bauxite, andalumina. The survey did not uncover any obviouslydiscriminatory or unfair practices which would pre-vent developing countries from putting their na-tional fleets into those trades. Forces of competi-tion, experience, and economics seemed to be gov-erning. 44

In addition, there is a critical difference betweenthe organization of the liner and the nonliner trades.The liner trades, except for the U.S. trades, areorganized into strong, and often closed, confer-ences, access to which has been extremely difficultfor the LDC carriers. There was also a feelingamong LDCS that substantial profits were beingearned by the conference carriers. The liner codereflected the LDCS’ desires to overcome these non-economic barriers to entry and a sense of ‘fairness’has been a major factor underlying developed coun-try support of the liner code. In the nonliner trades,however, no such noneconomic entry barriers seemto exist, and there is no presumption of high profitmargins; consequently, there is practically no arW-ment on “fairness” to support a bulk code. 1n ad-dition, the export of nonliner commodities is criticalto LDCS economic survival, and the movement ofthese commodities is very sensitive to changes infreight rates. Increases in shipping rates could haveserious economic consequences for individualLDCS.

Open Registry

1n November 1982, UNCTAD held the SecondIntergovernmental Preparatory Group (IPG)

44 See “Shipping Practices of Major Importers and Exporters in theBulk Trades, prepared by Arthur D. Little, Inc., November 1981for Mr. Charles Kiskaddon, President, Alcoa S. S. Co.

meeting on ship registration. The delegates failedto agree on the UNCTAD Shipping Secretariat’splan to phase out open registry. The United Stateshad attempted to persuade the other OECD coun-tries not to attend the first IPG meeting in April1982 on the grounds that the ‘‘recovery” of openregistry ships is a domestic, not international issue.While the United States received some support forits principle, it received no support for its boycott.Only Liberia and Panama joined in declining toparticipate in the IPG.

Even though there were sharp divisions at bothmeetings— and an almost complete lack of consen-sus on any of the critical issues—the second meetingended with a recommendation that a Conferenceof Plenipotentiaries be convened to consider the8-page draft of a set of basic principles proposedby the IPG. The draft attempts to link the nation-ality of crews, equity owners, and ship managersto the registries of merchant ships.

There is some support for the draft proposalamong developed countries as well as LDCS, de-spite different views on what would happen to theopen registry ships after open registry is phased out.Some developed countries believe that the shipswould be recaptured to the national flags of thebeneficial owners (largely themselves); the LDCS(and the Secretariat) believe that the ships would(or should) largely be captured by the LDCS. Thereis broader support for the wider application of thesafety, social, and environmental standards that arenow embodied in the international Maritime Or-ganization’s (IMO) and the International LaborOrganization’s (ILO) conventions. The widely dif-fering views in the proposed draft on how to achievethose goals were evident after the second IPG meet-ing. Despite the basic differences, it is likely thatthere will be a Plenipotentiary Conference within2 or 3 years and a document on file for ratificationapproximately 3 or 4 years thereafter. How quicklyit will be ratified will depend on how far the con-vention goes beyond the questions of ship opera-tion and into the questions of forced re-flagging.Since the LDCS have powerful weapons (e. g., sanc-tions barring open registry ships from their ports),and since the major international maritime unionssupport some restraint on open registration, anopen registry convention is possible sometime inthe future. However, there is no consensus at pres-


ent for the strong solution contained in the Secre-tariat’s draft for what many consider a mild prob-lem.

Convention on Multimodal Transport

The Multimodal Convention, adopted byUNCTAD in May 1980, would regulate the car-riage of goods between countries when more thanone mode of transport is used. Once in force, itwould be mandated if either an origin or a destina-tion country had ratified.

The convention calls for the creation of Multi-modal Transport Operators (MTOS), which wouldbe licensed and regulated by contracting govern-ments under the provisions of the convention. Theywould act as shippers’ agents and would handle allphases of a multimodal cargo movement. The con-vention would regulate documentation, liability,claims, and certain customs matters.

The convention was opposed by the UnitedStates, which has indicated its unwillingness toratify. Strong support has been voiced by the de-veloping countries, the Soviet Union, and otherEastern bloc countries as well as Scandinavia. How-ever, as of January 1983, only six countries hadsigned the convention, and just two had ratified.It does not appear that the convention is likely tocome into force in the near future.

The Sixth General Conference of UNCTAD washeld in June 1983. Its shipping activities agendaincluded further consideration and implementationof past initiatives. The main objectives of the LDCSincluded entry into force of the Code of Conducton Liner Conferences, further research into the roleof transnational corporations in shipping, effortsto abolish flags of convenience, and studies of in-vestment and support policies. The background pa-per for this conference prepared by the UNCTADSecretariat included a listing of six areas of currentconcern and review of recent activities as follows:

Major Areas of Concern

● Orderly development of liner and multimodaltransport service.

● An equitable basis for participation by develop-ing countries in bulk cargo transport.

●

●

●

●

A regime to facilitate funding of shipbuilding andbuying by developing countries.

An equitable compilation of maritime laws.

Adequate port facilities.

Fostering management and technological exper-tise in shipping and port development in develop-ing countries.

Review of UNCTAD ShippingActivities Since 1964

To demonstrate what it calls “the change in thepattern of the forces that manipulate market andoperational structures, UNCTAD cites the fol-lowing actions that have been taken under its aus-pices:

. in t he liner trades, adoption of the Code ofConduct for Liner Conferences;

. in multimod~ transport, adoption of the Mul-timodal Convention;

● in the revision of law on carriage of goods bysea, adoption of the Hamburg Rules;

. in the bulk trades, investigations of marketpractices and procedures, particularly as re-gards the role of translational corporations;

. in phasing out flags of convenience, negotia-tions on conditions for registration of ships andthe convening of a plenipotentiary conferenceto adopt a set of principles on registration; and

. in maritime legislation, preparation of modellaws.

Inclusion of ServiceIndustries Within GATT

GATT deals only with issues relating to tradein goods and does not apply to trade in services.With the increased importance of service transac-tions in both the overall economy and current ac-count, Ambassador Brock announced in April 1981the administration’s intent to make trade issuesrelating to service a high priority in the administra-tion’s overall trade program. This was the admin-istration’s opening attempt at getting its majortrading partners to recognize the need to developa multilateral approach to dealing with trade inservices. Presently, the bilateral approach is the only


track available on a case-by-case basis to resolvedisputes over services.

At the time of the announcement, OUSTR rec-ognized that progress would be slow in developinga multilateral regime and that the reduction of serv-ice-sector trade barriers could not be achieved be-fore 1990. This prognosis was confirmed at theGATT Ministerial Conference in November 1982when the administration won a minor concessionfrom the other GATT members to exchange in-formation on their countries’ service sectors andreview whether any multilateral action was appro-priate. These national work programs are proceed-ing at differing paces, with the U.S. analysis nowexpected to be finished by late 1983. The other na-tional work programs are not expected to be com-pleted before the next GATT Ministerial in thespring of 1984.

The status of services under GATT is of impor-tance here because the maritime industry is in-cluded. Thus far, services have been excluded fromGATT. Covered commodities are “bound,” whichmeans that a country can set a tariff rate for thatgood which cannot be raised in the future, althoughit can be lowered. This approach probably wouldnot be feasible as a trade rule in shipping. Britain,Norway, Japan, and West Germany have indicatedto a greater or lesser degree interest in extendingGATT to shipping. France and virtually all LDCShave registered opposition.

An interesting question would arise were servicesto be covered. Under the most-favored-nation con-cept in GATT, each signatory must grant equalstatus in trade agreements to all other signatories.Nontariff trade barriers are discouraged. TheUNCTAD Code, by its nature, erects such barri-ers (cargo-sharing). How the code would interactwith GATT should services be covered is question-able. However, the likelihood that GATT will actin this area in the near future does not seem to begreat, so the question probably will not arise soon.

Financing International Trade

One aspect of trade and cargo policy that doesnot appear to be incorporated in any multilateralor bilateral framework at present are the methodsused or made available to finance international

trade. These methods form an integral part of tradeand cargo policy today because an increasing num-ber of countries are getting involved in trade financ-ing as a matter of government policy. While mostindustrialized nations historically have providedsome instruments for foreign trade financing, suchas use of export/import credits, many countries andorganizations have moved far from these basic ap-proaches. Among recent developments in interna-tional trade financing are:

Government Financing Assistance

●

●

●

●

●

●

●

●

Foreign exchange rate insurance. Here a govern-ment guarantees the currency conversion rate.

Barter or inkind payment for import or exportgoods with governments involved in supplyingor purchasing and storing as well as stockpilingimported goods (discussed under countertrade).

Foreign trade risk insurance, where governmentsassume the risk of providing coverage of the riskincurred in the trade.

Cofinancing-with-foreign-aid exports, where thegovernment’s foreign aid or development agen-cy pays part of the cost as a foreign-aid grant tothe recipient country. This makes the export ex-tremely competitive.

Provision of technical aid grants (in support ofexports), which are used for training of local staff,expatriate professional staff, installation, andother technical assistance as part of the trade atno cost to the exporter. This is often an appre-ciable component of the value of the export dealand may affect choice of procurement.

Foreign trade import financing through use ofexcess foreign currency earned by governmentsfrom government-to-government trade. Thisoften includes sale of such currency at below nor-mal exchange rates.

Low-cost export/import financing through gov-ernment export/import bank.

Import/export loan guarantees provided by gov-ernment agency against small fee.

Commercial Financing Assistance

● Joint venture financing using multiple place-ments to minimize risk.


●

●

●

Cofinancing by private banks or other financialinstitutions with domestic government agencies,foreign banks, or international financing institu-tions, such as the World Bank, Inter AmericanDevelopment Bank, and Asian DevelopmentBank. Cofinancing is often also done with foreigngovernment agencies for the local currency costsof the trade such as transport, insurance, installa-tion, and training.

Export financing through delivery or supply offinished goods produced by export. This type offinancing scheme is usually combined with anadvance sale of the goods to be delivered in thefuture. As an example, coal mining equipmentexport is paid for by future coal deliveries soldas an advance sale to an electric powerplant, etc.

Trading company export/import financing. Herea trading company, which is usually also a com-

mercial bank, finances foreign trade exports anduses proceeds to buy other goods for import orsale to a third country or party. It may also sim-ply sell its proceeds to a third party. Because trad-ing companies deal in a large number of goodsand are represented world~’ide, they have thecontacts and means to consummate the mostcomplex chains of trading deals.

The above are just a few examples of foreigntrade financing schemes used in recent years. Manyforeign countries have Ministries of Trade (Com-merce) anci Industry that combine development oftrade and industrial policy. In the United States,these functions are dispersed among various agen-cies. There appears to be no overall strategy of U.S.trade financing policy that would serve to main-tain a competitive U.S. position in world trade andtrading industries.

SUMMARY

All trading nations have a self-interest in expand-ing their exports and controlling their imports. Astrading complexities increase, governments haveattempted to exercise rational management overtheir flow of imports and exports. The analysis inthis chapter has illustrated that the economics andmanagement of trade are closely linked to the eco-nomics and management of shipping.

As nations increasingly try to manage trade pol-icy to their best economic advantage, they tend toincrease governmental involvement in shipping.Most countries have some unilateral cargo reser-vation. In addition, many nations, particularly theLDCS that are attempting both to capture more ex-port trade and to bolster their national-flag fleets,are pushing for the establishment of bilateral andmultilateral cargo-sharing agreements. The latterattempts have achieved international recognitionin the form of the UNCTAD Code of Conduct forLiner Operations. This calls for an even divisionof liner conference cargoes between trading part-ners, with some percentage reserved for third-flagvessels, if agreed to by the national-flag liner en-gaged in the trade. The United States is not a sig-natory to the code, although there are fears thatU.S. carriers and possibly U.S. trade will benegatively affected once it is implemented.

The United States faces a significant disadvan-tage in dealing with countries where industry andgovernment have established close ties and wherenational and corporate goals are meshed. Japan isan example of how successful such a nation can bein the international trade arena. The United Statestends to disavow governmental interference in in-ternational trade and shipping and Governmentpronouncements historically have been in favor offree and open trade. Many U.S. shipping compa-nies find it increasingly difficult to compete in in-ternational markets that are protectionist or whereother governments more heavily subsidize their in-dustries. Many foreign governments tend to inter-vene on behalf of their national carriers, while theU.S. Government has not intervened.

There have been attempts by the United Statesand some of its industrialized trading partners towork within international organizations such asGATT for tariff barrier reduction and freer trade.However, the reality is that trade is becoming more,not less, managed, Thus far, the United States hasnot developed a national response that would beeffective in protecting our economic position andat the same time remain consistent with our his-torical national philosophy of free and open trade.

Appendixes

Appendix A

Administration Announcementson Maritime Policy, 1982-83

The Reagan administration early in its term indicatedthat a strong merchant marine was one of its goals. Ad-ministration spokesmen, such as the Secretary ofTransportation, the Maritime Administrator, and theChairman of the Federal Maritime Commission (FMC),have reiterated the administration’s commitment to re-juvenation of the U.S. fleet. This rejuvenation is sup-posed to be stimulated by a reduction of Governmentregulations that hinder the ability of the U.S. fleet tobe competitive. The administration has supported reg-ulatory reform legislation providing an expanded anti-trust immunity and permitting the U.S.-flag liner oper-ators similar flexibility as its international competitors.

