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To those who fly her on their commercial ships, she has become the flag of inconvenience. There are penalties for displaying this ultimate symbol of patriotism—U. S. tax laws, antitrust philosophy, and regulations which are both unwarranted and ineffective. We have fallen far if Old Glory is to be nothing but a reminder of old—and bygone—glory.
During my 19 years of experience in the U. S.- flag liner industry, 1 have observed an unexplainable phenomenon. The industry in general, and our government in particular, have both been slow to use what works, stubbornly slow to discard what doesn't work, and reluctant to try what might work—all to such an extent that many foreign governments and foreign businessmen judge us inept.
The resulting decline of our merchant marine to its present tragic condition is self-inflicted—caused primarily by Americans, not by forces outside our shores.
An examination of U. S. maritime activity reveals a sad picture:
► A massive net deficit of billions of dollars in the U. S. ocean balance of trade, as this nation pays foreign companies for the ocean carriage of the vast majority of our international commerce ► A severe and worsening shortage in vessels of all types needed to provide logistic and strategic support for our national security interests ► All. S, antitrust philosophy that discourages and inhibits the capability of this country’s operators to compete effectively
► Shipbuilding policies that impede the essential principle of asset cost competitiveness for the majority of U. S.-flag carriers
► Tax policies that hinder reinvestment and further handicap asset cost competitiveness
►Regulatory requirements that are not effective!) administered, or in some areas even warranted, from a cost/benefit perspective
►The absence of a clear definition of national maritime objectives articulated by the executive branc of government and fostered fairly and uniformly all concerned government agencies
Principal Causes of the Deterioration of V- j. Merchant Shipping: To identify the root causes 0 the failure of U. S.-flag liner shipping, we need t0 recognize that this situation to a great extent »a resulted from what the United States did, not fr° what other countries have done. . __
The origin of the governmentally imposed d>s advantages upon the U.S. fleet was the pre-Wor War I attempt to give U. S. domestic antitrust la extraterritorial reach. In the 1916 Shipping Act. government recognized the folly of such sweep1 unilateral action and proceeded to enact a nevV rel ulatory regime providing a shipping exemption >r° domestic U. S. antitrust regulation. However. ^ terms of the exemption were those deemed accep able from the point of view of parochial U. S. e , nomic and trade principles. The principles of ^ anced competition contemplated by the 1916 3 were, in time, eroded by counteractions abroad continue to the present. . e.
The unilateral U. S. regulatory scheme has come largely unenforcable and ineffective a8a1., foreign carriers. The primary effect of contm U. S. Government attempts to impose “free tr incentives” on foreign countries which re^ustorK abide by such a theoretical competitive frame* for shipping has been to materially disadvan - U. S. carriers.
It was the United States that unilaterally to extend its sovereignty to international liner ^ merce on the previously free and non-regulated 3 seas: first, in the form of antitrust laws, and tb shipping law. It did not ever achieve "fair co ^ tition.” but that reality was long obscured b>
Mai a Conditions associated with two World Wars, lot ?r *rading partners were content until recently tory 0 vigorously object to U. S. unilateral regulable t ^°rtS S° *ong as l^e'r own *'ner ^eets were ^ 0 avoid commercial disadvantage.
forcr'n8 be past two decades, the new political itiU]tes °C be Third World decided to press for new thejrlnat'0nal regulation of liner shipping as one of ti0n Parities in dealing with the industrialized na- Conv 0 ^Pr'l 1974, the first international shipping draft atl0n with origins in the developing world was tee0nan^er UNCTAD (United Nations Commit- It Ca|. * rade and Development) auspices at Geneva. orcjers ‘°r a new world order in liner shipping—an v°lv *lth a very large measure of government in- ent and market influence which would fur
ther reduce free trade. Europe and Japan were expected to adopt the so-called UNCTAD Liner Code, by the end of 1981.* Earlier this year, however, the Reagan administration requested that these nations postpone taking such action until administration officials can determine what U. S. policy will be toward the code.
