Copyright 2001 Journal of Commerce, Inc. Journal of
Commerce - JoC Week
October 29, 2001
SECTION: COLUMNS; Pg.4
LENGTH:
795 words
HEADLINE: The US-flag impasse
BYLINE: BY PETER TIRSCHWELL
BODY: Most everyone in the international trade field
grew up in the industry with at least a passing familiarity, if not direct
involvement, with the U.S.-flag fleet. If you're one of the Greatest Generation,
you remember how American merchant ships were deployed by the thousands into the
Atlantic and Pacific theaters, playing a decisive role in achieving victory in
World War II. If you're an industry veteran, you remember how U.S.-flag carriers
with names like American Export Lines departed U.S. ports jammed with cargo and
often returned with their holds empty, reflecting a trade picture that's the
mirror image of today. And if you joined the industry more recently, you've
watched how, as the number of U.S.- flag ships in international services
declined, the rationale for a U.S.-flag fleet has shifted from supporting U.S.
foreign trade and providing backup military sealift to one almost completely
based on military support needs.Now the U.S.-flag fleet is facing a crisis,
hardly the first one for sure, but one that threatens to undermine its viability
at a critical time in the eyes of its all-important patron, Congress. Some
already believe the millions of dollars in subsidies Washington pays to keep
ships under the U.S. flag represent corporate welfare, and a noxious form at
that because most of the shipping companies benefiting from the payments are
foreign-owned. It's unlikely the events of Sept. 11 will change those views.
With the current subsidy system, the Maritime Security
Program, due to expire in 2005, the U.S.-flag community has a strong
incentive to straighten things out.
Critical to
understanding the situation is the role played by foreign companies such as A.P.
Moller/Maersk, owner of Maersk Sealand, and the NOL Group, parent of APL Ltd.
U.S.-flag carriers had always been owned by Americans, and a few, notably
International Shipholding, still are. But one by one, beginning in 1997, the
major U.S.-flag container lines -- APL, Lykes, Sea-Land and finally Farrell,
were all sold to foreign companies.
With those
purchases, the buyers acquired the companies' U.S.-flag presence. Maintaining
U.S.-flag ships, with their inherently higher labor and compliance costs, is not
necessarily a net negative for a foreign company. Besides the $2.1 million
annual subsidies for the 47 ships in the Maritime Security Program, U.S.-flag
carriers get to carry military and other government cargoes reserved for
U.S.-flagged ships. In return, the carriers must grant the Defense Department
access to their intermodal systems and possibly the ships themselves in time of
national emergency.
The current crisis stems from one
final requirement the foreign owners face: The requirement that the U.S.-flag
ships available for military service be run by American ship-operating firms --
called Section 2 companies -- not the foreign companies themselves. The
requirement is intended in part to show Congress that there would be no question
of a crew of a U.S.-subsidized ship or its operator refusing to enter a war
zone, as some foreign-flag crews hired to carry military cargo did during the
Gulf War.
The problem is that the Section 2 companies
add a layer of costs, and ship lines such as Maersk Sealand and APL, with heavy
exposure to the container market, are facing significant cost pressures as
freight rates sink under the weight of cyclical overcapacity and a slowing
global economy. Reflecting the market, the share price of NOL/APL was recently
trading at only US$0.25 on the Singapore Exchange. Maersk has been vocal about
relief from the Section 2 requirement, and APL also recently weighed in again,
having been rebuffed last year after it sought a line-item accounting of
overhead costs from its Section 2 company, American Ship Management.
Maersk argues that a subsidiary, Maersk Line Ltd., already
holds a top-secret security clearance because it operates forward-positioned
ships directly for the military, and it should therefore be able to be trusted
with less militarily sensitive container ships. It has a waiver to operate up to
five container ships under MSP. The lines also argue that the current annual
subsidy allotment, $2.1 million per ship, is much too low. The Section 2 firms,
understandably, don't want to see their franchise disappear.
The squabbling over Section 2 is overshadowing the effort to develop
and sell to Congress a successor subsidy program to MSP. A precondition is a
united voice from the U.S.-flag community. If the impasse continues, someone
might decide the military, in fact, has all the sealift it needs, without help
from the commercial liner industry.
Peter Tirschwell is
editor of JoC Week. He can be reached at (973) 848-7158, or via e-mail at
ptirschwell@joc.com.
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