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The U.S. flag merchant marine.


Addressing this special issue's theme of Maritime Business, the issue editor has selected this widely read 1996 article to present a topic of great importance. As a maritime nation, the United States has effectively used its ships and seafarers to maintain its global supremacy. This article addresses the "fourth arm of defense," the U.S. flag fleet, which faces a significant decline in its share of international shipping. This decline has disturbing long-term implications for America's national security and economic well-being. The author makes a case for a subsidy as a strategic measure to access new markets and satisfy rapidly changing customer expectations.



Sea History's readers know, perhaps all too well, that America's peacetime merchant fleet always begins to dwindle shortly after every war. It seems that when a strong case for having an ongoing, vibrant U.S. flag merchant marine is made to one generation, the lesson goes untaught to the next. Priorities, incentives and opportunities naturally shift as the wartime emergency recedes. Thus, what President Eisenhower termed the "fourth arm of defense" remains out of the news, and the strategic and economic value of a home flag merchant marine becomes a cause only for a dwindling constituency.

Lack of public interest in the merchant marine is paradoxical when you consider that the U.S. is the largest single national market for trade the world has ever known. U.S. foreign trade is worth over one trillion dollars annually, which equates to nearly one billion tons of cargo. But the U.S. is currently carrying less than 4% of its entire trade. Despite our leadership in world trade--and leadership in shipping technology--we are not primary participants in carrying this trade to and from our shores.

Fewer Ships, Fewer Jobs

In order to understand what contributes to the decline in American shipping, let's start with the fact that some decline in the numbers of ships needed to carry a given amount of trade is inevitable. This is due to the use of the larger, faster, more efficiently loaded and crewed merchant ships of today. This means considerably fewer ships are required to do the same job as a few decades ago.

If we consider a 15-knot ship of the 1950s as our baseline, it would have a capacity of approximately 10,000 tons and spend about two more days in port than today's more efficiently loaded 20-knot ship carrying at least twice the cargo on each of its more frequent trips. Using these figures, we can estimate that one of today's vessels might do the work of three post-WWII vessels. A check on this relative ship productivity is easily performed by comparing yearly cargo delivery rates. Fifty million tons were carried by 1400 U.S. flag ships in 1950 and that rate (of tons carried per ship in a year) can be compared to the current productivity of 313 ships carrying 35 million tons. Today's average cargo delivery rate-per-ship of about 112,000 tons-per-year is just about 3.1 times our 1950s average of 35,000 tons per year.

It must be remembered, moreover, that the reduction in the number of ships also reflects on shoreside jobs, not just in the shipping companies, but also in the shipyards and many interfacing businesses that are a part of a larger maritime infrastructure. In looking at the current demand for seafarers, we must consider that today's U.S. flag ships each carry nearly half as many crew members as ships of the 1950s, although today's ships have twice the capacity or more. We employed nearly 60,000 mariners in foreign commerce then, compared to about 7,500 today (these numbers exclude seafarers in our domestic trades or working for the U.S. Government). Just as important as the reduction in number of seafarers themselves is the difficult-to-regain loss of their skills and know-how. Also significant is the attendant abandonment of shoreside facilities and the shutdown of organzations that took decades to build.

Loss of Market Share

But America's diminutive role in carrying its own trade obviously accounts for more of the decline in U.S. shipping than the use of more efficient ships. The fact is that worldwide competition for the carriage of our trade has sent our imports and exports galloping away from American ships.

The current round of maritime decline also exhibits the earmarks of change that may be just a smaller subset of events taking place in an "America in transition." The current maritime dilemma might be most realistically viewed in the perspective of the last half-century's rapidly changing times. In Megatrends, John Naisbitt characterized these changing times as "time in parenthesis"--meaning that we are living in a transitional period between eras.

Without question, the country is moving from an industry-based economy to a service-based economy and an information society, just as surely as farm economies gave way to the industrial revolution. Wealth in our economy was generated from growing, mining or manufacturing things we could "reach out and touch." An electric shock is about all you'll get if you touch "it" these days.

It is nearly impossible to utter the term "global economy" without linking it to both trade and the world's emerging economies. Continuing our trade with and increasing our aid to emerging economies of the third world is laudable--providing, of course, that the new trade or trading systems formed do not decimate our own economy in the process.