Largely as a result of the State Department’s ostrich-like conduct, the United States has looked with complacency upon this imminent international revolution in liner shipping. Until 1980, State insisted that the liner code would not come into effect. Dur-
*The UNCTAD Liner Code specifies percentages of national-flag shipping to be reserved for trading partners: 409? for each of the bilateral nations and the remaining 20% for third-flag carriers.
als°
ing 1980, the position of our country’s arbiter of foreign relations changed to the intellectually dishonest claim that the code won’t harm the United States. Other agencies disagree, but there is no effective mechanism to resolve their differences. Conflicting positions within the U. S. Government leave the nation with no plan whatever to cope with the expected dumping of foreign ships into open U. S. liner trades as the code closes trades abroad. The conscious State Department policy of ignoring the potential impact of the liner code, coupled with the long record of U. S. Government unilateral intervention in shipping, is viewed from abroad as incoherent and irrational.
It is the United States that unilaterally insists on preventing liner conferences from operating in U. S. trade the way they can operate throughout the rest of the world. It is the United States that has refused to negotiate toward the creation of an internationally acceptable fair competitive framework for liner shipping. It is the U. S. maritime industry (and, therefore, the national interest) that is suffering extensive harm from this self-defeating situation. The State Department and Department of Justice insist upon the mistaken belief that free trade, open ports, and the propagation of U. S. antitrust laws must be the only rule of law. This blind adherence to free trade economic theory in a trade environment where free market forces do not operate is suicidal. It *s both understandable and commendable that foreign nations, even our principal trading partners, are resisting the intrusion of the U. S. antitrust laws into the international trade arena.
Defense officials now realize the perilous threat to our national security and have voiced publicly and before Congress their concern over the inadequacy of our merchant fleet capabilities. International trade officials see that shipping is one of many U. S. service industries confronted by extensive barriers and obstacles to the successful export o services. Opinion shapers and decision-makers are beginning to recognize that persistent U. S. Government efforts to advance open access and free competition principles in both liner and bulk trades have been rejected by almost every foreign country- And why not? Nothing in the reality of world ge0 politics supports the U. S. Government position-
The antitrust and shipping regulatory environ ment are not the only homemade governmental o
ta ^ Gcwernment-imposed disadvantages in the an^ ship operating areas. There is a stark diflaw °Ce ^etvveen vessel tax depreciation under U. S. ers ^ that provided by other major maritime pow- ass' ^he U. S. rules for tax depreciation of shipping g^ets provide for a period of 14.5 years. Japan and r°Pe generally provide for much shorter periods, Veserj% about six years. In the United Kingdom, °fpSe s ean be depreciated in one year. Treasury sited'a S ^Cal Primari|Y w‘th taxation of domestically eXj etltities and have refused to acknowledge the geQS etlCe- or competitive effect, of more advanta- TheU[Srtax Peri°ds available to foreign-flag vessels. bas ‘ S.-flag operators are saddled with higher rate f0rs ar*d are handicapped in accumulating and Ij <,lng capital for asset replacement. This inferior duri CaPhaI recovery policy is extremely punitive Trean® Periods of protracted high inflation. The abjij^G department last year claimed that avail- bythy.of {he capital construction fund authorized hx" 2 . rchant Marine Act of 1936 created a “zero
VenieP(jlicy ^or G- S.-flag shipping. Treasury con- Oniv j y ignored that use of such a fund is available restrj(°fanc* ^or vessels built in U. S. shipyards. This
Serjojj Wf)lch assists only U. S. shipyards—to the ape c,s ^advantage of U. S. ship operators who ^iaf^u^ ^ reason of existing operating differ- advan.SU°s’dy (ODS) contracts. This policy also dis- operd8es those who have the courage to build and So.-6., S.-flag ships without public subsidy. a *ed Title XI Mortgage Insurance for U. S.-
Port Elizabeth, New Jersey, is the largest of Sea-Land's port facilities. Containerization has brought a revolution to the commercial shipping industry by allowing ships to be unloaded and loaded within 24 hours. This kind of efficiency means a ship can spend nearly all her time at what she was built for—hauling cargo.
