The U.S.-Flag Merchant Marine: Let the New Millennium Begin

By ROBERT W. KESTELOOT

CAPTAIN ROBERT W. KESTELOOT, USN (Ret.), is founder and president of K Associates Ltd. of Reston, Va., a maritime firm that specializes in merchant marine and national security affairs. He also is a principal in Management & Transportation Associates of New York City and a member of the Navy League's Merchant Marine Affairs Committee. His last active-duty assignment was as director of strategic sealift on the staff of the chief of naval operations.

The United States is by far the largest trading nation in the history of the world. U.S. ocean imports and exports combined exceeded one billion metric tons last year, or almost 20 percent of the world oceanborne trade. In addition, the United States imports 11 million barrels of oil per day. Most of it also comes by sea.

Impressive numbers, but the fact to focus on is this: Last year, less than three percent of that cargo was carried by U.S.-flag ships. The other 97 percent came and went in foreign-flag ships. However, the only complaint heard by most Americans is about the imbalance of trade. No one considers the export of billions of dollars paid annually to foreign ship operators who carry the other 97 percent of the cargo, who do not pay U.S. taxes, and do not hire U.S. mariners. This is economically indefensible--but, more importantly, a threat to U.S. national security. With fewer military forces forward-deployed in potential areas of threat, rapid response with U.S.-flag commercial sealift has become more important than ever before.

As of 1 July 2000 the number of privately owned oceangoing commercial U.S.-flag ships was down to 265, a continuation of recent trends. That total included 118 ships in domestic (Jones Act) trade and 34 other ships engaged exclusively in U.S. government work. Therefore, there were only 113 U.S.-flag ships operating in international trade, in head-to-head commercial competition with foreign-flag ships and nations on a daily basis.

Only 47 of these U.S.-flag ships receive government assistance--in the form of Maritime Security Program (MSP) payments of $2.1 million per ship, per year. An annual budget cap of $100 million per year and a minimum payment per ship of $2.1 million dictated the size of the MSP program, which started in 1996. Thus, the number 47 was budget-driven rather than requirements-driven. A Journal of Commerce editor observed that the $100 million is "less than what the Agriculture Department spends on farm subsidies in a slow week." It is highly likely that many of the 66 remaining ships engaged in international trade, but not receiving Maritime Security Program payments, will be replaced by foreign-flag ships when they are retired.

The MSP payments partially offset the higher cost of operating under the U.S. flag and manning the ships with U.S. crews. In exchange for these payments, the ship operating companies have agreed to make cargo capacity and their entire intermodal systems--including port facilities, truck and rail assets, electronic tracking systems, and management expertise--available to the government for contingency operations. The Maritime Security Program is already halfway through its originally planned 10-year life and will expire in 2005. Each year, however, because it requires annual appropriations, the program still has to run through the congressional gauntlet.

A point not always remembered, even by members of Congress, is that the only way so few ships can provide adequate sealift for the deployment and resupply of the nation's military forces is because MSP payments buy cargo capacity, not ships. Any ship with which the U.S. operating company has a cargo-sharing arrangement can provide that capacity. Because all U.S. liner operators belong either to an alliance (usually consisting of several ship operators from a number of independent nations) or have entered into cargo-sharing agreements with one or more other ship operators, the U.S. owner of ships eligible for MSP payments is able to ship government cargo on any ship, without regard to flag, on which the owner has space reserved. In essence, therefore, the 47 MSP ships provide leveraged access to literally hundreds of other ships.

MSP participants also must enroll 100 percent of their U.S.-flag MSP vessel capacity, intermodal resources, and services in the VISA (Voluntary Intermodal Shipping Agreement) program, an Emergency Preparedness Program run by the Departments of Defense and Transportation.

Jones Act: "Critically Important"

There have been several virulent attacks on the Jones Act fleet in recent years, most notably from the Jones Act Reform Coalition, a group of shippers seeking to change U.S. cabotage laws. Maritime interests, with strong support from the Navy League and other patriotic organizations, replied by encouraging passage of 1998 House Concurrent Resolution 65, cosponsored by Reps. Joe Moakley (D-Mass.) and Gerald Solomon (R-N.Y.). The resolution, which states specifically that "the Jones Act and related statutes are critically important components of our nation's economic and military security and should be fully and strongly supported," won overwhelming support from 245 other members of the House.

