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Is the American Merchant Marine a Zombie?

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Robert Bowman, Forbes
Special to In Homeland Security

Supporters of U.S.-flag merchant shipping are fighting hard to protect it against cheaper foreign competition. But the fleet is effectively dead already, according to one industry expert.

Former State Department official Richard K Bank said decades of government subsidies and cargo-preference laws have failed to preserve ships that are built, owned and operated by U.S. interests. The few remaining vessels that supposedly sail under the American flag are, for the most part, not under American control, he said.

The battle over the federal budget has revived the debate over U.S. shipping. The industry has long received subsidies to offset the higher cost of American labor. In addition, a set portion of government-generated cargoes, such as military and international food aid shipments, has been set aside for U.S. merchant vessels, even though their rates are substantially higher than those of foreign carriers.

The budget sequester is threatening what’s left of the fleet. Critics charge that the current Maritime Security Program, which is supposed to maintain a modern U.S.-flag merchant marine, is in danger of being dismantled due to the fiscal crisis. The International Propeller Club of the United States, in an October letter to Congress, complained that proposed legislative changes would result in the “devastating underfunding” of the program. It called for maintaining the current funding level of $186 million a year, which supports a fleet of 60 commercial vessels that can be made available to the U.S. government in times of war or national emergency.

If ships are cut from the program, “thousands of mariners will lose their jobs, our military will lose significant logistics capacity, and our nation’s military sealift capabilities will be degraded,” wrote Propeller Club international president Stephen E. Smith, Jr.

But Bank, who now serves as president of Millennium International Consultants, LLC, questioned whether those ships would really be available when needed. Most are operated by foreign-based companies that set up American operating units in order to keep receiving government subsidies. American President Lines still exists in name, but it’s been owned by Singapore’s Neptune Orient Lines since 1997. Sea-Land Service, another former U.S.-flag carrier, was acquired by Denmark’s Maersk Line in 1999.

The U.S. pays ship owners about $3.1 million to keep their vessels flying the American flag. And that amount doesn’t even cover half the differential between U.S. and foreign-flag operating costs. To make up the rest, the government requires that U.S.-registered ships be used for at least half of all food-aid shipments, and 75% of military cargoes.

Bank said foreign operators could easily renege on their promise to provide those vessels to the U.S. government for emergency purposes. Denmark, for example, might forbid any ships operated by Danish companies to operate in a war zone, regardless of whether they were part of a U.S. subsidiary. Or Singapore could bar the U.S. from deploying any of its ships in a military action against China.

Government aid doesn’t even guarantee a shipping line’s survival, Bank said, pointing to the rash of failures that hit U.S. operators in the 1970s, including Pacific Far East Lines, Prudential-Grace Lines and Moore-McCormack Lines. All were given the benefit of subsidies and preferential treatment for moving government cargoes. All died because of high operating costs, bureaucratic restrictions and intransigent unions, he said.

What remains, despite the strength of carriers like APL and Maersk, does not constitute an actual U.S.-flag fleet, he said, calling subsidies “a waste of money,” and cargo preference “a detriment to free trade.”

Bank also attacked the Merchant Marine Act of 1920, known as the Jones Act, which bars foreign-built or registered ships from serving the U.S. domestic trades. Qualified operators are required to build their vessels in the U.S., at a price far in excess of foreign shipyards. Matson Navigation Co., Inc., which operates between Hawaii and the U.S. mainland, recently placed an order for two ships with a Philadelphia shipyard for approximately $209 million apiece. The deal “underlines the possibility that U.S.-flag protectionism is an increasingly expensive luxury,” said a recent report by Drewry Maritime Research. It claimed the ships could be built today in Asia for less than one-fifth that price.

Bank said restrictions placed on carriers by the Jones Act make it virtually impossible to start up a coastal operation in U.S. waters. “People keep talking about coastwise shipping,” he said. “You can’t do that as long as you require U.S.-built and manned vessels.”

Supporters of the U.S.-flag restrictions argue that they protect American jobs. The Maritime Security Program directly supports 2,700 mariners as well as 5,000 shoreside jobs, according to K. Denise Rucker Krepp, a transportation and homeland security expert, and former chief counsel to the U.S. Maritime Administration.

But Bank said that benefit isn’t worth the higher cost of moving cargoes on American ships, which reduces the amount of food aid that can be shipped to countries in need, and doesn’t protect U.S. interests in any case.

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