flag ships is a second example of counterproductive place-of-construction restrictions. While these requirements for construction in this country might at first appear not to handicap U. S.-flag carriers, in truth they do. The 50% limitation on the shipyard subsidy paid by the U. S. Government and the pronounced failure of U. S. shipyards to reduce their overall production costs result in subsidized U. S.- flag carriers buying new ships in the United States at costs that substantially exceed world market prices. Thus, most of the U. S. liner fleet owners are saddled with higher-cost, less-than-competitive vessels—a violation of the first economic principle essential for success. This policy, effectively requiring that subsidized carriers operate at noncompetitive costs, is particularly dangerous when you consider that only nine U. S. liner companies remain and that eight of those companies depend upon operating differential subsidy. Sea-Land is now the only major U. S.-flag liner company not receiving or seeking ODS.
Despite my criticisms of the government, the fault does not lie there alone. I cannot ignore the problems that exist within the industry itself—for we share some of the blame for our sorry predicament. It could even be said that our industry appears to like the problem better than the solution. The industry, composed of ship operators, shippers, shipyards, and labor, has failed to articulate clearly what needs to be done—leaving Congress in a state of bewilderment. We have not achieved any semblance of unity on legislative action required, much beyond agreement that something needs to be done. Industry agreement then degenerates into self-serving emphasis of parochial corrective measures that benefit only separate industry segments.
n
October 1981
In the liner industry, carriers and shippers ought to be able to reach a common position on most issues. I doubt that carriers and shipyards can ever agree completely on U. S. maritime objectives, because of the fundamental differences in building ships and operating them. It is ironic that some industrial companies that own and operate U. S. shipyards also operate their own foreign-built vessels, and import foreign-built dry docks, while claiming it is un-American for U. S. carriers to consider building outside the United States.
Solving the Problems: Now that the Reagan administration has taken inventory and recognized the desperate plight of both our merchant marine and our Navy, there is an unprecedented opportunity for effective solutions to be implemented in the immediate future. Failure to act promptly will ensure that foreign-flag lines, furthering foreign interests, will eventually control the entire U. S. foreign commerce which they already dominate with 96%
of bulk carriage and 75% of liner carriage. Ho"' could prior administrations have pledged to p&' serve national security and allowed our nation ocean lifelines to come under almost total contro of foreign interests?
There are several options that can be followed 10 correct the causes and ultimately reverse the dechne of our merchant marine:
► The legislative option has been the principal channel of proposed reform in the past and must again be vigorously pursued.
► The use of international negotiations to develop mutually workable solutions has met with success in other fields. This approach must be pursued maritime and trade matters.
► The third option, one that we generally tend R)
overlook, is administration action under exisW1. authority in the executive branch. .
One truth is self-evident. None of these strategy for action will be followed, nor will they succee • without leadership from the White House. Ther simply is no substitute for the President clearly ou lining national objectives and establishing a P° framework for their achievement. After all best definition for leadership is a short one: "^eLU. ership is leading"—and for too long we have fl had enough of the right kind.
1 recommend the following strategy for a n beginning:
► First—Establish a specific accountability for & itime policies within the Executive Office oi
President. The designated official should be directed to develop a presidential proposal for comprehensive national maritime objectives. The official should be empowered to coordinate the administration and execution of policies that regulate and affect maritime affairs. The accountabilities might be entrusted to the holder of a new position, such as a Maritime Advisor, or the existing capabilities of the U. S. Trade Representative could be used for this purpose. This latter approach would be consistent with recognition that ocean carriage is an exported service.
^ Second—Quantify the U. S. merchant marine s r°le as a vital support segment for national security as a resource for the military in times of peace and war. The President, the Congress, and the public all need to clearly understand the role of our merchant ^rine in the defense context.