The resulting confidence provided to Jones Act operators is evidenced today by the increasing orders for new-construction ships: two large roll-on, roll-off (RO/RO) ships for the Alaskan trade, one medium-size RO/RO for the Hawaiian Islands trade, six new double-hull tankers for coastal oil trade, and two new cruise ships for the Hawaiian trade. An agreement has been signed, moreover, for the construction of two more cruise ships, plus options for two additional ships, for use in the U.S. coastal cruise trade. It is anticipated that construction contracts will be signed this year.

This commitment of investment dollars will make legislative assaults on the Jones Act more difficult. However, it still will be necessary to stiffen the resolve of the executive branch of government. This is because of a World Trade Organization (WTO) agreement to review, within five years, the 1994 WTO exemption of the 1920 Jones Act, as well as the closely related Passenger Vessel Act of 1886, from national treatment rules. The European Union and Japan have already called for the review.

It may be time, therefore, for the maritime industry and others interested in maintaining the Jones Act fleet to remind the new president and incoming Congress of the changing circumstances that make continuation of the exemption essential. In 1982, direct shipbuilding subsidies were ended by President Ronald Reagan because the 600-ship Navy envisioned at the time was expected to keep shipyards busy, thus maintaining the shipbuilding base essential to national security. Today, the Navy has only half as many ships and the Navy's long-range shipbuilding plan projects so few new ships being built that fleet numbers will shrink even further. Maintaining the "critical mass" of the shipbuilding industry therefore may well depend upon commercial construction--more specifically, the domestic Jones Act and Passenger Vessel Act shipbuilding order books.

The second national-security implication resident in the need to preserve the Jones Act relates to manpower. Unless the MSP is renewed--and expanded to include more ships--there is little hope for growth in the international trades. However, there is potential for growth in clean-product tankers, the cruise fleet, and the domestic coastal shipping market. This growth is essential for, among other reasons, providing new opportunities for sustainment of the seafarer manpower base.

It seems evident that, for at least the next two decades, the Department of Defense (DOD) will depend upon the VISA agreements, its own Fast Sealift Ships, and the inactive Ready Reserve Force (RRF) to meet its sealift needs in times of crisis. In order to activate these ships for national emergencies or contingency purposes, however, qualified mariners must be immediately available. Because most commercial ships operate about 340 days a year--with the balance of the year required for repairs, dry docking, and mandated inspections--each ship has two full crews. Normal rotation is about four months at sea and four months ashore for rest and training. The off-duty crews provide the manpower pool required to make the entire RRF concept both credible and executable.

The maritime manpower issue is really a global problem. The April 2000 quinquennial Baltic and International Maritime Council (BIMCO) and the International Shipping Federation (ISF) Manpower Update quantified supply and demand not only for the present but also for the next decade. The worldwide supply of seafarers in 2000 was estimated to be 404,000 officers and 823,000 ratings. The OECD (Organization for Economic Cooperation and Development) countries--Western Europe, the United States, Canada, Australia, New Zealand, Turkey, and Japan--remain the most important source for officers, but the Far East has increased its share.

The latter is now by far the largest source for ratings. The estimate of worldwide demand for seafarers in the near future is 420,000 officers and 599,000 ratings.

The world fleet continues to rely upon large numbers of officers from Europe, North America, Japan, and other OECD countries. More than 40 percent of these officers are over 50 years old, though. Most serve in senior positions as masters or chief engineers. The impact of their retirement, without enough well-trained replacements readily available, could be severe, particularly on the U.S.-flag merchant marine.

Opportunity Beckons

Several ongoing studies on U.S. coastal shipping have focused on increased use of water transportation along the Northeast I-95 corridor--and for good reason. This sector consists of 12 states--and the District of Columbia-- and stretches from Virginia and Delaware in the south to Maine, Vermont, and New Hampshire to the north.

