Shipping requires a large quantity and variety of economic resources to compete. Thus, virtually every maritime nation, regardless of the size of its merchant fleet, offers some form of direct or indirect assistance to its maritime industries. Promotion of U.S.-flag shipping services in the U.S. foreign and domestic trades is a basic fundamental of American maritime policies.
Section 27 of the Merchant Marine Act of 1920, known as the Jones Act, stipulates that operations in the United States coastwise trade, intercoastal and noncontiguous trades (including Alaska, Hawaii, and Puerto Rico) are to be reserved for U.S.-built and U.S.-owned ships manned by U.S. citizens.
The Passenger Vessel Services Act of 1886 (46 U.S.C. Sec. 289) prohibits the transport of passengers between ports or places in the United States by a “foreign vessel” under penalty of $778. The fine is the responsibility of the vessel operator, not the passenger. Exemptions to this rule include the U.S. Virgin Islands which are not covered by U.S. cabotage policy unless otherwise declared by presidential proclamation, an allowance for foreign vessels to transport passengers between Puerto Rico and other U.S. points if no eligible U.S. vessel offers such service and “cruise to nowhere” which depart a U.S. port and return to the same port without touching another port, U.S. or foreign and when a foreign vessel carrying passengers between U.S. ports calls at a distant foreign port between U.S. port calls.
The Act of December 27, 1950 provides for an administrative waiver whenever such waiver would be in the best interest of the national defense. In enacting the Coast Guard Authorization Act of 1998, the 105th Congress further established an administrative process for Jones Act waivers. The Secretary of Transportation, under certain conditions, is authorized to issue certificates of documentation with an endorsement for employment in the coastwise trade to certain small passenger vessels and uninspected passenger vessels carrying no more than 12 passengers for hire. The waiver, which is subject to notice and public comment, may not be granted if it would adversely affect U.S. shipbuilders or the coastwise trade business of any person who employs U.S.-built vessels. This administrative process is not applicable to larger passenger vessels and to cargo vessels. Any other waivers of the Act must be obtained legislatively.
On October 8, 1996, the Maritime Security Act (P.L. 104-239) was signed into law after it was overwhelmingly adopted by the House of Representatives and the Senate. This measure establishes the Maritime Security Program (MSP) supporting in the international shipping trades a fleet of militarily useful U.S.-flag commercial vessels crewed by American citizens. Participating vessel operators are required to make their ships and other commercial transportation resources available to the Department of Defense during times of war or national emergency.
The 108th Congress adopted the Maritime Security Act of 2003, contained in the FY 2004 National Defense Authorization Act (P.L. 108-136), which extends the MSP for an additional 10 years, subject to annual appropriations, beyond its September 30, 2005 expiration date. The new MSP increases the number of participants from 47 ships to 60 ships and increases the annual readiness payment to ship operators. On January 3, 2013, the President signed into law the National Defense Authorization Act of 2013 legislation which includes the renewal of the Maritime Security Program (MSP) at 60 ships through fiscal year 2025. Under the newly signed law, MSP funding is authorized for a third 10-year period, beginning in fiscal year 2015, at the current 60-ship level of $186 million in fiscal years 2012-2018, $210 million in fiscal years 2019-2021 and $222 million in fiscal years 2022-2025. Under the Maritime Security Act of 1996, this funding must be approved each year as a direct appropriation.
This program, officially known as the “Federal Ship Financing Guarantee Program”, was established under Title XI of the Merchant Marine Act of 1936. Its initial purpose was to assist U.S.-flag operators in obtaining private capital to build ships in American shipyards for both the U.S. foreign and the U.S. domestic trades. The government, through the Maritime Administration, guarantees payment of the underlying debt obligations, permitting the shipowner to obtain long-term financing at favorable interest rates. The U.S. government insures or guarantees full payment to the lender of the unpaid principal and interest of the mortgage obligation in the event of default by the vessel owners. Since it is a guarantee program, funds for the guaranteed debt obligations are obtained in the private sector. The main sources for such funds include banks, pension funds, life insurance companies, and notes or bonds sold to the general public.
Guarantees on the obligations are eligible to be granted for up to 87 1/2 percent of the vessel’s actual cost, as defined in Title XI regulations. Moreover, vessels eligible for Title XI guarantees are required to be of a design satisfactory to MarAd and includes passenger vessels, cargo vessels, tankers, tugs, towboats, dredges, barges, floating dry docks, oceanographic research vessels, and drilling rigs. The 103rd Congress enacted legislation amending the Title XI program to allow guarantees for vessels built for the export market. The legislation also authorized guarantees for shipyard modernization and improvement.