Shortly after the administration took office, an inter-agency task force was set up to examine current mari-time policies and to make specific recommendations forchanges. The first major step was the curtailment ini-tially and then the cutoff of construction differential sub-sidy (CDS) funding. For fiscal year 1982, no CDS fundswere requested ($49. 5 million in carryover funds weremade available), compared with an average annual re-quest of$132 million in the previous 4 years. It was an-nounced that this was intended as a phasing out of theCDS program and that in the future no funding wouldbe made available. Temporary authority (for 1 year)was granted for the building of subsidized vesselsabroad.

On May 20, 1982, Secretary of Transportation DrewLewis announced the initial elements of a new program. i

He stated the administration’s intent to honor existingoperating differential subsidy (ODS) contracts and tomaintain the sanctity of the Jones Act and existing car-go-preference laws covering government-impelled car-goes. In addition, he announced the following initia-tives:

support of an extension of temporary authority forsubsidized U.S. -flag operators to construct or ac-quire vessels built abroad without CDS but stillqualify for ODS under U.S.-flag operations;administrative reform of ODS by Department ofTransportation (DOT)/Maritime Administration(MarAd) to increase operating flexibility and re-duce costs in the program;encourage foreign investment in U.S.-flag shippingand permit the current 49 percent foreign owner-

‘<‘ ~’. S. Department of T’ransportatmn News, May 20, 1982, Washington,r) c

ship in U.S. -flag vessels to be increased to 75percent;relieve all U.S. -flag ships of the current 50 percentad valorem duty on repairs performed abroad, pro-viding flexibility to ship operators in making suchrepairs and reducing the repair costs to ODS;reduction of unnecessary regulation of the ship-building and ship operating industries and estab-lishment of a top level government-industry groupto further that effort; andsupport by the administration of elimination ofFM-C re~lations governing the level of the ratesof liner operators in the domestic trades.

On August 5, 1982, the Secretary announced a sec-ond

●

●

●

It

set of policy initiatives:z

the administration would authorize an increase inthe fiscal year 1983 ceiling on ship financing guar-antees (title XI) from $600 million to $900 million.The additional funds would be held in reserve bythe Secretary to be used in the interests of nationalsecurity;permission was to be granted to U.S.-flag operatorsto use existing and newly deposited tax-deferredmoneys in capital construction funds (CCF) andconstruct or acquire foreign-built vessels; andthe Department of Defense (DOD) would continueits efforts to expand use of civilian nongovernmentseafarers to crew Government ships.was reaffirmed that the Government would honor

existing ODS contracts, but that no new contracts wouldbe signed. The fiscal year 1982-83 moratorium on newGDS contracts would be continued.

It also was announced that an interagency interna-tional shipping policy group would be established toevaluate the options available to the government. Thegroup would be chaired by the Secretary of Transpor-tation with the vice chairman from the State Depart-ment.

1t was affh-med that the U.S. Navy would be provid-ing significant work for U.S. yards, not only in combat-ant ships, but the U.S. Navy T-ship programs that areessentially construction/conversion of merchant ships forNavy use,

*“U.S. Department of Transportation News, ” Aug. 5, 1982, Washington,D c.

203


The administration subsequently announced that athird round of policy initiatives would be forthcomingin the first half of 1983.

Most of the initiatives listed above require legislativeauthority, although some can be implemented admin-istratively. MarAd’s proposed fiscal year 1983 authori-zation bill included some elements consistent with theadministration’s position and others that limit the ad-ministration’s ability to implement some of the proposedpolicies. The proposed bill included a 9-month exten-sion of authority for foreign building of ODS ships. Theadministration sought a 1 -year limit of $950 million ontitle XI guarantees and annual limits in the future, aswell as limited guarantees because of vessel type (oildrilling rigs were to be prohibited).

The administration also has sought authority withinauthorization bills to allow use of CGF moneys forforeign building. Amounts for subsidy programs in theproposed authorization bill for fiscal year 1983 were$454 million for ODS, $15.3 million for research anddevelopment, $78 million for operations and training,and $25 million for three ships being turned into thereserve fleet by American President Lines Ltd.

In December 1982, the administration reported thestatus of its policy initiatives as follows:

. reform of ODS—simplification of proceduresunder section 605(c) of the Merchant Marine Actis under review in DOT. Other reforms were pre-sented to the industry for comment, Legislationwill be drafted within the next few months;

. shipbuilding, ship-operating regulatory reform—changes in the number of statutes regarding man-ning have been drafted. These deal with such itemsas mixing deck and engine room duties, personssubject to watch, and number of persons in bridgewatch. They are all part of title 46 of the U.S.Code, which has been proposed for recodification.When this is accomplished, the above modifica-tions will be pursued;— amending the Longshoremen and Harbor

Workers Compensation Act;— revise buy America requirements for title XI

ships. Would require modification of 46 CFR298.1 l—a committee will be formed to evaluatethe proposal and insure an opinion as to its eco-nomic consequences;

— memorandum of understanding between U.S.Coast Guard (USCG) and American Bureau ofShipping (ABS)—discussions are continuing toidentify additional areas that can be transferredto ABS;

— simplify vessel documentation requirements—rules were published in June 1982;

— simplify and improve requirements for licens-ing of officers and motorboat operators—regu-

lations have been drafted and are being receivedin USCG. Proposed changes are to 46 CFR part10;

revision of watch relief—Federal CommunicationCommission (FCC) has changed requirements forships in coastal trade, international Maritime Or-ganization (IMO) to consider changes in interna-tional requirements;modification of regulations for vessel sanitationdevices—Coast Guard and Environmental Protec-tion Agency (EPA) have under consideration, find-ings to be published in Federal Register shortly;review proposed Occupational Safety and HealthAdministration (OSHA) regulations pertaining tomarine terminals and shipyards—Maritime Advi-sory Committee to review in near future;Interagency international Shipping PolicyGroup— working group will continue to monitordevelopments in a number of Asian countries andassess recent Organization for Economic Coopera-tion and Development (OECD) negotiations;authority for overseas construction of ODS vessels;use of Capital Construction Funds (CCF) for for-eign-built ships;authority for reflagged vessels to gain immediateaccess to government-impelled cargoes;authority to increase allowable foreign ownershipof U.S.-flag vessels;relief of duty on foreign repairs;rate deregulation of the domestic offshore trades—MarAd draft legislation is under DOT review,FMC staff report and analysis of comments will besent to Commission shortly; andpossible legislation on fiscal year 1983 title X1ceiling.

The Shipping Act Amendments which are currently(September 1983) before Congress were also supportedby the administration.

In summary, the promotional maritime policy ele-ments which do not require legislation announced bythe administration to date are: 1) operating subsidy con-tracts (22) will continue but no new contracts will besigned; 2) construction subsidies no longer will befunded; and 3) the mortgage guarantee program willcontinue, as will the CCF program.

On April 8, 1983, the Secretary of Transportationtransmitted draft legislation to implement five promo-tional elements of the previously announced maritimepolicy package. The following are excerpted from thatletter:

(1) Build ForeignSince the enactment of the Merchant Marine Act of

1936, vessels receiving operating differential subsidy(ODS) have been required to be constructed in the UnitedStates. Such vessels were generally constructed with the

App. A—Administration Announcements on Maritime Policy, 1982-83 205

aid of construction differential subsidy (CDS). Public Law97-35 added section 615 to the Merchant Marine Actauthorizing the granting of ODS for the operation offoreign-built, U.S.-flag vessels in the absence of avail-able CDS. However, that authority technically expiresat the end of fiscal year 1983, and because of certain re-strictions such authority cannot be used after the last dayof fiscal year 1982. The draft legislation continues the sta-tutory authority to permit subsidized operators to con-struct and acquire vessels outside the United States andstill receive ODS. It also clarifies current authority to ac-quire existing vessels outside the Untied States to be re-flagged and made eligible to receive ODS.

(2) Immediate Cargo Preference Eligibilityfor Reflagged Vessels

Section 901(b) of the Merchant Marine Act of 1936currently requires that foreign-built or rebuilt vessels mustbe documented under U.S. laws for 3 years before theycan carry Government-impelled cargoes under the pro-visions of that section. This requirement is inconsistentwith a major thrust of the President’s policies, which isto allow U.S. operators to construct or acquire foreigntonnage. Government-impelled cargoes are a majorsource of revenue for virtually all the U.S. liner operatorsand many U.S. bulk operators. U.S.-flag vessels cannotbe denied immediate access to such important cargoesif we are to have a strong U.S.-flag merchant marine.The draft legislation would provide immediate eligibili-ty for reflagged vessels of less than 5 years of age for thecarriage of Government-impelled cargoes. Vessels be-tween 5 and 10 years of age could receive immediateeligibility if they were determined to be useful for the na-tional defense.

(3) Foreign Investment in U.S.-Flag ShippingThere currently are no U.S.-ownership requirements

for a U.S. corporation to operate U.S.-flag vessels in theforeign trade of the United States. However, problemsarise with respect to the citizenship requirements for aU.S. corporation that has availed itself of one or moreof the promotional programs provided by the MerchantMarine Act of 1936. Such a situation invokes the citizen-ship definition set forth in the Shipping Act of 1916, whichrequires that the controlling interest of a U.S. corpora-tion must be owned by U.S. citizens. Relaxation of theexisting citizenship requirements would provide addi-tional potential sources of capital for new investment inU.S.-flag tonnage. The draft legislation provides that for-

eign investment in U.S.-flag shipping be encouraged byincreasing the current 49 percent foreign-ownership linl-itation to 75 percent.

(4) Capital Construction Funds for ForeignBuilding or Acquisition

Section 607 of the Merchant Marine Act of 1936 au-thorizes the Secretary to permit a citizen of the UnitedStates owning or leasing vessels to defer the tax on cer-tain funds generated by particular vessels when such fundsare deposited into a CCF and subsequently used for theacquisition of qualified vessels. The tax-deferred fundsfrom a CCF are an important source of capital for theconstruction of U.S.-flag vessels, particularly for subsi-dized operators engaged in the foreign trade. Present law,however, requires that CCF may be used only in con-nection with vessels constructed in the United States.Thus, subsidized operators who acquire foreign-builtships under section 101 of the draft bill would be deprivedof this important source of capital for the acquisition oftheir vessels. Nonsubsidized U.S.-flag operators who ac-quire tonnage abroad are in the same difficult positionwith regard to the availability of CCF to assist in theircapital programs. The draft bill would authorize a U. S.-flag operator engaged in foreign commerce to use CCFin connection with foreign built vessels.

(5) Ad Valorem TarifTon Foreign RepairsPursuant to the Tariff Act of 1930, a 50 percent tariff

currently is levied on the cost of nonemergency foreignrepairs that have been made on U.S.-flag vessels. Thisad valorem duty adversely affects the ability of U. S.-flagvessels to compete with foreign-flag vessels. By requir-ing U.S.-flag vessels to return to the United States forsuch repairs, this ad valorem duty limits the flexibilityof our liner operators, places undue hardship on our bulkcarriers operating in foreign-to-foreign trades, and resultsin the interruption of service with the loss of operatingrevenues. The draft legislation would amend the TariffAct so that the current 50 percent ad valorem duty wouldno longer apply to foreign repairs made to U.S.-flag ves-sels. In addition, section 606 of the Merchant Marine Actof 1936 currently requires subsidized operators to per-form repairs in the United States or Commonwealth ofPuerto Rico. The draft legislation would permit subsi-dized operators who are eligible for repair subsidy to per-form such repairs in foreign shipyards without subsidyor within the United States and Commonwealth of PuertoRico with subsidy.

Appendix B

Maritime Cargo Policies of64 Foreign Countries 1982-831

Algeria

Algeria requires a 50-percent clause in its export con-tracts for both oil and liquefied natural gas (LNG) thatgives preference to Algerian-flag vessels.

Article 1 of Algerian Law No. 78-02 of February 11,1978, gives the state a monopoly on foreign trade. Itreads, “In accordance with the provisions of the nationalcharter and applying Article 14 of the Constitution, theimport and export of goods, supplies and services of allkinds are under the exclusive control of the state. ”

Except for crude oil, traffic between metropolitanFrance and Algeria is reserved for Algerian- and French-flag vessels.

Algeria and Brazil have signed a maritime naviga-tion and transport agreement to cover all traffic betweenthe ports of the two countries except for petroleum andbulk-cargo shipments.

Algeria also has bilateral agreements with theU. S. S. R., Bulgaria, the German Democratic Republic,Guinea, the People’s Republic of China (P. R. C.) andthe Republic of Cape Verde that divide cargo on a 50/50or 40/40/20 basis.

Transportation of LNG is provided for in the salescontracts and varies according to contract with the state-owned Campagnie National Algerienne de Navigation(CNAN) usually receiving at least one-third of the cargogenerated.

Angola

Imports in Angola pay 20 percent less import dutyon cargoes carried by state-owned Angolan-flag lines.Preferential customs legislation and reduced port duesas well as handling priorities are given Angolan-flagvessels.

