The Ten Percent Solution
A New Mission for the U.S.-Flag Merchant Marine
By ROBERT W. KESTELOOT
Capt. Robert W. Kesteloot, USN (Ret.), a member of the Navy League's Merchant Marine Affairs Committee, 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 partner in Management & Transportation Associates of New York City. The author's last active-duty assignment was as director of strategic sealift on the staff of the chief of naval operations.
As of 1 October 2001, the number of privately owned active, oceangoing commercial U.S.-flag ships was 239 (down 26 ships from the year before, and a continuation of recent trends). That total included 105 ships operating in domestic Jones Act trade (down 13 ships) and 32 other ships engaged exclusively in U.S. government work. Therefore, there were only 102 U.S.-flag ships operating in international trade, where head-to-head commercial competition with foreign-flag ships and nations takes place on a daily basis.
Only 47 of these ships receive government assistance--in the form of Maritime Security Program (MSP) payments of $2.1 million per ship, per year. It is highly likely, unless the size of the program is expanded, that many if not all of the other 55 ships engaged in international trade, but not receiving MSP payments, will be replaced by foreign-flag ships when they are retired.
For years, numerous industry and government officials have warned about the decline of the U.S.-flag Merchant Marine, which in 1950 carried as much as 42 percent of the nation's two-way foreign commerce, exports and imports combined, but for the last several years has carried less than 3 percent--only 2.6 percent in 2000, for example.
The traditional rationale for supporting a rebuilding of the U.S.-flag fleet is that the United States needs commercial ships and crews to support military contingency operations. In reality, though, in recent years the need has been more for crews (than for ships) to activate and man the government-owned strategic sealift ships maintained in varying states of readiness.
The Maritime-Security Rationale
Since 11 September 2001, however, there has been a newly recognized requirement for increased maritime security that is reason enough in itself to take whatever remedial actions are needed to do something to reverse the decline in the number of U.S.-flag ships.
The basic problem facing U.S.-flag ship operators is the difficulty of competing against foreign ship operators who benefit from lower crew costs because they operate ships flying flags of convenience; they also face easier and less expensive regulatory constraints, and pay little or no corporate tax on earned income. Facing that type of competition, it was inevitable that the U.S.-flag fleet would continue to decline.
The Navy and Marine Corps have always advocated "forward presence" as the key to the U.S. defense strategy. There is a similar need for the forward presence of the U.S.-flag Merchant Marine. As with the Navy's active fleet, there is a definable number of ships below which the U.S.-flag merchant fleet cannot fall without jeopardizing its ability to maintain a significant forward presence.
In the case of the U.S.-flag Merchant Marine, forward presence consists of a continuing involvement in world trade and a concomitant ability to play an active role in determining the rules by which such trade is conducted. It means, in other words, being "a player" in world trade and in all that is implied in that nebulous term--including, for example, credible participation in the International Maritime Organization, the International Labor Organization, and the International Transport Workers Federation. There is much to be done in these arenas that would improve U.S. maritime security--e.g., creating and implementing a uniform international credentialing system for transport workers.
To become more involved in global trade and have a greater presence and impact on how trade is conducted, U.S.-flag ships will have to carry a larger share of that trade. Presence and direct involvement both lead to better intelligence--and, therefore, to a higher degree of national security with regard to imports and exports.
Greater improvements in maritime security will be possible when all legitimate oceanborne cargo can be tracked from origin to destination with assured knowledge of any attempts of tampering en route. To further the technology and methods of a secure tracking system, it would be helpful if more American companies owned and operated a greater number of ships manned by U.S. citizens.
A reasonable national goal, perhaps, would be to require that 10 percent of all U.S. imports and exports be carried in American bottoms. Numerous studies predict a doubling and perhaps tripling of the nation's two-way foreign trade by 2020, so no foreign-flag carrier would have to give up cargo if such an increase in the U.S.-flag share were mandated by Congress.
It also is important--for economic and environmental as well as security reasons--that the United States develop a highly capable U.S. domestic fleet that can at least transport the commercial truck trailers now carrying hazardous cargoes between coastal states. This would greatly improve security in the seaports, bridges, tunnels, and highly populated urban areas of those same states. It also would relieve congestion on coastal highways such as I-95 and I-5.
A Shrinking Manpower Pool
The original reason to develop and enlarge both the international and domestic fleets--i.e., to increase the citizen seafarer manpower pool--is still valid. Between them, the Departments of Defense and Transportation have responsibility for 88 government-owned strategic sealift ships (growing to 91 ships by the end of this year). All are maintained in varying stages of readiness ranging from four days to 20 days.
Those that are maintained at the highest degree of readiness already have skeleton crews aboard. The others do not--to activate them to meet national contingency requirements, the government relies on off-duty commercial mariners, who normally work four months on and four months off. The Gulf War was the only time when almost the entire strategic sealift fleet was activated, and there were at that time barely enough mariners to do the job. Some of them were veterans of World War II.
In the 12 years since the end of the Gulf War, the size of the U.S.-flag fleet has declined further; so has the manpower pool, which is now inadequate to man all of the ships in the strategic sealift fleet. A larger fleet, both international and domestic, would solve this problem.