"Free trade" is a keystone of the new global economy and it idealistically seeks to eliminate all external forces that would interfere with the control of trade other than by market forces alone. The global economy's drive toward free trade, however, has resulted in U.S. industrial work being deliberately sent off-shore to companies operating under business rules not burdened by U.S. environmental, safety and fair labor regulations, and manned by lower wage workers. (i)

But the decision makers--the real "free traders"--are not necessarily residents of the third world. Many of them enjoy Uncle Sam's protection of their wealth and they enjoy it right here in the USA. Here they are permitted to adroitly lobby for even more freedom to compete for the business that Americans once took for granted. As result, "free trade" and the U.S. problem of its "balance of payments" are coming into serious conflict.

In the 1970s, both survival and profit motives sent traditional northern manufacturing centers to our sunbelt in search of lower-wage industrial workers and other concessions. This trend was soon extended to the export of high-wage, blue-collar jobs overseas. Along the way, many businesses that didn't follow the trend found themselves unable to compete. Both of these geographic employment shifts, like the trend to flag out (i.e., to register U.S.-owned ships overseas and crew them with non-nationals), were in full swing long before the fuss and notice recently caused by the signing of the North American Free Trade Agreement (NAFTA). Despite early bipartisan support for that agreement, serious public discussion on this latest special interest adventure in globalization theory is conspicuously absent as new trade difficulties with Mexico emerge. Significantly lower-cost imports have also demonstrated their potential to ruin increasing numbers of domestic companies and even whole industries. America's machine tool industry is one example. Global competition, on the other hand, must be credited with providing the "wake-up call" to such industries as auto and steel.

As we came into the last quarter of this century, the computer, its modem and the fax became universal business tools. The shipping business uses computers to do everything from handling what used to be cargo "paperwork" to controlling ships' engines or assisting navigation. With such tools, certain business owners learned that high-priced American white-collar workers could be as readily replaced as factory workers had been the decade before. Not only could the company port captain take his work home to New Jersey, but he could now even do his work from Singapore--at the prevailing local wage, of course.

Invest in America? Not Likely!

Any discussion of change on the American business scene cannot ignore recent approaches to investment management taught by our leading business schools, which are also undoubtedly instrumental in fanning the fires for more globalism. The financial community is highly proglobalism and, therefore, strongly in favor of foreign investment and more free trade. This doesn't bode well for new investments in U.S. shipping companies. Low-yield investments in long term projects, like building ships and new marine transportation companies, find less favor on Wall Street than only a few decades ago.

Last year, 1995, saw phenomenal 33.5% growth in the Dow Jones average, but there was sparse reinvestment in America. This is clearly because the rules of the game offer high corporate profits to capital invested abroad. Almost unnoticed in the touting of the necessity to be the "low cost provider" is the self-interest of other nations and the ploys of foreign-crewed shipping firms headquartered over here. Many lurk in the wake of weakened U.S. shipping businesses, anxious to take over their routes.

American businesses in the 1990s have a wide range of choices that include hiring the lowest-paid workers on earth and then (1) lowering their prices to "survive," (2) pocketing the difference, or (3) buying other companies cheaply, moving them overseas, increasing their capital base with $2-per-hour labor and selling them off for a handsome profit. American shipping companies, however, can't do these things on ships crewed by Americans and flying the U.S. flag. Some of the best U.S. flag shipping companies left are, in fact, in a survival mode, highly leveraged and marginally profitable. Mixed signals from government that involve subsidies on crew costs hinder the ability of companies to plan wisely for their future. American shipboard wages are a subject of considerable disinformation but are a driving force toward using foreign crews. In a future article, we will see that American seaman's and officers' pay and benefits are not out of line with comparable Americans in similar jobs ashore.

U.S. flag ships operate under strict Coast Guard standards, they are well-built, well-maintained and crewed by well-trained officers and crew. Many of the foreign flag vessels they compete with are much more loosely regulated, often unsafe and manned by poorly trained personnel. In the past the U.S. government has aided the merchant fleet to make up for such disparities and help U.S. ships remain competitive.

But, over the past 15 years the U.S. maritime industry has been steadily receiving less and less help from government. Remaining U.S. maritime industry "aids" are shadows of their former selves. Surprisingly, less than one-quarter of the remaining U.S. oceangoing fleet is currently receiving Operational Differential Subsidy (ODS), designed to make up the disparity between U.S. and foreign costs. ODS pays an amount equal to about one-half of crew costs.

But much more than crew costs are involved. Most other maritime nations give support to their own shipbuilding and ship-operating industries in myriad ways, by granting concessions, preference, tax breaks and direct or hidden subsidies. They do this on the presumption that they have a need to remain self sufficient in the transport of their trade and their capability to build ships. They consider these to be important links in the chain that supports their economies.

Meanwhile, remaining government support for America's maritime industry is very seriously threatened and may soon be eliminated. This movement is coming primarily from two directions. One involves the international interests and the "free trade" promoters, some of whom work at the U.S. State Department. It's too bad that our State Department doesn't consider giving Most Favored Nation status to the USA!