In March 1976, the Angolan Government decreedthat priority be given to vessels flying the Angolan flagin the shipment of imports and exports. The use of for-eign ships is allowed only when there are no nationalships available or when expressly authorized in specificareas by the Merchant Navy Board. At present, onlyAngonave (Angolan Shipping Lines) is authorized to

carry or delegate Angolan Government cargo. The tradeis said to be served by Communist Bloc nonconferencelines, and Western European lines cannot get access tocargoes.

Argentina

According to its 1973 Merchant Marine Law, thegovernment of Argentina must approve all freight con-ference agreements that involve Argentina’s “right” tocarry 50-percent of its waterborne foreign trade, Anyfreight conference agreement that appears to place lim-itations on Argentine ships or assign a smaller than 50percent share to Argentine ships will not be recognizedby the government. The government reserves the rightto deny port facilities to foreign ships that do not operateunder approved agreements. In actuality, the new leg-islation adds little to the previous legislation, but insteadacts as enforcement legislation, reinforcing the 50 per-cent provision. The new legislation also clarifies the fi-nancial aspects of the domestic provisions while mak-ing known the internal promotion mechanisms.

All imports consigned to a government organizationmust be transported on Argentine-flag vessels. Argen-tine vessels must also be assigned the largest possibleshare of government exports.

Argentina has commercial agreements with Uruguay,Peru, Chile, the P. R. C., and the U.S.S.R. whereby theexchange of goods is to be divided in equal proportionsbetween Argentine-flag ships and ships of these tradingpartners. In case of a shortage of such ships, it is neces-sary to obtain a waiver for transport in third-flag car-riers.

In practice, a liner conference that gives Argentinaat least 50 percent of the pool may carry cargo up toa maximum of 50 percent. The 50/50 agreements re-serve trade to conference vessels of two parties. Secondpreference is given to national nonconference lines andthen to other—preferably Latin American—third flags.Only a very small percentage of the trade is carried bynonconference lines, however, and an even smaller per-centage is carried by cross-traders (primarily Brazil).

Australia

I LI .S, wpa~ment of Transportation, ‘‘Maritime Subsidies, February 1983,

Washington, DC with update by the Ofllce of Technology Assessment,

Australia has no national laws, regulations, or admin-istrative practices requiring international carriage to be

App. B—Maritime Cargo Policies of 64 Foreign Countries 1982-83 ● 207

reserved either totally or in part for national flag car-riers. No apparent flag discrimination has been re-ported.

Japan agreed to purchase 6.5 million tons per yearfrom Australia’s Northwest Shelf LNG project in early1981. Shipping requirements are estimated to be seven,125,000 M3. vessels starting in 1986. Vessel ownershipis to be divided between Australian and Japanese flags.

Bolivia

Legislation provides for 50-percent reservation to thenational flag, including general, reefer, and bulk cargo.The remaining 50 percent is open to associate foreignlines which have an agreement with the Bolivian na-tional line. Implementation has not been possible,however, because of aships).

Under Decree Lawand exports in which

lack of tonnage (fleet of only two

Brazil

666 of July 2, 1969, all importsthe government provides finan-

cial assistance must be carried on Brazilian ships whenavailable. However, this law provides for the waiver ofcargo preference in the following instances:

1:

2.

3.

import or export cargoes obligatorily linked totransportation in Brazilian-flag ships can be lib-erated in favor of the flag of the exporting or im-porting country by weight up to 50 percent of thetotal as long as the legislation of the buying or sell-ing country concedes at least equal treatment inrelation to Brazilian-flag ships;in case there is no Brazilian-flag ship or flag shipof the importing or exporting country in positionto take on the cargo, the Brazilian Superintend-ent of Merchant Marine can, in his exclusive judg-ment, liberate the transportation (of the cargo) toa third-flag ship specifically designated; andwhen the exportation or importation of merchan-dise subject ~o liberation is made to or from a coun-try that is not served by ships of both the coun-tries involved, the Brazilian Superintendency ofMerchant Marine will effect prior liberation of thecargoes covered by this decree, designating thetransporter.

Only a small percentage is allowed to be carried bynonconference lines. Foreign shipping companies can-not operate to Brazil unless they are comembers witha Brazilian line of a conference. Most agreements coverthe whole trade and do not recognize third-flag rights.

The government has a monopoly on the transporta-tion of petroleum and petroleum products, except for

some small companies that were in operation when themonopoly law went into effect.

All imports of ordinary paper (excluding special paperand pulp) must be carried in Brazilian ships, but intrades where special arrangements are made, as in thecase of the Equal Access Agreement betweenSUNAMAM and the U.S. Maritime Administration,the other national lines also can participate in thiscarriage.

Algeria and Brazil have signed a maritime naviga-tion and transport agreement to cover all traffic betweenports of the two countries except petroleum and bulk-cargo shipments.

Since 1967, Brazil’s legislation has called for theestablishment of cargo quotas through pooling agree-ments aimed at achieving a 40-percent share for Bra-zilian carriers, 40 percent for national-flag lines of itstrading partners, and 20 percent for third flags. BetweenBrazil and Argentina, Chile, Ecuador, Mexico, Peruand Uruguay, however, the agreement is 50-50 unlessnational-flag ships are unavailable.

A protocol to the Brazil/West Germany maritimeagreement provides for participation in equal rights inregards to tonnage and freight values for governmentalcargo. Brazil also has signed maritime agreements withthe U. S. S. R., Poland, Romania, and East Germany.

Burma

In Burma, up-to-date information is not available,but earlier legislation reserves all cargo to the nationalline, except for certain regional trades where Burmaoperates in a conference.

Cameroon

The Cameroon Shipping Lines is given exclusive rightto transport all imports for the government, public col-lectives, or state-owned companies. All contracts forprivate imports and exports must give priority to or ob-tain a waiver from the company for any shipment it can-not handle.

Chile

Decree Law No. 3059 reserves for Chilean-flag vessels50 percent of international ocean transport except whenreciprocity by foreign countries determines their indi-vidual participation above or below this limit.

Decree law signed December 23, 1975, provides that50 percent of export cargoes may be carried on shipsof flag of country of destination as long as that countryrecognizes an equal right for Chilean vessels.


Cargo moving between Chile and Argentina, Chileand Brazil, and Chile and Peru, must be carried in equalportions by ships of the two countries when available.

Chile and Israel have signed a convention accordingthe two countries equal shipping access to cargo in bi-lateral trade and equal port facilities in their respectivenations.

People’s Republic of China

A new maritime code is being drafted that is likelyto contain protectionist measures. The Chinese lay downall conditions on which cargo moves in their trades.They discriminate by buying f.o. b. and exporting c.i. f.and by fixing freight rates. In practice, much cargo iscarried in foreign ships because of their small fleet.

Colombia

Legislation reserves a minimum of 50 percent of allnational cargo to Colombian vessels on routes where aColombian vessel operates. Import/export licenses onlyare given to approved lines, i.e. , lines in a conferencewith a pooling agreement that guarantees 50 percent ofthe trade to Colombian lines. These licensing proceduresvirtually preclude the operation of nonconference lines,except for a very small group of unstamped cargoes.Conference cross-traders are not necessarily excluded,provided they do not take away from the 50 percent Col-ombian share.

Decree No. 1208 of July 1969, states as follows:Article I.—In order to effect Article 1 of Legislative

Decree No. 994 of 1966, a reserve is made for Colombian-flag ships of no less than 50 percent of the general cargoof imports and exports on routes served by Colombianvessels, providing that the requirements of Article 2 ofthe same Legislative Decree are met.

The Colombian Government, after examining the ca-pacity and speciality of the mentioned vessels through astudy made by the Ministry of Development, the Mer-chant Fleet, and a representative of the Colombian Ship-owners, will establish a reserve of no more than 50 per-cent of Colombian-flag ships transporting bulk, liquid andrefrigerated cargoes of imports and exports.

The reserved cargoes stipulated in this article will beapplied only if they are not in conflict with previousGovernment obligations with regard to foreign loans.

Article 2.—The reserved cargoes could be included inthe transportation treaties between Colombian shipownersand foreign maritime companies, in order to enlarge, in-tegrate, or consolidate the services and to reduce theircosts.

The Latin American shipowners registered in the LatinAmerican Association of Shipowners could participate inthe transportation of reserved cargoes under equal con-ditions as the Colombian ships, provided that equal treat-

ment or its equivalent be given to Colombian ships intheir respective countries.

Decree 616 of 1972 states: “The Colombian reservefor Colombian flag vessels also operates for cargo withfinal destinations to Colombian trade zones. ”

Costa Rica

At present, 80 percent of all exports are reserved toa Caribbean line, but in response to complaints fromforeign governments, Costa Rica has agreed to revisethe law when the U. N. Liner Code comes into force.

Cuba

All cargo is allocated to Cuban- or Soviet-flag ships.

Denmark

Effective July 31, 1973, any sea transport of goodsfrom Denmark to Greenland requires a permit from theMinister for Greenland. Exempt from this requirementare Danish Government and Government institutionships, and sea transport of goods required for the opera-tion of the Danish-American defense areas. With theexception of this Greenland trade, Denmark has noother national laws or regulations on cargo preference.

Dominican Republic

In the Dominican Republic, Law No. 180 of May31, 1975, provides that 40 percent of commercial im-port and export cargo, 50 percent of “exonerate” cargoand 60 percent of government-controlledried on Dominican Republic-flag ships.that this law is ineffective in practice.

cargo be car-It is believed

Ecuador

Ecuador reserves 100 percent of hydrocarbon cargoesexclusively for state companies or mixed companies inwhich the state has 51 percent interest and the right tocarry 50 percent of all cargoes imported to or exportedfrom Ecuador.

All imports and exports that are the property of theGovernment or its enterprises, or of public or privateinstitutions that are intended for social or public pur-poses, as well as cargo belonging to companies in whichthe government owns more than 50 percent of the cap-ital, are to be transported in vessels owned by nationalshipping companies or by those which the cargo reservelaw considers as such. Fifty percent of the cargo may


be transported on vessels of the importing or exportingcountry provided it is done on the basis of reciprocity.

A series of decrees reserve 100 percent of imports fromBrazil, Argentina, and South Africa and 100 percentof all trade with Panama, to Ecuador flag vessels or tovessels of foreign companies associated with an Ecua-doran line.

Implementation is taking place route by route asEcuadoran vessels become available. Associate statushas been granted to a number of foreign lines in thedirect trades to Europe.

Egypt

In 1976, Egypt’s Council of State issued a rulingthrough the Supreme Administrative Court in Cairothat in the future all seaborne shipments entering orleaving Egypt on the business of the Arab Republic ofEgypt, her public institutions, organizations, and theiraffiliates must be arranged and supervised by the Egyp-tian Company for Maritime Transport or the foreignagents of this company.

Article 1 of Ministerial Decree 221 of 1974 requiresall organizations in which the Government has 25 per-cent or more interest to give priority to Egyptian-flagcompanies. More recently, Government cargoes, plus30 percent of all imports and exports, have been reservedfor Egyptian-flag ships. The state cargo-allocation agen-cy gives priority to the state line and second preferenceto major Egyptian private lines.

Ethiopia

In Ethiopia, legislation is not known, but importlicenses bear the words ‘ ‘to be shipped in Ethiopian-flag vessels. ” However, the fleet is very small andwaivers are given automatically.

France

According to a decree of April 1931, as amended inAugust 1970, two-thirds of the crude oil imported forinternal consumption must be carried in French shipsor in ships of which the charter parties have been ap-proved by the Ministries concerned [i.e., Ministry ofFuel and Ministry of Transport (Merchant Marine)].A 1935 French law specifies that 50 percent of France’scoal imports be carried in French-flag vessels. Excep-tions can be granted if needed ships cannot be supplied.

French-flag ships have a monopoly on coastal trafficin metropolitan France; they also have a de facto mo-nopoly on traffic between ports of the French Depart-ments of La Guyane, La Guadaloupe, and La Martin-

ique, and between ports of the same overseas Depart-ments. Trafiic between ports of metropolitan France andTunisian ports is reserved jointly to French- and Tuni-sian-flag ships. It is the same for traffic betweenmetropolitan France and Algerian ports according to re-cent agreements. Trafilc between France and formerFrench colonies is not reserved to French-flag ships.

France has bilateral agreements with the Ivory Coastand with Senegal dividing cargo on a 40/40/20 basis.

A French/Morroccan agreement divides cargo either40/40/20 or 50/50 on a case-by-case basis.

Concerning export credits, France imposes French-flag vessels if the transport is being financed as well asthe goods being exported. This restriction relates onlyto those exports that are being undertaken on a c.i. f.basis. If, however, only the products are being financedand not the transport, a complete freedom-of-choice flagexists.

Gabon

A government decree signed on September 7, 1978,confirms the division of cargo using the UNCTAD40/40/20 formula, with the qualification that Govern-ment and quasi-Government cargo be expressly reservedfor Gabonese-flag vessels.