Within this corridor--6.2 percent of the U.S. landmass--reside nearly 25 percent of the U.S. population. The extremely heavy concentration of people, infrastructure, and traffic within the region has made it the most congested in the United States. It was this realization that led to formation, in 1993, of the I-95 Corridor Coalition, a partnership of transportation agencies and transportation industry volunteers. (Further information on this organization, which already is producing tangible results, is available at www.I95coalition.org).

The ongoing studies conclude that U.S. international shipping will double by 2010 and triple by 2030. Some ports, such as the Port of New York and New Jersey, foresee even greater increases--from 2.5 million TEUs (20-foot equivalent units) in 1999 to nearly six million in 2010, almost 12 million in 2030, and more than 14 million in 2040. This has the potential to establish permanent gridlock in the surrounding areas and along the immediate I-95 corridor area unless alternative distribution methods are developed. The same problem exists nationwide to varying degrees and affects the I-10 interstate along the Gulf Coast and the I-5 interstate on the Pacific Coast. For that reason, there is a major national interest in these studies.

One study, "Coastal 2000," being conducted by a subcommittee of the National Defense Transportation Association's Sealift Committee, points out that the already projected doubling of U.S. international trade equates to an additional 16 million TEUs of cargo arriving every day on each coast and would require 11,000 semi-trucks to carry that cargo. The same study notes that, on the East Coast, the recently combined Conrail and Northern Southern railroads could take only about 1,000 of these trucks per day. That leaves 10,000 more trucks that will have to be absorbed by the already congested I-95 corridor--or one more truck on the highway every 270 yards between Boston and Miami.

Several of these studies also postulate, though, that a combination of domestic high-speed feeder ships and tug and barge systems could be used to safely and swiftly bypass the most highly congested traffic areas on the interstates and to decrease the number of port calls that have to be made by transoceanic ships. These findings run counter to earlier-held beliefs that short-haul barge trips are too expensive, at least compared to truck dray-age costs. Closer and more recent
analysis has shown that trucking costs (as opposed to tariff rates) in open-highway areas run about $1.50 per mile. However, in such highly congested areas as the Northeast Corridor, trucking costs now run $3.50 per mile or more. Moreover, the transfer of incoming containers from an international carrier to a short-haul barge
service, rather than to port container yards, reduces long-term storage costs.

The time that containers remain in port before they can be picked up by trucks for final delivery is referred to as "dwell time" and averages about eight days in major ports. Transferring containers to barges means that cargo often can be delivered earlier, despite the slower transit speed of barges when compared to trucks.

The opportunity to develop coastal shipping through the use of barges and high-speed RO/RO ships could be a partial answer to the U.S. seafarer manpower problem. A study commissioned by the Maritime Administration and conducted by Louisiana State University's National Ports and Waterways Institute envisions the following: (a) a coastwise network of low-cost domestic terminals adjacent to deep-sea terminals; (b) a fleet of high-speed monohull RO/ROs; (c) a service pattern based on highly coordinated multiport loops; and (d) an institutional setting similar to that of the intermodal U.S. rail system.

The high-speed ships would operate in regions that, on the East Coast, for example, might consist of seven adjacent coastal areas extending from Maine to Florida. Most of these areas would encompass several ports and could be served by two or more ships operating on counterrotating routes. The northern and southern arrivals and departures in the various regions would be very closely coordinated with other transportation modes. These ships probably would have limited defense utility, if any, because they would be relatively small (less than 500 TEUs), have limited range, and possess minimal seakeeping facilities. But their rotating crews would be trained mariners, and would be available in large numbers for military contingencies that require the activation of the RRF.

A Possible Show-Stopper

There is, however, a potential major impediment to the increased use of coastal shipping: the Harbor Maintenance Tax (HMT). From 1789 to 1986, before the Water Resources Act of 1986 was enacted into law, most harbor-maintenance and harbor-deepening projects were funded from general revenues. The 1986 Act imposed an HMT of 0.04 percent on the value of the cargo for any port use--e.g., the loading and unloading of imports and exports.