The other great foe of maritime aid is the farm lobby. Since the Department of Agriculture receives about 150 times the tax dollars drawn down by the Maritime Administration, one has to wonder why farm belt representatives are so obsessed with killing maritime support. Certainly farmers operate at American standard of living levels, yet their lobby vehemently begrudges the same living standard to American mariners.

"Protection"--or Cargo Sharing?

The "protective" policies of the past have not kept the wolf from the industry's door and, of course, they need to be reexamined. It may be a dangerous thing, however, to eliminate them altogether merely because some profess that all forms of protectionism are inherently flawed and are necessarily bad for all. Flaws in the design of government maritime aid programs may have had far less to do with the current decline than insufficient federal funding, misapplications of policy, bureaucratic administration or political ravishment along the way. One also has to keep in mind the identity and interest of both proponents and opponents of regulatory reform. The point of view of industry protectionists is entirely straightforward, but what is motivating the opposition isn't so clear.

Perhaps we should regard federal payments to support U.S. flag ship operations not as "subsidies" but "seed money"--that is, investment in the future of the U.S. Merchant Marine, tying its growth to the growth of American foreign trade.

Growth in American foreign trade has been phenomenal since World War II. But in the same period our merchant marine has dwindled from world leadership to an insignificant role. Our foreign trade grew 7.8 times from 1950 to the present (averaging 4 3/4% per year) and it promises to keep growing by at least 3% in the short term. This growth in trade might presume a current requirement for about 3,300 modern U.S. flag merchant ships in foreign commerce, granted the same share of the shipping trade the U.S. had in the 1950s. In the 1950s America was the prime infrastructure survivor of WWII despite high wartime losses of American merchantmen. (ii) We then carried about 43% of our foreign trade.

Interestingly, in the late '70s a majority within the United Nations group responsible for trade policy attempted to pass a 40-40-20 cargo sharing agreement for the liner portion of foreign commerce (i.e., the UNCTAD liner code cargo reservation provision). The U.S. State Department was the only significant holdout. If the agreement had been approved, the carriage of 40% of foreign commerce (i.e., nearly as much as our 1950s level) would have been reserved to each trading partner (the buying and selling nations) and the remaining 20% earmarked for competing cross-trade carriers. Today, the cross-traders are well on their way to carrying all of it.

Progressive trade missions and radical trade agreements are readily sold to the media these days as "good news." Political leaders involved are hailed as working for the good of their nation. But serious questions need to be asked about whether they understand enough about the good of a nation--beyond the next election--when they tamper with the linchpins of economic security.

General H.R. Del Mar, a retired army logistics expert, aptly stated the importance of a merchant marine in the last decade when he said: "A nation that is blessed with ample raw materials and that is a major producer of manufactured goods, but cannot transport either to where they are needed, can hardly expect to maintain its position as a world power."

One also needs to question if U.S. trade policy really needs to be so convoluted or require hoards of bureaucrats to administer. Suppose, instead, we simply insisted on the "Golden Rule" in dealing with our two-way trading partners overseas: that is, deal as you would be dealt with. Do we really run a serious risk that the world might thereupon stop selling their goods to us? This hardly seems likely. For the world knows, though we may forget, that America remains the world's largest and most lucrative market for foreign trade. Fear of a trade war is whispered by those who fail to realize that we have been in one for two decades.


There is a cost to any measure that can be proposed to revive the U.S. flag merchant marine. Putting American owned tankers under the U.S. flag, for example, would increase the cost of gas at the pump--perhaps by as much as one cent per gallon. The economic truth is that transportation costs are an insignificant part of the final price of just about anything shipped today.

But the question of who carries the cargos of the greatest trading nation on earth is not insignificant, not to anyone who cares for the security and well being of the United States.


(i) Defined here as a wage significantly lower than payments to Americans on welfare.

(ii) Our enemies knew that sinking our cargo ships was the only way to defeat the Allies in World War II. As a result, the percentage of casualties among U.S. merchant mariners was second only to those of the U.S. Marine Corps.

David A. O'Neil, Chairman and Founder of Seaworthy Systems, Inc.

Reprinted from Sea History 77 (Spring 1996) with the permission of the National Maritime Historical Society, Peekskill, NY
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Title Annotation:america's orphan, national security
Author:O'Neil, David A.
Publication:Review of Business
Geographic Code:1USA
Date:Sep 22, 2004
Previous Article:Facilitation and practical competency assessment of shiphandling skills.
Next Article:From the editors.

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