Gabon’s national merchant marine company, SocieteNatiomde de 7knsports Maritime (SONATRAM), hassigned agreements with both a West German and a Bel-gian company to divide cargoes on a 40/40/20 basis,which is similar to a French/Gabonese agreement. Theagreements also provide for the Transportation of freightby the Belgian and West German companies, for theaccount of SONATRAM if no SONATRAM ships areavailable. A similar agreement has been negotiated withthe Dutch line Nedlloyd.

Federal Republic of Germany

There are no legislative provisions requiring the useof West German ships in the transportation of suppliesfor development assistance provided by the Federal Re-public of Germany (FRG). Bilateral agreements on cap-ital assistance provide that receiving countries shall allowfree choice of transportation enterprises to passengersand suppliers of goods and shall abstain from any meas-ures that might exclude or impair the participation byWest German transportation enterprises.

Cargo may be reserved, however, to West German-flag vessels if the receiving countries preclude West Ger-man lines from participation in the carriage of suchcargo. Furthermore, cargo may be reserved under exist-ing agreements on sea transport concluded with the Re-


public of Ivory Coast and Brazil. West Germany hassigned an agreement with the Ivory Coast to divide car-go on a 40/40/20 basis.

Cargo- and revenue-pooling agreements that involvenonresident shipping companies, and freight contractsand charters with carriers from countries that discrimi-nate against West German vessels, must be approvedby the government.

A supplementary protocol to the Brazil/FRG Mari-time Agreement provides for participation on equalrights regarding freight values and tonnage for govern-mental cargoes.

Ghana

Ghana favors f.o. b. purchasing as a means of discrim-ination, and all indications are that cargo control willbe tight and effective. All cargoes ordered by the GhanaSupply Commission, the Government’s purchasing or-ganization, are handled by the Black Star Lines as ship-ping agents. However, cargo is moved by the first avail-able conference vessel. Ghana has indicated that non-conference lines will be allowed to participate but onlyup to a certain share of trade (yet to be decided).

GuatemalaGuatemala Congressional Decree No. 26/77 dero-

gated the previous basic shipping laws and establisheda nondiscriminatory regime. A 6-percent surcharge,which must be paid by all national or foreign shippinglines that transport merchandise destined to the Repub-lic of Guatemala, is levied on the value of maritimefreight on all products or merchandise entering the coun-try through national ports and customs houses. Until1983, 30 percent of the revenue collected will go the Na-tional Maritime Co. (in which the state has a majorityinterest), with the rest going into a loan fund to assistthe merchant marine.

Honduras

In Honduras, no effective measures are yet in force.The 1970 legislation reserves imports of certain “privi-leged companies” to Honduran vessels. However, thefleet is too small for this legislation to be enforced.

India

Government cargoes in India are reserved to the na-tional-flag fleet. Further legislation is under considera-tion to reserve 40 percent of all export cargoes to Indi-an vessels.

India is exerting cargo preference pressure on her oilimport trade The national refineries give preference toshipping under the Indian flag, which is to transport90 percent of all crude oil imports.

India has agreements with Peru, Romania, Czecho-slovakia, Hungary, Bulgaria, the U.S.S.R, Poland, EastGermany, Iran, and Egypt to utilize as far as possibleshipping of either party in the carriage of mutual trade.The agreements provide for the carriage of bilateraltrade on the basis of suitability and equality in tonnageand earnings.

India has signed a bilateral agreement with Czecho-slovakia that divides cargo on a 40/40/20 basis with the20 percent share allocated to Polish and Yugoslav ves-sels.

Export-Import Bank cargoes that are not carried inU.S.-flag vessels must be carried on national-flag ves-sels.

Shipments foron national flag

Government account must be carriedships.

Indonesia

An instruction of November 27, 1964, orders that allrequests for shipping space for export of Indonesiancommodities be channeled through the Directorate forShipping of the Directorate General of Sea Communica-tions. This is designed to give national shipping com-panies priority in the transportation of Indonesian ex-port goods.

The Minister of Sea Communications has ruled thattrans-shipment of goods for Indonesia must be withIndonesian-owned ships using only Indonesian trans-shipment ports. It also was pointed out that as soon aspossible, Indonesian-owned coasters will be used fortram-shipment from Bangkok, Thailand and Kompong-som, Cambodia. Licenses will be issued by the NationalShipping Bureau. If national vessels are unavailable,foreign-flag ships can be licensed to carry trans-shipment. The Government has stipulated that nation-al-flag ships carry 40 percent of all cargo moving be-tween Indonesia and Europe.

Fifty percent of c.i. f. fertilizer imports (100 percentof f.o. b. fertilizer imports) must be carried on Indone-sian-flag vessels. In late 1981, Indonesia and Koreanegotiated an agreement to split the shipping of theirbilateral trade 50/50.

Minister of Communications Decree No. KM/16/PR. 302/PHB-82 dated January 18, 1982, provides fora 50-percent reduction in port and bunkering chargesfor national oceangoing ships, including ships charteredby national oceangoing companies, loading nonoil andnatural gas export products. The reduction is to be ac-

App. B—Maritime Cargo Policies of 64 Foreign Countries 196243 211

counted by the shipping company as port charges reliefto exporters.

Presidential Decree 18-82 dated April 12, 1982, states‘‘the transportation of export and import commoditiesowned by the Government of Indonesia will be carriedout by vessels operated by Indonesia shipping compa-n i e s .

Iran

Iranian Decree No. 35510 of August 23, 1976, createda bureau at the Ministry of Commerce for the purposeof planning and programing the importation and ship-ment of Government goods. All ministries and Govern-ment enterprises and organizations, as well as Govern-ment-afllliated organizations (excluding the War Min-istry and the Armed Forces) are responsible for arrang-ing for the shipment of their own goods, whether by seaor by air, through the Ministry of Commerce. The Min-istry of Commerce arranges with the Iranian merchantmarine for the shipment of such goods, and all Govern-ment cargoes are apparently reserved to the Iranian flag.

Iraq

Preference in the carriage of cargo is given to Iraqi-flag vessels.

Italy

Generally, Italy has no overall cargo-preference lawsor regulations. Italy and the U.S.S.R. have signed abilateral shipping pact that stipulates that Italian shipsshould carry all raw materials while Soviet ships shouldcarry general cargo.

Italy and the Ivory Coast have signed an agreementto divide cargo on a 40/40/20 basis.

Ivory Coast

An order of 1975 declares that cargoes of all typescoming from or destined for the Ivory Coast are dividedbetween Ivorian and foreign shipping following the40/40/20 sharing formula of the UNCTAD Code ofConduct for Liner Conferences.

Cargo booking offices in most trades contribute toclose control of cargoes. Preference for allocation is asfollows:

● Ivory Coast-flag ships,● trading partner-flag ships,. conference cross-traders,● Ivory Coast nonconference lines, and. others.

The Ivory Coast has signed agreements with WestGermany, France, and Italy which divide bilateral cargoon the above basis.

Jamaica

The Cargo Preference Act of 1979 requires specifiedimport and export cargo be carried by ships owned,chartered, or operated by the Jamaican Government.Those cargoes are: all bauxite, alumina, and such othernatural resources of Jamaica and their byproducts asmay be prescribed; such agricultural products to be ex-ported from Jamaica as may be prescribed; and all Gov-ernment-controlled cargoes. A waiver of 50 percent ofcargoes can be based on reciprocity. The requirementcan be completely waived if in the national interest. Astrong directive has been issued to Government depart-ments to use Jamaican-flag ships, but it has not beenwell-implemented.

Japan

Japan has no generally applicable laws or regulationsin support of cargo preference. However, utilization ofGovernment financing or licensing services often resultin the direction of commercial cargoes to Japanese-flagcarriers. The shipment of tobacco from the UnitedStates to Japan is a case in point—such cargoes havebeen shipped exclusively on Japanese-flag vessels foryears. The close Government-industry relationship inJapan necessarily results in a shipping policy that hasthe net effect of a ‘‘ship Japanese’ program.

Republic of Korea (South Korea)

A preferential interest rate for importing raw mater-ials for export production is extended to cover freightcosts when the imports are carried on Korean-flag ships.

The Marine Transportation Promotion Law of De-cember 5, 1978, as supplemented by Presidential En-forcement Decree of June 8, 1979, reserves 100 percentof all liner cargoes for Korean-flag vessels.

The Shipping Promotion Law enacted by South Ko-rea makes it mandatory for exporters and importers inthat country to use only Korean-flag vessels for all theirshipments.

The Government encourages the use of Korean-flagships by awarding some Government procurement con-tracts on a f.o. b. rather than a c.i. f. basis, enabling theseships to compete on a more equal level. The extent towhich this policy is successful is indicated by the relative-ly large ratio of cargoes carried by its oceangoing mer-chant fleet.


There is a waiver system designed to assure the ut-most cargo for the national fleet. A waiver is allowedonly when there is no Korean vessel available for car-rying cargo.

A Transportation Ministry decree names five com-modities, imported in foreign bottoms, which as soonas possible are to be carried in Korean-flag ships. Theseitems are crude oil, iron ore, logs, grains, and fertilizers.

Korea has trade agreements for the carriage of cargoby ship with the United States, West Germany, Japan,and Denmark.

Kuwait

Government of Kuwait crude oil sales contracts in-clude terms that require that cargo preference be givenfirst to Kuwait-flag tankers, and then to other Arabflags.

Libya

A Libyan decree reserving all imports to domestical-ly owned or chartered vessels was to have been issued,but, if issued, has never been implemented.

MalaysiaMalaysian law requires all coastal trade be carried

on Malaysian-flag vessels. All goods destined for EastMalaysia must pass through Johore Baru, eliminatingSingapore trans-shipment. The prime benefactor willbe the Malaysian International Shipping Corporation(MISC), which is 51 percent owned by the Government.

Malaysia has adopted the UNCTAD Code of Con-duct for Liner Conferences cargo carriage ratio of40/40/20. Legislation and fiscal incentives reservingGovernment and quasi-Government cargoes to the na-tional flag are ineffective at the moment, but Malaysiahas ambitious plans for fleet expansion.

Malta

The Maltese minister for ports may exclude fromtrade with Malta those lines not party to an agreementof which he approves. Legislation has led to a numberof 50/50 commercial deals.

Sea Malta Co. Ltd. is to share in the carriage offreight on the routes between Malta and Belgium, WestGermany, Holland, Italy, and the United States routeson a 50/50 basis as a result of an agreement reachedbetween the island’s national carrier and a number offoreign lines that operate on the Malta route.

Previous nonconference lines were accommodated inthese agreements, but presumably there would be dif-ficulties for new nonconference lines. Cross-traders alsowere accommodated but on a limited basis.

Mexico

The constitution of the Caribbean MultinationalShipping Line (NAMUCAR) requires members to usethat line for all shipments between member countriesin which there is a Government interest, unless suchcargo is reserved to national lines.

Preferential treatment is on the basis of administrativeactions rather than laws. These actions have taken thefollowing forms:

1.

2.

3.

4.

5.

A

approval of applications for import licenses withthe provision that the goods covered by the applica-tion be imported in Mexican-flag vessels;in some cases where the importation of a given itemis restricted by allocations of quotas in currency,the cost of sea transportation is not charged againstthe quota when the goods are imported in Mexi-can-flag vessels. The effect of such a ‘‘credit’ isto increase the quota of the importer who choosesto utilize the services of Mexican-flag ships;a decree ofJanuary 30, 1967, grants a 97.7-percentreduction of the export tax on cotton to cotton pro-ducers, The purpose of the decree is to encourageproducers to seek foreign markets. It is stated inthe decree that preferential treatment will be givento shippers who use Mexican-flag vessels or vesselschartered by a national shipping company;a decree of January 18, 1963, established an ex-port tax of 1 percent of the invoice value on beehoney if the shipment is made on a Mexican-flagship. The tax applied on bee honey shipped on aforeign-flag vessel is 3 percent; anda decree effective January 1, 1966, provides thefollowing subsidies of products intended for export:50 percent of the railroad freight rate for manufac-tured products not for end consumption. Whensuch products are shipped by sea, the subsidy canonly be given when either a Mexican-flag vesselor a foreign-flag vessel under charter to a Mexicanshipping company is used.provision has been published under the Mexican

Export Tax scheme which applies rebates on a progres-sive scale to exports if the exporter uses Mexican insur-ance and c:arriers.

Article 6 of the Mexican Decree on Fiscal Incentivesto the National Merchant Marine provides a tax creditequivalent to 10 percent of the cost of transport andother costs associated with the transport of imports tothose who contract with a Mexican-flag transport firm.

App. B—Maritime Cargo Policies of 64 Foreign Countries 19624?3 ● 213

The Law of the Development of the Mexican Mer-chant Marine enables the Secretariat of Communica-tions and Transport to reserve specific shipments ofcargo for transport solely in ships of Mexican registryand to fix the Mexican-registered vessels’ percentageshares of the transport of import and export cargoes thatare the property of the Government or semi-public in-stitutions. Under the law, import or export cargoesmarketed with state financing, subsidy or guarantee,and duty exempt cargoes are preferably to be trans-ported in ships of Mexican registry.

Regulations published on October 27, 1981, imple-menting Mexico’s Law for the Development of the Mex-ican merchant marine reserves 50 percent of all generaland bulk cargoes for the Mexican merchant marine.