The HMT was designed to fund routine harbor maintenance. Harbor-deepening projects would be cost-shared between the ports and the federal government. Unfortunately, the law did not differentiate between foreign and domestic cargo. Noncontiguous Jones Act cargo moving between the U.S. mainland, Puerto Rico, Alaska, and Hawaii was exempted from the HMT, but domestic coastal shipping, almost minimal in 1986, was not exempt.

In March 1998, the Supreme Court ruled that imposition of the HMT on exports violates the Constitution's ban on export taxes. The HMT now stands at 0.125 percent, or 12.5 cents per $100 of cargo value, and is still collected, but only on imports. The ban on an export tax mattered not at all in moving domestic cargo between two U.S. ports because the original Act specifies that "only one tax shall be imposed ... with respect to the loading on and unloading from ... the same vessel of the same cargo."

During the 106th Congress the Clinton administration proposed: (a) replacing the HMT with a new tax based on the carrying capacity of vessels; and (b) using the revenues to fund both routine harbor maintenance and harbor-deepening projects, thus significantly increasing the amount that would have to be paid by shippers (for domestic moves), by importers, and by private-sector exporters.

Last year, Rep. Robert A. Borski (D-Pa.) proposed a bill that essentially would turn the clock back to 1986, when maintenance dredging was funded in its entirety from general revenues. The American Association of Port Authorities, ship associations, labor unions, and shipper groups all supported the Borski bill on the premise that the entire country benefits from a low-cost competitive port system and that, if enacted, the administration's proposal would hurt exports.

The National Industrial Transportation League opposed the administration's bill, but did not support the Borski bill.

Almost all segments of the sometimes-fragmented U.S. maritime industry hope that Congress will pay prompt attention to this issue, but most industry experts do not really expect expedient action because enough maintenance and dredging funds are available to meet current needs, so "fast-track" action would be viewed as unnecessary. However, it obviously is not in the nation's best interest to discourage coastal shipping, and it makes little sense to heap added cost on shippers attempting to move cargo vehicles from the I-95 corridor to what might be called an alternative "W-95" route serving the entire eastern seaboard.

Until the HMT issue is resolved, shipping interests have the option of seeking congressional sponsorship for, and rapid passage of, Environmental Tax Credit (ETC) legislation that would reward efforts to mitigate highway congestion and improve air quality by granting a corporate income tax credit equal to the amount paid for domestic HMT. While the domestic portion of the HMT is not a large source of revenue for the U.S. Army Corps of Engineers ($48.8 million in FY 1999), it is a potentially show-stopping disincentive for domestic shipping. Such federal legislation could be modeled on the existing Massachusetts Harbor Maintenance Tax Credit, passed in August 1996, which serves this very purpose for corporations in that state.

The ETC would apply only to containerized and break-bulk cargo, including vehicle shipments, and the cargo would have to be carried on oceangoing vessels.

Bigger Ships Around the Bend

Whatever the solution for the HMT problem, the deepening of many of America's harbors is absolutely essential in order to accommodate the larger ships now on the drawing boards. Maersk Sealand already operates ships with cargo capacities greater than 6,000 TEUs. More than 100 post-Panamax cargo ships--i.e., ships with beams wider than 105 feet and therefore unable to transit the Panama Canal--are now on order. This will double the size of the existing post-Panamax fleet. Hapag-Lloyd has ordered four of the largest of these ships (capacities of 7,200 TEU) from Hyundai. The 6,000-TEU Regina Maersk made a "show the flag" visit to New Jersey's Port Elizabeth two years ago, but had to offload several hundred containers in Halifax in order to enter New York harbor, which has a controlling draft of 42 feet. Dredging already has begun to increase channel depths to 45 feet by 2004, and a just-released Harbor and Navigation Study carried out by the U.S. Army Corps of Engineers recommends further dredging, to 50 feet, to be completed by 2009.