None of this is new. The need has existed for years, but the events of 11 September have exacerbated the security problems and provided a more urgent rationale for rebuilding the U.S.-flag fleet. There is another factor also to consider: The U.S. maritime industry has evolved from an ocean shipping business to a global freight transportation conglomerate. The intermodal network that stretches from the source of freight to its destination is now as important as the ships themselves--or almost so.
The ocean/vessel share of overall intermodal costs is below 20 percent and remains under intense competitive pressure. The entire intermodal network must be protected from potential acts of terrorism, and it seems obvious that those who are best trained and will work in the best interests of the United States are citizen mariners who understand the system.
The problem here is that it would take many more U.S.-flag ships engaged in everyday commercial operations around the world to create a manpower pool large enough to activate all of the government-owned strategic sealift ships now in the fleet. The post-9/11 creation of the new Transportation Security Administration (TSA) has resulted in a significant increase in the need for personnel experienced in maritime and intermodal transportation and familiar with port operations. Traditionally, most such personnel have come from the ranks of mariners who gained their first experience in the distributive trades by going to sea. Later, many moved into management positions in port operations, in shipping or freight forwarding companies, and/or into other positions ashore where their basic sea experience was put to good use.
Oberstar Seeks Taxation Parity For American Seafarers
The need for such personnel has never been greater than it is today. Today, the U.S.-flag Merchant Marine lacks the critical mass needed even to meet its long-standing strategic sealift responsibilities. For that reason, the Military Sealift Command has chartered a number of foreign-flag vessels to fill the gap. The new responsibility to provide personnel for port security as well increases the strain on the already inadequate manpower pool.
There is, however, one encouraging piece of legislation--introduced by Rep. James L. Oberstar (D-Minn.), ranking member of the House Transportation and Infrastructure Committee--that promises both relief for U.S-flag ship operators and hope for improved maritime and national security.
The Oberstar Bill, H.R. 3262, introduced last November, is titled the "Merchant Marine Cost Parity Act of 2001." Its stated purpose is to revitalize the international competitiveness of the U.S.-flag maritime industry through international tax parity. It proposes to do so primarily through a tonnage tax on ships operating in international trade as an alternative to normal U.S. corporate tax.
Several other countries--most recently and successfully the United Kingdom--have adopted this form of tax on their nationally registered ships. Another major provision of the bill would extend to U.S. mariners the same personal income tax benefits available to other U.S. citizens working overseas.
Under the Oberstar Bill, if a citizen of the United States is employed for a minimum of 90 days during a taxable year as a regular member of a crew of a U.S.-flag ship engaged in international trade, his or her income, regardless of where it is paid, may be treated as income that is "foreign earned," and thus may be exempted from U.S. income tax. This provision would allow a ship-operating company to pay its crews lower wages, and thereby become more competitive, but would not reduce the net income earned by individual crew members. [The Merchant Marine Affairs Committee of the Navy League has endorsed the Oberstar Bill and has urged other Navy League members to support it.]
Review and Assessment
In Title I, Declaration of Policy, the Merchant Marine Act of 1936 states the following:
"It is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine: (a) sufficient to carry its domestic waterborne commerce and a substantial portion of the waterborne export and import foreign commerce of the United States and to provide shipping service essential for maintaining the flow of such domestic and foreign waterborne commerce at all times; (b) capable of serving as a naval and military auxiliary in time of war or national emergency; (c) owned and operated under the United States flag by citizens of the United States insofar as may be practicable, composed of the best-equipped, safest, and most suitable types of vessels, constructed in the United States and manned with a trained and efficient citizen personnel, and supplemented by efficient facilities for shipbuilding and ship repair. It is hereby declared to be the policy of the United States to foster the development and encourage the maintenance of such a merchant marine."
In governmental affairs as in business, it is useful to periodically review important policy statements periodically and assess how well (or how poorly) the nation is doing. Any objective assessment of the current state of the U.S.-flag Merchant Marine would raise a number of serious questions, including the following: Does 2.6 percent of foreign imports and exports constitute a "substantial portion" of the nation's waterborne commerce? Can today's U.S.-flag Merchant Marine adequately serve as "a naval auxiliary" in time of war? Is there an adequate number of "trained and efficient citizen personnel" available to meet the U.S. national-defense and economic needs? Does the United States now possess the "efficient facilities" needed both for shipbuilding and for ship repair?
No one faults the quality of the U.S. Merchant Marine. But few if any would assert that the number of ships in its fleet is sufficient, and suddenly that long-term inadequacy has taken on added importance. Congress might be well-advised, therefore, to review Title I of the 1936 Act and add a sixth policy requirement--namely, that in addition to carrying a "substantial portion" of the nation's commerce, the Merchant Marine manpower pool be capable of contributing significant numbers of trained personnel to support both strategic sealift and national maritime-security requirements.
Formal recognition of maritime security as a function of the merchant marine industry, combined with tax relief for U.S. ship operators, may be the magic elixir needed to kindle a resurgence in both the size and role of the U.S.-flag Merchant Marine.
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