Mexico’s Multimodal Transport Decree requiresequal participation of Mexican-flag carriers in the trans-port of containers. Despite legislation favoring confer-ence shipping, a high proportion of trade continues tobe nonconference.

Morocco

State enterprises and mixed public-private activitiesand/or concessions or subsidiaries of such entities reserveall their cargo for Moroccan-flag carriers. Forty percentof imports and 30 percent of exports are required tomove on Moroccan vessels. Morocco has agreed to di-vide cargo 40/40/20 or 50/50 on a case-by-case basis withFrance and Spain. Existing bilateral exceed the UNC-TAD Code by implicitly covering bulk trades.

Mozambique

All trade between Mozambique and Portugal is re-served for Portuguese-flag vessels. There is a 20-percentreduction in taxes on goods shipped via Portugal.

Nicaragua

Decree Law No. 299 of March 24, 1972, provides thatcargoes purchased or sold by the State shall be trans-ported exclusively by Nicaraguan shipping enterprises.Fifty percent of commercial cargoes shall be carried bynational flag ships, and 50 percent by ships of the otherparty. Should the other party not provide shipping serv-ices, the Nicaraguan share may go up to 80 percent.

A recently passed Government decree states that 40percent of each shipment in or out of Nicaragua mustbe transported on the state shipping line, NavieraNicaraguaense (NANICA). Forty percent of the ship-ment can be transported by a line from the trading part-ner and 20 percent by a shipping line of any Central

American country. Recent legislation, not yet imple-mented, calls for Government approval of freight ratesand increases.

Nigeria

On December 29, 1981, Nigeria anounced its adop-tion of the UNCTAD 40/40/20 cargo-sharing formulawith implementation to be effective January 1, 1982.It was also announced that bilateral agreements will beundertaken with friendly countries to promote shippingtrade. A 50/50 agreement has been concluded with Bra-zil, and discussions with OECD trading partners arecurrently underway. A high proportion of current tradeis carried by nonconference lines.

Pakistan

Cargo preference is practiced among participants ininternational shipping conferences that reserve a por-tion of the conference trade to Pakistan ships.

Half of U.S. and World Bank aid cargo and mostGovernment cargo is reserved to national-flag ships.

It is reported from Karachi that 40 percent of thecountry’s imports and exports will be reserved tonational-flag ships. Pakistan is believed to have had a50/50 cargo sharing agreement with Poland dating from1975.

Paraguay

A decree reserving 100 percent of Paraguay’s inboundcargo for Paraguayan ships was signed on August 21,1981.

Peru

For certain types of cargo (wheat, corn) Peru reserves100 percent of cargo for Peruvian-flag vessels. For othercargoes, it reserves 50 percent, but since export cargois normally sold full-lot, the effect is that Peruvian flagvessels end up with the entire cargo.

A decree, effective March 26, 1976, guarantees thatCompania Peruana de Vapores, the state-flag line, shallreceive preference in the carriage of all Government car-goes, whether national or local.

A Peruvian decree provides that all public bodies givepreference to the transportation of import and exportcargoes to vessels belonging to the Peruvian ShippingCompany (CPV). Also, the organization will contractthrough CPV the transportation of cargoes which CPVvessels cannot carry.

214 . An Assessment of MarMme Trade and Technology

A Peruvian Government decree established that upto 50 percent of Peruvian exports and imports (calcu-lated on a monthly basis) must be reserved for Peruvi-an shipping lines. In practice this started at 30 percentand permitted a periodic increase to bring it up to 50percent, to which it was raised by a decree of June 2,1980.

Decree 22067 of January 11, 1978, obliges all public sector entities to contract Peruvian-flag shipping lines

for the maritime transport of nonconference articles forimport and export with priority to: 1) Corporation Per-uana de Vapores (CPV); 2) Peruvian-flag vessels; 3) for-eign-flag vessels chartered to Peruvian companies.

Supreme Decree No. 024-80-TC signed December30, 1980, reserves cargo exclusively for Peruvian-flagvessels in cases where the trading partner does not havea representative line calling in Peru. Argentina and Bra-zil have similar agreements with Peru whereby the par-ties have an equal right to transport the cargoes andshare the freight receipts derived from their bilateraltrade. Peru has acceded to UNCTAD code with reser-vations.

Philippines

In the Philippines, an original decree reserved allGovernment cargoes to the national flag. A subsequentdecree (January 1982) reserves 40 percent of all linertrade to the national-flag vessels and 40 percent to thebilateral partner. Legislation on Government cargo isalready in force, but implementing regulations for thegeneral cargo reservation law have been issued only forthe U.S. route so far. The combined effect of the twodecrees will probably mean 60 percent of the trade isreserved for Philippine vessels.

Presidential Decree 806 states that the Governmentwill take all steps necessary, including the provision ofdirect incentives to Philippine- flag vessels and nationalshipping lines, to enable them to carry a substantial andincreasing share of the cargo generated by Philippineforeign trade. It also states that Philippine-flag vesselsand those that are owned, controlled, or chartered byPhilippine nationals shall carry at least an equal shareof cargo as that carried by vessels of another countryin trade between the two countries.

Exporters will be able to deduct from their taxableincome an amount equivalent to 150 percent of overseasfreight expenses and charges in Philippine ports incurredin shipping export products, provided they use Philip-pine-flag carriers. Enterprises registered with the Boardof Investments also will be allowed to deduct from theirtaxable income 200 percent of shipment costs incurredin the transport of their products and raw materials to

.

and from foreign ports, provided the shipments are onPhilippine vessels.

Under a Philippine licensing regulation, import li-censes will be issued for a Government cargo only whensuch import is to be transported on Philippine-flag ships.However, import licenses may be issued if no Philippine-flag vessel is available at the port of shipment. In ac-tual practice, many shipments go to foreign liners dueto the unavailability of Philippine ships.

Presidential Order No. 37 requires that all purchasesof Philippine imports be made on an f.o. b. basis, thatall freight payments be made in pesos in the Philippines,and that preference on the carriage of imports be givento Philippine-flag vessels.

Presidential Decree 917 of April 1, 1976, establishedthe Freight Booking and Cargo Consolidation Centerto: 1) encourage, facilitate, and assist Philippine ship-pers, and affect the consolidation of their cargoes, inorder to achieve economy and efficiency in bulkshipments; 2) provide systematic vessel-chartering serv-ices or charter vessels for the benefit of Philippine ship-pers; 3) secure adequate shipping services for the car-riage of Philippine overseas trade and book cargoes atreasonable freight rates; 4) serve as the central imple-menting authority for the utilization of Philippine ship-ping lines for the seaborne transport of Philippine ex-port and lumber imports as prescribed under Presiden-tial Decree No. 894; and 5) foster cooperation among,and enter into suitable arrangements with, appropriateprivate and public sectors in the Association of SoutheastAsian Nations for these purposes and projects.

Decree No. 894 of February 26, 1976, requires Gov-ernment offices, agencies, and instrumentalities,Government-owned or controlled corporations, and per-sons and entities enjoying tax exemption, incentive, orsubsidy from the Government to utilize in internationaltransportation the services of Philippine-flag shippinglines to the maximum extent service by such lines isavailable.

Presidential Decree 1466 narrowed the provisions ofPresidential Decree 894 by requiring only those cargoespaid for with Government funds or with Governmentloans, credits, or guarantees to be carried on Philippine-flag vessels (waivers may be granted on the basis of rec-iprocity y).

All imports of U.S. agricultural commodities undersection 402, of the U.S. Government Mutual SecurityAct and U.S. Public Law 480 that are in excess of the50 percent required to be carried on U.S.-flag ships mustbe shipped in Philippine vessels when available.

Executive Order No. 769 signed onJanuary 19, 1982,orders the maritime industry authority to issue the nec-essary rules and regulations to reserve 80 percent of thePhilippine export and import liner cargo trade not cov-


ered by Presidential Decree 1466 for flag carriers of thePhilippines and those of the bilateral partner, with thereserved cargo to be shared equally.

Portugal

Decree Law 75-U/77 prescribes that the maritimetransportation of goods by any public administration orpublic enterprise must be on ships under Portuguese flagor on foreign ships chartered by the Portuguese shipowners. This regime must also be observed for c. i. f. ex-ports made by any public administration or public en-terprise.

The principles that govern the granting of a deroga-tion are expressed in the Decree Law 75-U/77, in itsArticle 2:

Up to 50 percent of the import or export consignmentscovered by the provisions of Article 1 may be freed forcarriage in foreign ships, in particular those of the im-porting or exporting country, provided that the legisla-tion of such countries grants equal treatment to Portu-guese vessels.In practice, Portuguese authorities intervene only

when there is no agreement between carriers and ship-owners, and even then only in cases in which there areno significant differences in transportation costs andthere is no delay in the expedition or reception of goods.

In the other cases, waivers are automatically granted.At present, there is no record of any waiver being de-nied. If the laws of the importing or exporting countrygrant equal treatment to the vessels sailing under thePortuguese flag, then up to 50 percent of the import orexport cargoes may be liberated in favor of ships flyingthat country’s flag.

The maritime transport companies of Portugal andthe U.S. S. R. are entitled to equal shares in the carriageof merchandise in the bilateral trade between their ports.

Saudi Arabia

By royal decree, preference shall be given to Saudicompanies whenever financial and other items are equal.Saudi legislation in 1975 reserved 5 percent of Saudiexports—mainly oil—for national vessels. This figurewas supposed to increase to 50 percent by 1980. Saudiflag is also given first preference for defense and govern-mental cargoes.

Singapore

The Singapore Shipping Association and the Indone-sian Shipowners Association have an agreement dividing

cargo between them on a 50/50 basis.apore has no cargo preference laws.

South Africa

Otherwise, Sing-

All goods shipped from the United Kingdom or Eur-ope to South Africa for government use must be ship-ped in vessels operated by the South and South-EastAfrican Conference Lines of which SAFMARINE, Ltd.is a member. No other cargo preference laws are ineffect.

Spain

A ministerial order dated March 15, 1963, impliescertain limitations on the freedom of shipping for im-ports of essential commodities, “the prices of which, dueto their absolutely essential nature, are exposed to thevery frequent changes of freight rates in the internationalmarket, and which being considered as governmentaltrade, do not contravene, therefore, to the rules of theinternational organizations of which Spain is a mem-b e r .

In this connection, the freedom of trade and freightrates will be limited in the following cases:

. imports of governmental cargoes, which have to becarried in full shiploads and on Spanish-flag vessels;and

● the same conditions apply to the imports of thosecrude oil loads, which are assigned to be consumedwithin the area covered by the petroleum monop-oly.

However, this regime is not entirely restrictive, inview of the fact that 45 percent of crude oil is movedin foreign-flag vessels, and waivers are granted whenor where there are no Spanish flags for the cargoes.

Spanish exports enjoying some kind of official sup-port are not subject to any restriction on the flag of thecarrying vessels. If transportation is contracted withnon-Spanish vessels, the freight value is considered asforeign content. Offlcia.1 support for foreign content nor-mally is limited to 10 percent of total contract value.The above comment implies exports on a c.i. f. basisonly. There is no restriction at all on a f.o. b. basis.

Spain restricts to national vessels, through Govern-ment monopolies, many imports such as petroleum, to-bacco, and cotton. When Spanish-flag ships are sub-jected by another country to measures contrary to freecompetition, they shall have the right to apply similarmeasures in return.

A ministerial order of February 24, 1977, providesthat imports of goods classified as ‘‘commerce of state’are reserved for national-flag ships.

216 ● An Assessment of Mar/time Trade and Technology

Sri Lanka The Tanzanian Government is establishing a centralfreight bureau to oversee implementation of UNCTAD

The state-operated Ceylon Shipping Corporation has Code of Conduct’s 40/40/20 formula and to negotiatea monopoly on all cargo imports for the Government freight rates.and state-owned corporations. If that company is notready to carry cargo within 14 days it can be divertedto other shipping companies. Law No. 26 of 1973 es-tablished the Central Freight Bureau of Sri Lanka tocentralize the booking of freight from Sri Lanka to for-eign ports. All export cargo is allocated by the CeylonFreight Bureau since 1971, with first preference givento the state line.

Sudan

Virtually all Government or quasi-Government cargo(about 75 precent of total) uses Sudan’s national line.

Taiwan

Government agencies and state-owned enterprises inTaiwan are required to consign their import cargoes tonational-flag shipping lines with second priority to flag-of-convenience vessels. Liner operators may be licensedand may be restricted if overtonnaging is found on aroute.

Other regulations require that imports of bulk com-modities be shipped by national-flag vessels with secondpriority to flags of convenience.

The Joint Overseas Shipping Association (JOSA), agroup formed by Taiwanese ship operators serving Tai-wan, is responsible for ensuring Taiwanese vessels havea preference on cotton cargoes. Each cotton importeris required to approach JOSA before the issuance of theimport license in order to verify the shipping scheduleand intended Taiwanese vessels to be utilized for theshipment. (A waiver can be issued if no Taiwanese ves-sels are available. )

Additionally, the financing for cotton shipments toTaiwan is arranged through the Central Trust of China(CTC) or a bank named by CTC. The importer is at-tracted to this financing because of the low interest rate.within this financing there is a double check on JOSAapproval, and letters of credit will not be opened withoutthe proper import license approved by JOSA.