Not all gridlock is confined to roads. Many of the U.S. container-handling yards are already so overloaded that containers have to be "grounded"--i.e., taken off the chassis they were loaded onto when lifted off a ship, and other containers stacked on top of because of inadequate acreage in the container area of the port. Ideally, a container should be lifted off the ship onto a chassis and moved to a temporary holding section until a tractor can enter the yard, hook up, and move the chassis and container to its final destination. When containers are grounded, the result is double--and sometimes even triple and quadruple--handling, particularly when containers are stacked. This causes major delays, compounds the congestion within the yard, and increases operating costs.

The ports of Long Beach and Los Angeles are bursting at the seams and struggling to handle nine million TEUs a year. The looming question is, how will they handle twice that volume 10 years from now? There are a number of infrastructure improvements planned, including on-dock rail yards and expanded off-dock rail transfer facilities, but most movement of cargo into and out of the ports will be by truck.

The Long Beach Freeway (I-710) now handles 80 percent of the traffic, but the estimated saturation point, 50,000 daily trips, could come as early as 2006. This estimate takes into account future use of the ongoing $2.4 billion Alameda Corridor, scheduled for completion in 2002.

Long lines of truckers waiting in line are already common at nearly every major U.S. port, particularly in the heavy import months of June though November. Infrastructure improvements, both within and outside the ports, will help, but cannot solve the problem. Los Angeles and New York have plans in hand to expand port space by reclaiming land. Long Beach is converting much of the old naval shipyard there to container piers. Faster cranes capable of making 50 lifts an hour--and able to reach to the outboard side of the wider post-Panamax ships--are replacing older, slower cranes.

In addition to these improvements, port authorities say, there has to be wider use and acceptance of intelligent transportation systems (ITSs). Extending the time that ports are open to trucks also will help. The technology exists to automate dispatch systems, bar code both documents and cargo, and conduct paperless gate transations. But much of the dispatching done today still depends on the traditional stubby pencil and a notepad. This is partly due to reluctance by the longshoremen unions--the International Longshore and Warehouse Union (ILWU) on the West Coast, and the International Longshoremen's Association (ILA) on the East and Gulf Coasts--to accept ITS automation. The worst situation is on the West Coast, where union leaders insist that any jobs created by ITS should also belong to the union.

Because no stevedore contracts are due to expire in the immediate future, this could be an opportune time to trade jobs for union acceptance of information technology and intelligent transportation systems that would improve the productivity of almost every component of the nation's marine transportation system. In the long term, the only way the exponential increases in cargo now projected can be accommodated safely and cost-effectively is by combining infrastructure improvements with information technology systems and to move to "24/7" (24-hour, seven-day-a-week) operations. The additional jobs generated by the extra shifts should more than offset any job losses resulting from ITS and higher productivity.

The impact of 24/7 port operations would be felt nationwide. Truck traffic near the ports would be spread over both night and day, easing congestion during the traditional rush hours. Warehouses also would have to remain open longer, and train schedules would require adjustment. But the end result of all these changes should be even lower costs and higher productivity.

There undoubtedly would be some serious local zoning and noise-restrictions issues to be resolved, though. Compromise or relocation may be required in some cases. Drayage companies would benefit from the dilution of traffic and better use of their equipment through "virtual yards" that provide real-time conditions and current "ready-for-pickup" signs, courtesy of ITS. Interestingly, the industry sector that would be least affected would be the ships, since mariners routinely work 24/7.

The NDTA study cited earlier was recently briefed to the NDTA Sealift Committee, which includes maritime industry CEOs, the commander in chief of the U.S. Transportation Command, the commander of the Military Sealift Command, and the Maritime Administrator. Those in attendence were presented with a cogent, thought-provoking logic regarding support for a strong U.S.-flag merchant marine that went something like this:

Each year the federal budget includes funding for hundreds of programs providing federal assistance to undertakings deemed valuable because they contribute to national security or support other legitimate national interests. In the last quarter of fiscal year 1999, there were 1,424 domestic assistance programs, administered by 57 different federal agencies, in the budget. There also were a large number of national-security programs (many of them classified, so the exact number cannot be determined) administered by the Departments of Defense and State.