The Title XI program is self-sustaining. The Credit Reform Act of 1990 mandates that the Maritime Administration may only approve Title XI guarantees to the extent appropriations have been obtained to cover the estimated cost of the project to the government, as well as the administrative expenses of the entire program. The current portfolio is $1.7 billion in Title XI outstanding loan guarantees and 39 individual loan guarantee contracts, covering approximately 250 vessels (including drill rigs, tankers, barges, containerships, roll-on/roll-off vessels, fast ferries, passenger vessels, supply vessels, and tugs) to foster efficiency, competitive operations, and quality ship construction, repair and reconstruction. The President’s FY2015 budget requests $3.1 million for administration of the loan portfolio to ensure agency compliance with the Federal Credit Reform Act requirements, borrower compliance with loan terms, and to process new loan applications. However, the administration did not request any new funds for the program itself. The current Title XI subsidy balance for new loan applicants is $73 million. This will support approximately $735 million in shipyard projects assuming average risk category subsidy rates.
The Merchant Marine Act of 1970 established the Capital Construction Fund program. The program assists operators in accumulating capital to build, acquire, and reconstruct vessels through the deferral of Federal income taxes on certain deposits as defined in Section 607 of the Act, as amended (e.g. from vessel operations, proceeds from the sale or loss of vessels, and vessel depreciation). The CCF program enables operators to build vessels in U.S. shipyards for the U.S. foreign trade, Great Lakes, noncontiguous domestic trade (e.g. between the West Coast and Hawaii), and the fisheries of the United States. It aids in the construction, reconstruction, or acquisition of a wide variety of vessels, including containerships, tankers, bulk carriers, tugs, barges, supply vessels, ferries, and passenger vessels.
Preference for national-flag ships to move national cargoes in international trade is a policy pursued by many maritime nations. The Maritime Administration maintains on its website, http://www.marad.dot.gov, a listing of U.S.-flag vessels eligible to transport preference cargoes as well as a listing of carriers with contact information. Preference cargoes account for thousands of mariner jobs and a larger number of shoreside maritime and transportation-related jobs. In a five year period through 2011 the cargo preference programs generated over 70 million revenue tons of cargo and over $9 billion of ocean freight revenue for international trading U.S.-flag vessels. These cargoes represent from 7 percent to more than 50 percent of some U.S. carrier’s annual revenues and are vital to retaining vessels under the U.S.-flag. U.S. cargo policies include the following:
- The Cargo Preference Act of 1904 requires all cargoes procured for or owned by the military services to be carried exclusively (100 percent) on U.S.-flag vessels.
- Public Resolution 17, enacted in 1934, requires that all cargoes generated by the Export-Import Bank (Eximbank) be shipped on U.S.-flag vessels unless a waiver is granted by the Maritime Administration. The agency may grant general waivers permitting up to 50 percent of the cargo generated by the individual loan to be shipped on vessels under the flag of the recipient nation. It also may grant statutory waivers permitting a specific shipment to be made on a foreign-flag vessel if a U.S.-flag vessel is not available at a reasonable rate, or if the vessel cannot accommodate the cargo.
- The Cargo Preference Act of 1954 requires that at least 50 percent of all government-generated cargo subject to the law be transported on privately owned, U.S.-flag commercial vessels available at fair and reasonable rates. The Food Security Act of 1985 increased the percentage of the U.S.-flag tonnage requirement from 50 to 75 percent of agricultural cargoes under certain foreign assistance programs of the Department of Agriculture and the Agency for International Development. However, the 2012 Surface Transportation Act reduced the cargo preference requirement of P.L. 480 Food for PeaceProgram from 75% to the pre-1985 level of 50%.
Maritime bilateralism may be defined as agreements between two countries to reserve the carriage of specific cargoes to a designated number of participants, principally but not always, national-flag fleets. They are legal instruments of the participating governments, specifying the commercial rights and the responsibilities of the national-flag fleets of each country in their bilateral trade. Maritime bilateral agreements may involve revenue pooling agreements and sharing, on an agreed basis, the movement of specific commodities in the ships of the two trading partners. Presently, the United States has entered into maritime bilateral agreements with China, Russia, Brazil, and Vietnam.
- Reliance on merchant shipping and concerns with its present condition have been critical factors in strategies of forward deployment crucial to America’s leading role in world affairs, as evidenced by the recent statements of key government officials.
- “In time of war or national emergency, the U.S. military depends on shipping and seafarers drawn from the U.S.-flag commercial fleet to deploy our military overseas and, once deployed, to transport the supplies necessary for them to fight, and win anywhere in the world. . . Programs. . . that guarantee intermodal cargo lift and management services when needed in times of crisis or conflict, such as the Maritime Security Program, should be maintained.” — Governor George W. Bush, October, 2000.
- “[The Maritime Security Act] will ensure that the United States will continue to have American-flag ships crewed by loyal American citizen merchant mariners to meet our Nation’s economic and sealift defense requirements. . . By contracting with the owners and operators of U.S.-flag commercial vessels, the Government will gain access to a fleet of modern commercial ships, along with the sophisticated intermodal transportation system supporting it. The Government also assures that the seafaring men and women who crew these commercial ships in peacetime will be available to crew the Government’s reserve sealift ships in time of crisis.” —President Bill Clinton, October, 1996.