Tanzania

Tanzania has imposed an income tax on gross receiptsaccrued from outbound shipping freight and passengerseffective April 2, 1976. This tax applies only to foreignshipping lines. The tax does not apply to trans-shipmenttraffic.

Thailand

Government agencies are encouraged to use the Gov-ernment-owned forwarding agent and vessels belong-ing to the Thai Maritime Navigation Co. Ltd. and theUnited Thai Shipping Corporation.

The Mercantile Marine Promotion Act B.E. 2521,passed in October 1978, aims at promoting Thai-flagvessels through fiscal and other measures, includingcargo preference and the prevention of dumping by for-eign-flag vessels. It empowers the Government to per-mit a deduction amounting to not more than 50 per-cent of the costs of carriage from the shippers net in-come prior to income tax calculation when using Thai-flag vessels for import and export cargoes. It also em-powers the Government to make mandatory the use ofThai-flag vessels for the seaborne transportation ofcargoes ordered by governmental agencies and enter-prises.

The Communications Ministry has issued regulationsrequiring Government agencies, governmental organi-zations, and state enterprises to use Thai ships to trans-port their imported goods on five routes (Japan-Thail-and, Korea-Thailand, Hong Kong-Thailand, Taiwan-Thailand, and Europe-Thailand). Goods purchasedthrough loans by foreign governments and internationalfinancial institutes are exempt from the regulations. Todate, most imports have fallen into the nonreserved cat-egory.

Trinidad and Tobago

No legislation has been enacted to date, but discus-sions are underway concerning a proposed edict thatwould reserve all governmental or quasi-governmentalcargoes (about 70 percent of all cargo) to the nationalline.

Tunisia

Trade between Tunisia and metropolitan France isreserved for Tunisian- and French-flag vessels. TheGovernment owns the Compagnie Tunisienne de Nav-igation (CTN) which aimed to carry 30 percent of thecountry’s maritime trade by 1981.

App. B—Mar/time Cargo Policies of 64 Foreign Countries 1982-83 . 217

Turkey

All “public sector” cargoes must be carried in Turk-ish-flag ships. Furthermore, the Maritime Bank exertspressure on Turkish exporters and importers to shipcommercial cargo on Turkish ships when available.

The Turkish Government issued a decree in 1975which directs that cargo for Turkish destinations shouldbe carried by Turkish ships whenever possible. How-ever, should there be no Turkish ship in port at the timethe goods are ready to be taken on board, ships of anyother flag are free to take the business after obtaininga Turkish nomination certificate.

United Kingdom

The only cargoes required to be shipped in Britishvessels are sensitive stores and equipment of the armedforces for which security considerations require themto remain under national control.

In the United Kingdom, guaranteed finance is notavailable for the foreign element of the freight costs:

. where there is clause in the contract which dis-criminates against United Kingdom shipping or infavor of foreign ships; or

● for business with the CO MECON countries andP. R. C., where the United Kingdom recognizesthat, even though there may be no overt flag dis-crimination clauses in the contract, the goods areto be carried in COMECON vessels or, in the caseof P. R. C., in Chinese-registered vessels.

Uruguay

Law No. 14650, the Uruguayan Merchant MarineDevelopment Law, was enacted by Executive Power onMay 12, 1977. It reserves 50 percent of all waterborne,(in particular, 100 percent of all imports) for Uruguay-an-flag vessels; except where one is not available or isfully loaded. Prior authorization from the Ministry ofTransportation and Public Works is needed to use anon-Uruguay an-flag vessel. Such vessel must fly the flagof a country which has an international convention withUruguay, be in a conference approved by the Ministryof Transport and Public Works, or grant reciprocaltreatment to Uruguay an-flag vessels.

The above reservations can be extended to exportsthat are tax exempt or are financed by the national bank-ing system. Tax allowances are awarded to exportfreights carried on national-flag vessels. Uruguay hasagreements with Brazil and Argentina that provide foran equal sharing of their bilateral trade.

Venezuela

Legislation is in force reserving 50 percent of all cargoto national flag vessels, with all Government cargoes be-ing reserved to the state line. In practice, the nationalline gets 50 percent of the conference trade. Noncon-ference lines have free access to nonreserxred cargoes butrarely to reserved cargoes.

The Law for the Protection and Development of theNational Merchant Marine stipulates that ships shouldbe 80 percent owned and 100 percent administered byVenezuelan nationals to qualify as Venezuelan flag, andon the general cargo side, the law requires 50 percentof the traffic of each shipper and importer to travel inVenezuelan-flag vessels; it also further excludes theVenezuelan private sector from much of this trade.

The National Executive shall initially reserve for Ven-ezuelan-flag ships the transport of a percentage that isnot less than 10 percent of the export and import of pe-troleum and its derivatives. This percentage shall in-crease gradually until 50 percent of the total is reached.In a like fashion, the transport of iron ore, wheat, andother free-flowing cargo shall be treated equally whetherthey are exports or imports.

Compania Anonima Venezalana de Novegacion(CAVN) maintains joint services with several “associ-ated’ * foreign-flag lines and under the agreements es-tablishing the joint services imports partially or totallyexempt from import duties (known as exonerated car-go), ** must move on CAVN or ‘‘associated’ line ships.The ‘ ‘exoneration ‘‘ is at the discretion of the Govern-ment agencies concerned and amounts to about 15 per-cent of the value of Venezuelan imports. This assuresa definite share of the cargo to CAVN in areas whereit maintains a service.

Yugoslavia

An export premium on ocean freight of 20 percentto U.S. North Atlantic ports and 30 percent to otherports is being given to Yugoslav exporters by the Yu-goslavia National Bank when the following conditionsare met: 1 ) shipment is made via a Yugoslav port ona Yugoslav vessel, and 2) if no Yugoslav vessel is avail-able and shipment is made via a Yugoslav port, a for-eign-flag vessel may be utilized; however, a certificate

*CAVN is associated with a number of lines in the Scandinavian countries,Europe, and Japan whereby joint services are maintained.

“*Government financed cargoes The Government of Venezuela points outthe majority of ‘ ‘exonerated cargo’ IS bulk cargo that is not normally carriedby CAVN ships.

25-417 0 - 83 - 15 QL 3


must be obtained from the Association of Yugoslav Ship- ports from the Republic of Zaire and the monopoly onowners stating that no Yugoslav-flag vessel is available. imports of all goods and products imported with the as-

sistance of the Bank of Zaire. It may bestow a part of

Zaire the operation on other companies of its choice.

Law 70-014 of July 10, 1974, gives Compagnie Mar-itime Zairoise the monopoly of transport by sea of ex-

Appendix C

Federal Departments With MaritimeResponsibilities Related to Commercial

Shipping and Shipbuilding Industries

Transportation

Department of Transportation

● Primary administration spokesman on maritime pol-icy issues. Has overall lead in all maritime issues, sub-ject to coordination with other agencies having specificareas of responsibility.

Maritime Administration

Administers subsidy programs (ODS, CDS).Provides financing guarantees (title XI) for the con-struction, reconstruction, and reconditioning of ships.Enters into capital construction fund agreementswhich grant tax deferrals on moneys to be used forthe acquisition, construction, or reconstruction ofships.Conducts research and development activities.Under emergency conditions, charters government-owned ships to U.S. operators, requisitions or pro-cures ships owned by U.S. citizens, and allocatesthem to meet defense needs. In conjunction with theDepartment of the U.S. Navy, develops definition ofshipyard mobilization base and sealift requirements.Maintains a National Defense Reserve Fleet ofgovernment-owned ships.Operates the U.S. Merchant Marine Academy andadministers Federal assistance to State maritimeacademies.Oversees enforcement of cargo-preference laws.Develops maritime policy analysis under guidance ofthe Office of the Secretary of Transportation.

U.S. Coast Guard

●

●

●

Administers and enforces safety standards for thedesign, construction, equipment, and maintenanceof commercial vessels of the United States.Enforces vessel personnel manning and crew qualifi-cations standards.Administers the vessel documentation laws.

Commerce

International Trade Administration

Advises on the formulation and implementation of in-ternational economic policies of a bilateral, multilat-eral, or regional nature.Develops policies and implements programs dealingwith import and export administration issues.Administers U.S. antidumping and countervailingduty laws.Advises on international trade and investment policiespertaining to domestic business sectors and carries outprograms to promote world trade and to strengthenthe position of the United States.Manages ITA’s trade-related information and re-search-gathering and dissemination functions.

Navy

Military Sealift Command owns or charters a fleetof cargo vessels for logistical military support.Office of Assistant Secretary (Shipbuilding and Lo-gistics). Responsible for maritime policy analysiswithin DOD. In conjunction with MarAd, developsdefinitions of shipyard mobilization base and sealiftrequirements.Deputy Commander for Acquisition and Logistics.Develops and approves national defense features formerchant vessels.

Justice

Antitrust Division

● Reviews and represents the U.S. Government in casesinvolving agreements and activities of carriers andconferences which may be anticompetitive.

219

—


State interstate Commerce Commission

●

● Office of Maritime and Land Transport Affairs—has lead in coordinating U.S. Government responsesto international shipping issues as they affect inter-—national conventions and trade practices.

Regulates inland waterway, Great Lakes, and coastalshipping, primarily in maximum rate regulation, fi-nancial responsibility of passenger carriers, and in col-lective agreements.

Independentand Groups

Federal AgenciesWith Maritime

Responsibilities

Federal Maritime Commission

Interagency Group on InternationalShipping Policy -

● Formulates and coordinates administration policieson international shipping issues, such as bilateral andmultilateral cargo agreements, and positions on leg-islative proposals; includes representatives fromFMC, OMB, USTR. and the Departments of Trans-

●

●

●

●

Regulates the waterborne foreign and domestic off- portation, St-ate, Justice, Commerce, and Defense.shore commerce of the United States and protectsagainst unauthorized, collusive activity. U.S. Trade RepresentativeApproves or disapproves agreements filed under sec-tion 15 of the Shipping Act, 1916; reviews activities ● A cabinet-level official in the White House withunder approved agreements. responsibilities for interagency coordination andAccepts or rejects tariff filings. representing the United States in international tradeIn domestic offshore trade, can set maximum or min- negotiations.imum rates or suspend rates.

Appendix D

Glossary of Acronyms and Terms

Glossary of Acronyms

ABS —American Bureau of ShippingACVS —air-cushion vehiclesAID —U.S. Agency for International

Development, Department of StateANL —Australian National LineAPL —American President LinesASIB —Active Shipbuilding Industrial BaseAWES —Association of West European

ShipbuildersBLS —Bureau of Labor StatisticsCAB —Civil Aeronautics BoardCAD/CAM—computer-aided desigrdcomputer aided

manufacturingCAORF —Computer-Assisted Operations

Research FacilityCCA —Controlled Carrier ActCCF —Capital Construction FundCDS —construction differential subsidyCGRT —compensated gross registered tonnagec, i. f. —cost, insurance, and freightCMEA —Council for Mutual Economic

AssistanceCPES —centrally planed economiesCPI —Consumer Price IndexDITI —proposed Department of International

Trade and IndustryDOD —U.S. Department of DefenseDOT —U.S. Department of Transportationdwt —deadweight tonsEEC —European Economic CommunityETCA —Export Trading Company ActEximbank —Export-Import BankFMC —U.S. Federal Maritime Commissionf.o.b. —free on boardFTC —U.S. Federal Trade CommissionGATT —General Agreement on Trade and

TariffsGDP —gross domestic productGNP —gross national productgrt —gross registered tonsIATA —International Air Transport

AssociationI c c —U.S. Interstate Commerce

Commission

IMCO

IMOIREAPS

ITBLASHLDCSLNGLOILOLPGMarAdMELMSCMTNNACOA

NSCNSRP

OBOODSOECD

OPEC

OPIC

O T AR&DROIROSAJSCASESSSNAME

SWATHteuU.N.

—Inter-Governmental MaritimeConsultative Organization

—International Maritime Organization—Institute for Research and

Engineering Automation andProductivity in Shipbuilding

—integrated tug barges—lighter aboard ship—less developed countries—liquefied natural gas—lift-on/lift-off—liquefied petroleum gas—U.S. Maritime Administration—Marine Equipment Leasing, Inc.—Military Sealift Command, U.S. Navy—Multilateral Trade Negotiations—National Advisory Committee on

Ocean and Atmosphere—National Security Council—National Shipbuilding Research

Program—oil, bulk ore—operating differential subsidy—Organisation for Economic

Cooperation and Development—Organization of Petroleum Exporting

Countries—Overseas Private Investment

Corporation—Office of Technology Assessment—research and development—roll-on, roll-off—Shipbuilders Association of Japan—Shipbuilders Council of America—surface effects ships—Society of Naval Architects and

Marine Engineers—small-waterplane-area twinhull vessels—twenty-foot equivalent units—United Nations

UNCTAD —United Nations Conference on Tradeand Development

USCG —U.S. Coast GuardUSTR —United States Trade RepresentativeVLCCS —very large crude carriers

221


Glossary of TermsABS—American Bureau of Shipping: A U.S.-based,

private classification, or standards-setting, society formerchant ships and other marine systems.