In the procurement of ships, aircraft, and weapon systems the U.S. defense industry has argued, correctly, that government assistance often is needed to "level the playing field" for U.S. manufacturers. They also express legitimate concern about government actions that weaken the defense industrial base and/or reduce the number of skilled workers in that base.

These same concerns apply to any potential weakening of the U.S. maritime and/or shipping industries. However, except when there is a mobility crisis, there are few champions for the shipping industry.

Yet maritime programs stand in good stead in any assessment of their relative worth to the country. The national security link to strategic mobility is the most obvious benefit, but others exist--helping to maintain the defense industrial base, obviously, and building up the pool of skilled maritime manpower.

The incoming Congress and new administration must ask themselves--and then answer--two major questions related to strategic mobility: (a) How important is it to U.S. national security that the United States have available to it (through MSP and VISA) a core fleet of militarily useful cargo ships and supporting infrastructures ready to respond to national or international crises? (b) How important is it that government policies help to ensure that U.S.-flag vessels can be crewed by skilled and experienced U.S. mariners who in an emergency can man both the commercial fleet and the government's own strategic sealift ships?

Congressional testimony during committee hearings on the MSP concluded that the MSP/VISA programs save the government as much as $800 million annually compared to what it would cost for the same lift capacity if it had to be acquired and maintained by the Department of Defense. That assessment includes the cost avoided by the government because it could rely on using commercial ships for sealift missions in times of war or other crisis.

The bottom line is that the various components of the nation's maritime industry--including the ships, the construction and repair yards, maritime suppliers, and, especially, the skilled maritime work force, both afloat and ashore--are all part of the overall defense industrial base and, as such, worthy of the support pledged in
the 2001 Maritime Policy of the Navy League (see the accompanying sidebar on this page).

As the United States takes its first real steps into the new millennium, it is worth emphasizing that an economically viable U.S.-flag Merchant Marine and prosperous maritime industry are the best and most enduring solution to meeting the U.S. national defense sealift requirements, both for ships and for crews. The United States of America is the most prosperous nation in the world--and the largest trading nation in all history. But it is no longer a true maritime power--and will never again become one unless there is a national resolve to do so.

The tax policies of the maritime industry worldwide, particularly as they affect investment in new ships in this very capital-intensive industry, suggest that the United States needs to reconsider the basis upon which it taxes maritime activities. The issue of instability in the MSP, due to reliance on annual appropriations,
is yet another example of how the federal budget process actually impedes the long-term goals of the programs funded under those budgets. A long-term MSP contract, just like a long-term commercial or government charter, could serve as the basis for attracting commercial investment in new ships constructed for the
MSP program.

The U.S.-Flag Merchant Marine

For economic, national security, and environmental reasons, the Navy League of the United States:

Supports the Jones Act and related maritime cabotage laws critical to America's maritime infrastructure--and, therefore, to U.S. national defense--and strongly opposes legislation that has been introduced to alter those laws in ways that, according to the Joint Chiefs of Staff and other defense leaders, and to many members of Congress, would be harmful both to the U.S. defense infrastructure and to America's economic well-being.

Supports proposals that would facilitate the shift of truck, car, and passenger traffic from coastal highway and train corridors to deep-water ships operating in U.S. coastal and inland waterways as a way to reduce traffic congestion and vehicle emissions, improve highway safety, and strengthen the U.S.-flag Merchant Marine through the building and operation of increased numbers of ships in the contiguous Jones Act coastal trades.

Supports all additional budgetary and legislative measures necessary to maintain a robust and economically competitive U.S.-flag Merchant Marine and Marine Transportation System and its supporting infrastructure. Continuing support of the annual appropriations necessary to fund the Maritime Security Program is particularly important in this context.

Endorses equitable treatment for Merchant Marine veterans of World War II by extending to them the same eligibility to veterans' status already available to veterans of the nation's armed services.

For a complete version of the Maritime Policy of the Navy League of the United States, visit www.navyleague.org and click on Legislative to access Maritime Policy.