^ Third—Ease the regulatory environment that 'Hipedes American competitiveness. Elimination or reduction of the extraterritorial application of U. S. antitrust laws is vital and long overdue. Certain pro- P°sals to eliminate application of antitrust laws to lner shipping and thus the need for the complex regulatory and judicial disputes at the Federal Mar- •tirrie Commission were proposed in the course of rparitime legislative hearings during the last Confess. More recently, the Heritage Foundation reheated a similar proposal as a recommendation to ae Reagan administration. The recommendation eserves serious consideration. If the United States c°ntinues to attempt to apply its antitrust laws to "rternational liner shipping on a unilateral basis, the s 'Pping act amendments contained in the Senate- Passed “Ocean Shipping Act of 1980“ should be Enacted. Additionally, legislative authority should ^ provided that ensures conference members the '^Ht to exercise market-responsive tariff action.
fourth—Recognize and prepare to deal effec- Ve|y with conflicting maritime policies of other eat|°ns. I do not favor protectionism; I much prefer gnomic solutions over political intrusion in com- 0^rce between nations. It is clear, however, that j, er nations are allocating or reserving cargoes for toeir national fleets. We must therefore be prepared tr- H^ot'ate bilateral agreements with our principal d 'ng partners. Such a defensive strategy could c„SUre U. S.-flag carriers adequate competitive ac- nat'S l° a fe'r share of U. S. liner trade with other ^ 'ons. Through bilateral liner shipping agree- •**. mutually agreed rules of fair competition, shj U(?'nS reciprocal treatment, could be set. Liner a8reernents with our major trading partners Li U ^ an excellent response to the UNCTAD nat.er Code and numerous other forms of maritime a '°nalism confronting U. S. carriers. A bilateral i^Proach is better for the United States than adopt* tne UNCTAD Liner Code.
►Fifth—Examine the fundamental and overriding issue of cost competitiveness of U. S.-flag ships. This will necessarily require extensive review of both the government’s shipyard construction differential subsidy and carrier operating differential subsidy programs. The goal should be to assure that subsidies, when granted, are applied judiciously and prudently, and that they result in reasonable competitiveness with foreign fleets. Restrictions that impede U. S. operators’ ability to compete effectively in foreign commerce should be discarded. The tie between building and operating subsidies should be completely severed (instead of the recently enacted two-year trial) and the construction of U. S.- flag vessels made possible in foreign or U. S. shipyards, based on the lowest cost. There have been many proposals noting that maintenance of the shipyard mobilization base is primarily a defense matter rather than a maritime concern. I understand that the Reagan administration plans a very large naval shipbuilding program. It would seem prudent for the administration and perhaps the Defense Department to address the total shipbuilding situation.
►Sixth—Correct the handicap of U. S. tax regulations that now impose much longer periods for depreciation of U. S.-flag ships than are available to foreign-flag competitors. This should be done as part of the Reagan administration’s tax reform proposal. U. S.-flag ships should not receive discriminatory treatment, regardless of where they were built.
We have it within our means to remedy the errors of the past—if we act courageously and quickly. Just as our country must emphasize export of U. S. manufactured goods, it must also export services. None of our service export industries is in need of correction more than U. S. merchant shipping. We must not fail to confront this tragic situation and reverse the trend of a decaying merchant fleet resource. The same old strategies of the past 20 years have not served the national interest. Now is the time to finally discard what has clearly not worked and implement a strategy that can work.
In conclusion, I believe that our merchant marine industry faces a dilemma reflective of America’s will to survive or, from a broader perspective, the ultimate survival of freedom.
Mr. Hiltzheimer is chairman and chief executive officer of Sea-Land Industries Investments. Inc.
| He received a B.S. degree in business adminis- ■ tration from the University of Richmond in 1950.
'Jks f Prior to joining Sea-Land in 1962, he was with Hercules Powder Company and Roadway Ex- B press. In his 19-year career with his present cor- Ht AIBI poration. he has held various positions: general operating manager. Gulf-Puerto Rico Services; general manager, Alaska Service; vice president. Pacific Group; and executive vice president. Pacific Group. He was elected chairman in 1975 and appointed chief executive officer one year later.