ASIB—Active Shipbuilding Industrial Base: The ma-jor U.S. shipbuilding and repair facilities engaged inseeking contracts for construction of U.S. naval shipsand/or major oceangoing or Great Lakes merchantships. Presently 26 yards are included and, for defensepurposes, are considered to be the core of the Nation’sshipbuilding capability and a principal measure of theU.S. ability to respond to a national emergency.

bare-boat charter: A charter agreement which stipu-lates that the charterer provides for all operating ex-penses including crew, fuel, maintenance, etc.

beneficial ownership: Designates the owner who re-ceives the benefits or profits from the operation.

breakbulk: A general, multipurpose, cargo ship thatcarries cargoes of nonuniform sizes, often on pallets,resulting in labor-intensive loading and unloading.

bulk: Cargoes that are shipped unpackaged either dry,such as grain and ore, or liquid, such as petroleumproducts. Bulk service generally is not provided ona regularly scheduled basis, but rather as needed, onspecialized ships, transporting a specific commodity.

CAD/CAM-computer-aided design/manufacturing:An industrial term referring to the development ofspecifications and design data, via computers, whichlater are used as manufacturing inputs and controls.

CAORF—Computer-Assisted Operations ResearchFacility: A MarAd R&D facility.

CCF—Capital Construction Fund: A tax benefit foroperators of U.S.-built, U.S.-flag ships in the U.S.foreign, Great Lakes, or noncontiguous domestictrades, by which taxes may be deferred on incomedeposited in a fund to be used for the replacementof vessels.

CDS—construction differential subsidy: A direct sub-sidy paid to U.S. shipyards building U.S.-flag shipsto offset high construction costs in American ship-yards. An amount of subsidy (up to 50 percent) is de-termined by estimates of construction cost differen-tials between U.S. and foreign yards.

CGRT—compensated gross registered tons: A meas-ure of shipbuilding output which modifies total grosstonnage by allowances for differing levels of complex-ity in ships being built.

c.i. f.—cost, insurance, and freight: Export term inwhich the price quoted by the exporter includes thecosts of ocean transportation to the port of destina-tion and insurance coverage.

CMEA—Council for Mutual Economic Assistance:A Soviet-bloc organization comprising: Bulgaria,

Cuba, Czechoslovakia, East Germany, Hungary,Poland, Romania, and the Soviet Union.

cabotage policies: Reservation of a country’s coastal(domestic) shipping for its own flag vessels.

cargo preference: Reserving some portion of a nation’simports and exports for their own flag vessels.

carriers: Owners or operators of vessels providing trans-portation to shippers. The term is also used to referto the vessels.

coastwise: Domestic shipping routes along a singlecoast.

conference: An international group of ocean carriersserving common trade routes that collectively agreeon rates and service.

container ship: A vessel designed to carry standard con-tainers enabling efficient loading, unloading, andtransport to and from the vessel.

countertrade: A form of international bartering involv-ing importing and exporting companies or countries.

cross-trades: Foreign-to-foreign trade carried by shipsfrom a nation other than the two trading nations.

DITI—proposed Department of International Tradeand Industry: This proposed department would con-solidate existing ofllces and programs into a singlecabinet-level department.

dwt—deadweight tonnage: The total lifting capacityof a ship, expressed in tons of 2,240 lb. It is the dif-ference between the displacement light and the dis-placement loaded.

domestic offshore trades: Domestic shipping routesserving Alaska and noncontinental U.S. States andterritories.

Eximbank—Export-Import Bank: A Federal agencythat aids in financing exports of U.S. goods and serv-ices through direct loans, loan guarantees, and insur-ance.

f.o.b. —free on board: Export term in which the pricequoted by the exporter does not include the costs ofocean transportation, but does include loading onboard the vessel.

flag of registry: The flag representing the nation underwhose jurisdiction a ship is registered. Ships are al-ways registered under the laws of one nation but arenot always required to establish their home locationin that country.

flags of convenience: Sometimes referred to as flags ofnecessity; denotes registration of vessels in foreign na-tions that ofter favorable tax structures and regula-tions.

GDP—gross domestic product: The total value ofgoods and services produced by a nation over a givenperiod, usually 1 year.

GNP—gross national product: GDP plus the net in-come accruing from foreign sources.

App. D—Glossary of Acronyms and Terms 223

grt—gross registered tons: A common measurementof the internal volume of a ship with certain spacesexcluded. One ton equals 100 cubic feet.

Government-impelled: Cargo owned by or subsidizedby the Federal Government.

IMO—International Maritime Organization: For-merly known as the Inter-Governmental MaritimeConsultative Organization (IMCO), was establishedin 1958 through the United Nations to coordinate in-ternational maritime safety and related practices.

IREAPS—Institute for Research and EngineeringAutomation and Productivity in Shipbuilding:IREAPS is a not-for-profit organization of ship-builders and other members of the maritime industryset up to facilitate contracting and the disseminationof information from the National Shipbuilding Re-search Program.

intercostal: Domestic shipping routes serving morethan one coast.

intermodalism: The concept of transportation as adoor-to-door service rather than port-to-port. Thus,efficiency is enhanced by having a single carrier coor-dinating the movement and documentation amongdifferent modes of transportation.

intracoastal: Domestic shipping routes along a singlecoast.

Jones Act: Merchant Marine Act of 1920, Section 27,requiring that all U.S. domestic waterborne trade becarried by U.S.-flag, U.S.-built, and U.S.-mannedvessels,

LASH—lighter aboard ship: A barge carrier designedto act as a shuttle between ports, taking on and dis-charging barges.

Iandbridge: A system of through rates and service of-fered by a carrier for cargo shipments from a foreignport to a U.S. port, across U.S. land to another U.S.port and finally by sea to a foreign port destination.

lift-onflift-off (LO/LO): Ships designed to load and un-load cargoes with cranes.

liner service: Vessels operating on fixed itineraries orregular schedules and established rates available toall shippers.

microbridge: A system of through rates and service of-fered by a carrier for cargo shipments from any in-land U.S. location to a port, by sea to a foreign portand finally overland to foreign inland destination.

NSRP—National Shipbuilding Research Program:A research program jointly sponsored by the FederalGovernment and members of the shipbuilding indus-try.

neobulk: Shipments consisting entirely of units of a sin-gle commodity, such as cars, lumber, or scrap metal.

noncontiguous: Domestic shipping routes serving Alas-ka and noncontinental U.S. States and territories.

OBO—oil, bulk, ore: A combination carrier designedto transport combinations of petroleum, ore and dry-bulk commodities.

ODS—operating differential subsidy: A direct sub-sidy paid to U.S.-flag operators to offset the highoperating costs of U. S. -flag ships when compared toforeign-flag counterparts.

open registry: A term used in place of ‘ ‘flag of con-venience’ or “flag of necessity” to denote registryin a country which offers favorable tax, regulatory,and other incentives to ship owners from other na-tions.

RO/RO—roll-on/roll-off: Ships designed to allowtrucks or other vehicles to drive on with trailers ofcargo.

Shipper’s Council: An organization of shippers formedto collectively negotiate rates and services with theconferences of ship operators.

Seabee: A barge carrier design similar to “LASH” butwhich uses rollers to move the barges aboard the ship.

shippers: Individuals or businesses who purchase trans-portation services for their goods or commodities.

teu—twenty-foot equivalent units: A measurement ofcargo-carrying capacity on a containership, referringto a common container size of 20 ft in length.

title XI: A ship financing guarantee program, originallyestablished in Title XI of the Merchant Marine Actof 1936, under which the government guarantees upto 75 percent of the construction cost of vessels builtwith CDS or up to 87.5 percent of the constructioncost of nonsubsidized vessels.

tramp service: Vessels operating without a fixed itin-erary or schedule or charter contract.

USTR—United States Trade Representative: A Cab-inet-level ofllcial in the White House with responsi-bilities for interagency coordination and representingthe United States in international trade negotiations.

U.S. Effective Controlled Fleet: That fleet of merchantships owned by United States citizens or corporationsand registered under flags of ‘convenience’ or ‘ ‘ne-cessity’ such as Liberia or Panama. The term is usedto emphasize that, while the fleet is not U.S.-flag,it is effectively under U.S. control by virtue of theship’s owners and can be called to serve U.S. interestsin time of emergency.

VLCCs-very large crude carriers: Crude oil tankersbetween 200,000 and 400,000 dwt.

Index

Index

A & P Appledore, Ltd., 109, 136administration announcements on maritime policy,

1982-83, 203-205Alaska, 57, 77, 78Alaska Navigation Co,, 166Algeria, 206Allis Chalmers Co., 124American Bureau of Shipping (ABS), 133, 151American President Lines, 73, 124American Society of Testing Materials, 111American Waterways Shipyard Conference, 88AMPAC, 80Angola, 206Annual Report of the President on the Trade Agreements

Program, 23Argentina, 206Association of West European Shipbuilders (AWES), 34,

38, 40Australia, 206Australian National Line (ANL), 126AUTOKON system, 136Avondale Shipyard, 104, 133, 136

Bahamas, 25Bath Iron Works, 133Beaufort Sea, 122, 123Belgium, 38Bering Strait, 122Bethlehem Shipbuilding Co., 105Boeing Corp., 137Boggs, Congresswoman Lindy, 183Bolivia, 207Boshwitz, Senator Rudy, 183Brazil, 36, 39, 87, 188, 207Bureau of Labor Statistics (BLS), 104Burma, 207

Calcutta Shipping Conference of 1875, 69California, 78Cameroon, 207Canada, 23, 43, 122, 123CAORF, 133, 134cargo policies of 64 foreign countries, 1982-83, 206-218Chile, 207China, People’s Republic of, 39, 41, 173, 186, 188, 208Clarke, John, Citibank N. A., 173Columbia, 208Combustion Engineering Co., 126Commission on American Shipbuilding, 109compensated gross registered tonnage, (CGRT), 108, 109Congress

General Accounting Office, 72, 158, 184House Judiciary Committee, 157, 159House Ways and Means Committee, 180Senate Finance Committee, 180Office of Technology Assessment (OTA), 5, 10, 14, 19,

110, 113, 185questionnaire sent to SNAME’S Ship Technical

Operations Committee, 130-132

congressional interest, 12, 13, 14construction differential subsidies (CDS), 63, 64, 74, 89,

152, 153, 154, 155Consumer Price Index (CPI), 103Containerization International, 62Costa Rica, 208Crowley Maritime Corp., 77Cuba, 208cyprus, 25

Denmark, 41, 208Dominican Republic, 208

economic activity, trade, and shipping, linkage, of, 23Ecuador, 208E. G. Frankel, Inc., 110Egypt, 209Ethiopia, 209European Economic Community (EEC), 34, 174, 181,

194Export-Import Bank, 67, 179, 180Exxon, 78

Fairbanks Trucking Co., 166Far-Eastern Shipping Co., 150Federal departments with maritime responsibilities, 219Federal Republic of Germany, 27, 209Federal Ship Financing Guarantee Program, 155FORAN system, 136Ford, President Gerald, 183France, 41, 209

Gabon, 209General Agreements on Trade and Tariffs (GATT), 173,

181, 199General Dynamics Corp., 122, 126General Electric Corp., 137General Hydromechanics Research Program, 134General Motors Inc., 137Ghana, 210Greece, 27Green, Alan, 190gross domestic product (GDP), 42, 43, 44gross national product (GNP), 23, 24, 174Guam, 79Guatemala, 210

Hawaii, 57, 58, 77, 79Heinz, Senator John, 177Hiltzheimer, C. I., 81Honduras, 25, 210Hong Kong, 27Hood, Edwin, 96

India, 36, 210Indonesia, 36, 189, 210Industrial Development Bank, 156Institute for Research and Engineering Automation and

Productivity in Shipbuilding, 133

227


Inter-Governmental Maritime Consultative Organization(IMCO), 151

International Air Transport Association (IATA), 150International and Global Marine Development, Inc., 123International Convention on Tonnage Measurement of

Ships, 1969, 108International Maritime Organization (IMO), 151, 152,

197Iran, 211Iraq, 211Italy, 87, 211Ivory Coast, 211

Jamaica, 211Japan, 27, 43

cargo policies, 211shipbuilding, 34, 35, 41, 66, 85, 86, 111shipyard safety, 107trade outlook, 44trading companies, 178

Jones, Congressman Walter B., 183Joint Maritime Congress, 1982, 81

Kearney Management Consultants, 191Korean Shipping Association, 190Kuwait, 212

Latin America, 46, 49Lebanon, 25legislation

Act to Regulate Commerce, 1887, 146Cabotage Law of 1817, 141, 164Cargo Preference Act of 1954, 182Controlled Carrier Act (CCA), 150Elkins Act, 1903, 147Export Trading Company Act of 1982, 178Hepburn Act of 1906, 147House Resolution, 587, 147H.R. 3110, 163H.R. 4627, 184Intercostal Shipping Act of 1933, 142Interstate Commerce Act (ICA), 146, 147Longshoremen’s and Harbor Worker’s Compensation

Act (LHWCA), 108Merchant Marine Act of 1920 (Jones Act), 9, 76, 78,

80, 82, 89, 142, 148, 163, 164, 165, 166Merchant Marine Act of 1928, 142Merchant Marine Act of 1936, 61, 117, 141, 142, 144,

150, 152, 153, 156, 160, 165Merchant Marine Act of 1970, 74, 91, 117, 142, 153,

156Military Transportation of 1904, 142, 182, 183Panama Canal Act of 1912, 147Public Resolution 15 of 1934, 142Public Resolution 17, 182, 190Reciprocity Act of 1828, 142Shipping Act of 1916, 9, 13, 69, 72, 142, 147, 148,

157, 159Shipping Act of 1983, 13, 71, 72, 158, 159Subsidy Act of 1891, 142

Tariff Act of 1789, 141Trade Act of 1974, 142, 181Transportation Act of 1940, 147

less developed countries (LDCS), 23, 39, 43, 49, 60, 61,66, 185, 191, 192, 193, 197

Liberia, 25, 27Libya, 212lighter aboard ship (LASH), 61, 62, 145Lloyds Register of Shipping, 126Lockheed Shipbuilding Co., 105LO/LO cargo, 118Long-Term World Economic Outlook, 1987-92, 42

Mahan, Admiral Alfred T., 142Malaysia, 212Malta, 212Manalytics, Inc., 190Marine Equipment Leasing Inc. (MEL), 96, 105, 112maritime cargo policy, 182-200

bilateral cargo-sharing, 185-193U.S. bilateral agreements, 186, 188, 189, 190

countertrade, 191debate, 190

cargo preference in the United States, 182-185financing international trade, 199-200

commercial assistance, 199government assistance, 199

policies of 64 countries, 206-218UNCTAD Liner Code, 193-198

bulk cargo shipping code, 195convention on multimodal transport, 198EEC Council, 194, 195open registry, 197U.S. opposition, 194

maritime trade patterns, 19coal, 21, 30crude oil, 22grain, 22, 30iron ore, 21, 30principal commodities, 20United States, 23world seaborne trade, 20

Matson Navigation Co., 119McLean Trucking Co., 118Mexico, 212Military Sealift Command, 64, 68, 133, 144, 183Mitsubishi, 126Morocco, 213Mozambique, 213

National Academy of Sciences, 93Maritime Transportation Research Board, 107Structures Committee, 135

National Research Council (NRC), 117, 135National Security Council, 179, 180National Shipbuilding Research Program, 15, 133Naval Sea Systems Command, 133, 135Netherlands, 38New England Electric, 126Newport News Shipbuilding, 133, 136

Index 229

New York, 118Nicaragua, 213Nigeria, 213Norway, 27

Occidental Petroleum Corp., 192Oflice of Management and Budget, 156OffIce of Maritime Affairs and Shipbuilding Technology,

103Oman, 25operating differential subsidies (ODS), 59, 61, 64, 79,

150, 152, 153, 154, 155Organisation for Economic Cooperation and Development

(OECD), 23, 24, 29, 31, 32, 39, 42, 73, 108, 174,197

Organization of Petroleum Exporting Countries (OPEC),44

Overseas Private Investment Corp. (OPIC), 179, 180

Pakistan, 213Panama, 25, 27Pan American Steamship Co., 118Paraquay, 213Peru, 213Philippines, 189, 214Poland, 41Portugal, 215Puerto Rico, 57, 58, 77, 79Pugh-Roberts Associates, 93

Quincy, Mass., 126

Reagan administration, 179, 203Reagan, President Ronald, 177, 180research and development (R&D), 14, 15, 97, 113, 117,

132, 133, 134, 135, 136, 137, 138‘ ‘Review of Existing Agreements and Potential Cargo

Sharing Arrangements, 1981 ,“ 70Romania, 41RO/RO ships, 25, 31, 57, 61, 62, 80, 118, 144, 145, 163

Saudi Arabia, 215Seafarers International Union, 194Sea-Land, 59, 66, 68, 81, 118, 119Seatrain Shipbuilding Corp., 165Shell Oil Co., 123Shipbuilders Association of Japan (SAJ), 38, 40, 41Shipbuilders Council of America (SCA), 88, 91, 96, 162Shipbuilding Research and Development: A

Recommended Program, 112ship design and operating technology

maritime R&D, 132-138Federal role, 137MarAd R&D program, 133

CAORF, 134cargo handling, 133National Shipbuilding Research Program, 133

U.S. Navy R&D related to the merchant marine,134-137

computer-aided design and manufacture(CAD/CAM), 135, 136

operations, technological innovation in, 129-132OTA questionnaire, 130-132

overview, 117status and trends

advanced hull forms, 123arctic transportation, 121

environmental concerns, 123LNG tankers, 122politiczd considerations, 123submarine tankers, 122

bulk trades, technological innovation in, 120liner trades, technological innovation in, 118

containerization, 118, 119lift-on/lift-off (LO/LO) cargo, 118RO/RO cargo, 119

trends in propulsion technology, 123advanced powerplants, 127alternate fuels, 124diesel, 124propulsor technology, 127-129sail propulsion, 129steam-power, 124

Singapore, 25, 215Slater, Paul, Chairman, Pelican Finance Corp., 173Smith, Congresswoman Virginia, 183Snyder, Congressman Gene, 162Society of Naval Architects and Marine Engineers

(SNAME), 117, 130OTA questionnaire, 130R&D, 133

Sohio Alaska Petroleum Corp., 123South Africa, 215South Korea, 24cargo policies, 211bilateral agreement, 190shipbuilding, 35, 36, 38, 41, 66, 85, 86, 111

Spain, 41, 87, 98, 215Sparrows Point, Md., 105Sri Lanka, 216Sudan, 216Suez Canal, 69Sulzer Brothers Ltd., 124Sweden, 87, 109

Taiwan, 24, 36, 39, 41, 216Tanzania, 216Thailand, 216“The Five-Year National Shipbuilding Productivity

Improvement Plan (1983 -88),” 133The Influence of Sea Power Upon History, 1660-1783,

142The Motor Ship, 120Todd Pacific Shipyard, 133trade policies

enforcement of fair trade laws, 181international, 1945-75, 174, 175

GATT, 175, 176


International Trade Organization (ITO), 175Multinational Trade Negotiations, 174present trade policy, 175

overview, 173U.S. policy, 176

export trading companies, 178reorganization of Federal agencies, 179

Trinidad and Tobago, 216Tunisia, 216Turkey, 217

United Kingdom, 27, 87, 217United Nations (U. N.), 42, 193United Nations Conference on Trade and Development

(UNCTAD), 5, 173Code of Conduct for Liner Operations, 11, 185, 190,

191, 193-198Uruguay, 217U.S. Agency for International Development (AID), 67,

75, 182, 184U.S. Bureau of Census, 42U.S. Civil Aeronautics Board (CAB), 150U.S. Department of Agriculture (USDA), 179U.S. Coast Guard (USCG), 132, 219

safety regulations, 151, 152U.S. Department of Commerce, 179, 180, 181, 219U.sU.s

U.sU.sU.s

Department of Defense (DOD), 143, 144Department of International Trade and Industry(DITI), 179, 180Department of Justice, 149, 158, 159, 165, 219Department of State, 179, 189, 220Department of Transportation (DOT), 73, 155, 162,165, 219

Secretary Drew Lewis, 154Us.Us.

Us.Us.Us.Us.

Us.Us.

Department of Treasury, 179Federal Maritime Commission (FMC), 69, 71, 72.79, 147, 148, 149, 150, 157, 158, 159, 190, 203,220

Federal Trade Commission (FTC), 159Internal Revenue Service (IRS), 160International Trade Commission (ITC), 179, 192Interstate Commerce Commission (ICC), 79, 146,147, 148, 166, 220

Lines, 62, 73, 80, 155Maritime Administration (MarAd), 14, 15, 59, 61,63, 66, 74, 80, 81, 87, 90, 96, 99, 117, 124, 127,132, 138, 143, 179, 184, 219

“Cost Impact of U.S. Government Regulations onU.S.-Flag Ocean Carriers, ” study, 152

Federal Ship Financing Fund, 156IHI-Livingston project, 107Maritime Subsidy Board, 150Office of Maritime Labor and Training, 102R&D program, 133-134

U.S. maritime policiescabotage policies, 163-168

Alaskan oil, 164exceptions, waivers, and suspensions, 164Jones Act “fleet,” 164

proposal changes to the Jones Act, 166development of, 141-152

comparison with other transportation policy, 146-151U.S. v. international regulations, 149-151

history, 141-142policies for the future, 143-146

industrial changes, 143national defense, 143U.S.S.R. comparison, 144-146

U.S. Coast Guard safety regulations, 151-152regulatory policy, 157-159

Shipping Act, 157, 158, 159subsidy policy, 152-157

Capital Construction Funds (CCF), 153construction differential subsidies (CDS), 153, 154,

155maritime subsidy outlays, 1936-80, 154operating differential subsidies (ODS), 153, 154, 155ship financing guarantees, 155-156

taxation policies, 160-163accelerated cost recovery (ACRS), 163Capital Construction Funds, 160, 161, 162Construction Reserve Funds, 160, 162deferrals, 161investment tax credits, 163

U.S. Navy, 7, 9, 10, 15, 39, 64, 86, 88, 89, 90, 93, 102,114, 132, 134, 135, 136, 144, 153, 163, 219

U.S. shipbuilding industry“Active Shipbuilding Industrial Base” (ASIB), 87, 88,

89, 90, 91, 92, 94, 100, 101, 105characteristics of, 87-106comparison with Japan-Korea, 86, 98computer-aided design/computer-aided manufacturing

@AD/CAM), 99, 111 -

decline in new buildings, 9, 86definition of, 87Federal funds, elimination of, 9, 86

labor force, 100, 113management problem, 113markets of, 89military ships, 89, 90orders, 91, 93physical facilities problem, 112productivity, 106-112

determinants of, 106“buy America” policy, 108length of building cycle, 106man-hours required, 107nonproductive peripheral costs, 107shipyard safety, 107

improving of, 110-112E. G. Frankel report, 110management, 111standards, 111

trends, 108-110comparison, Japan-Korea, 109

shipyard work forcecharacteristics of, 102method of wage payment, 103

Index ● 231

workers’ hours and earnings, 102international wage levels, comparison of, 104organization of labor, 104unions, 106

size, 9, 39, 85technology, level of, 96-99U.S. shipyards, capabilities of, 94-96U.S. shipyards comprising the ASIB, 88

U.S. Shipping Board, 147U.S. shipping industry

bulk fleet, 8, 19condition of, 8lack of effective maritime policies, 5, 8liner fleet, 8, 19, 25ownership, 57seaborne trade, 50trade outlook, 52trade patterns, 48U.S. bulk fleet, 73-76

CDS-built tanker fleet, 74competition, 75construction costs, 73, 74operating expenses, 73U.S. dry-bulk carriers, 75

U.S. domestic fleet, 76-81barge service, 77crude oil trade, 78foreign-built ships, use of, 79regulation of, 79tanker trades, 77technological developments, 80

U.S.-effective-control fleet, 57, 58U.S. liner industry, 59-73

cargo preference, influence of, 67, 68conferences, pool ing, and cooperatives, 68, 69, 70consortium, 70containerization, 65, 71containerships, 61, 62cost, productivity, and competitiveness, 65, 66, 67crew size, reduction of, 62, 73flexible capabilities, 62foreign trade, share of, 61future competitiveness of, 72, 73intermodal service, 65joint service, 70joint venture, 70lighter-aboard-ship (LASH), 61, 62pricing, rates, and shippers’ councils, 71, 72technological developments, 61terminals, automation of, 63trade, 59, 60U.S.-flag fleet, 59, 61, 81-82value-of-service pricing, 71

U.S. Supreme Court, 74, 165U. S. S. R., 27, 31, 32, 44, 47, 80, 123, 186, 188

comparison with the United States, 144, 145, 146Five-Year Plan (1981-85), 145

U.S. Trade Representative (USTR), 23, 179, 180, 181,199, 220

Venezuela, 217very large crude carriers (VLCCS), 29, 32, 74, 120

Wharton Econometrics, Inc., 19, 42, 76World Economic Outlook, 42world economic and trade outlook

centrally planned economies (CPES), 43dry-bulk goods, 46, 48, 49economic forecast, 42liquid-bulk cargoes, 46, 47, 49seaborne trade, 44trade flows, 43-44U.S. trade patterns and networks, 48

world shipbuilding industryin Brazil, 39in China, 39commercial merchant shipbuilding, 40employment in AWES, 38financing of, 39in Japan, 34, 38, 66, 98laser use, 99LDCS, 39production, 35ships on order, 37shipyard capabilities and capacities, 34, 38in South Korea, 36, 38, 66, 98in Taiwan, 39in United States (see U.S. shipbuilding industry)workers compensation, 104

world shipping industrycontainerization, 32general cargo, 31national fleets, trends in, 32overview, 25shipping economics, 32ship types and features, trends in, 32United States (see U.S. shipping industry)world bulk fleet, 30

Yugoslavia, 217

Zaire, 218

U.s . GOVERNMENT PRINTING OFFICE : 1983 0 - 25-417 QL 3