- “The MSP is a vital element of our military’s strategic sealift and global response capability. As we look at operations on defense multiple fronts in support of the War on Terrorism, it is clear that our limited defense resources will increasingly rely on partnerships with industry to maintain the needed capability and capacity to meet our most demanding wartime scenarios. That makes MSP reauthorization even more important as we look toward the future. MSP is a cost-effective program that assures guaranteed access to required commercial U.S.-flag shipping and U.S. Merchant Mariners, when needed. The alternative to MSP is, ultimately, reliance on foreign-flag vessels manned by foreign crews during crisis. MSP provides the security of resources we must have in a very uncertain world fraught with asymmetric threats.” — Gen. John W. Handy, USAF, commander in chief, United States Transportation Command, oversight hearing before the House Armed Services Committee Merchant Marine Panel on the Maritime Security Program, October 8, 2002.
- “MarAd believes that an MSP follow-on program should be approved in order to assure the continued availability of U.S.-flag commercial ships and U.S. citizen crews to meet U.S. national security interests. Any follow-on program should consider a variety of factors. Of primary importance is the establishment of a program that will provide militarily useful vessel capacity composed of modern and efficient vessels to meet national security requirements. In addition, renewal should assure the availability of a U.S. citizen seafaring pool to crew both the commercial and government sealift fleets.” — Capt. William G. Schubert, Maritime Administrator, hearing before the House Armed Services Committee Merchant Marine Panel on the FY 2003 Authorization for the Maritime Administration, March 14, 2002.
- “Mr. Speaker, as Chairman of the Merchant Marine Panel of the House Armed Services Committee, I rise today to address a matter under the jurisdiction of my panel which is of the utmost importance to the national security and maritime capability of the United States, namely the need to reauthorize the Maritime Security Program (MSP)…. Without the MSP program, U.S.-flag vessel owners would have been forced to shift their operations to foreign flags with foreign crews in order to remain internationally competitive. This would have been detrimental to our national security interests…. Without the MSP the cost to DOD would be substantial–approximately $800 million annually would be required by DOD to provide similar sealift and related system capacity on its own for the rapid and sustained deployment of military vehicles, ammunition and other equipment and material.” Rep. Duncan Hunter, U.S. House of Representatives, Congressional Record — Extension or Remarks, April 26, 2001.
- “Let me spend a few minutes on the subject of America’s maritime destiny and the vital national importance of a robust merchant marine. In addition to America’s commercial interests — which included the movement of more than 2 billion tons of domestic and foreign commerce through U.S. ports last year — our military depends on sealift to move 95 percent of the materiel required for a major theater war. In DESERT STORM nearly 9800 merchant mariners and 200 midshipmen served on merchant ships that helped move 95 percent of the cargo required for our operations. Ask any officer from any of the Services who has had the opportunity to serve on a Joint Task Force in the myriad of hot spots around the globe — just ask any of them if the U.S. merchant marine is important to their operations. You will get not only a ‘yes, but a resounding ‘yes-and-can-we-have-more!'” — Gen. Henry Shelton, USA, chairman, Joint Chiefs of Staff, 12th Batallion Standard Dinner, April 5, 2000.
- ¨”Today, after two centuries, our merchant marine is every bit as important and every bit as vital to the commerce and defense of our nation as it ever has been. In addition to America’s commercial interests…the United States military depends on sealift to move 95 percent of the materiel required for a major regional contingency…. We simply cannot overstate the vital contribution of our U.S. merchant marine. Our national security strategy depends on it.” — Gen. John M. Shalikashvili, chairman, Joint Chiefs of Staff, 1997 Battle Standard Dinner, February 21, 1997.
- “In the sealift area, we ABSOLUTELY, POSITIVELY cannot get the job done without the support of America’s commercial maritime industry. That’s why the Maritime Security Program and our Voluntary Intermodal Sealift Agreement — what we call VISA — are so critical to this country…. Let there be no mistake…Sealift is absolutely critical to this country’s national security…. The importance of the link between VISA and the MSP should be clearly apparent. Forty-seven ships — by name — are enrolled in VISA Stage III. Approximately 131,000 TEUs of militarily useful capacity is available from MSP participants. Through VISA, we’re able to leverage, for the government, a relatively small investment to provide a large commercial transportation network for use in national emergencies…. MSP is vital to USTRANSCOM and our mission because it guarantees that we will be able to meet tomorrow’s sealift requirements without having to rely on foreign-flag ships and crews. It guarantees that we will be able to project an American presence anywhere in the world…. And…. by relying on the U.S.-flag fleet, we also receive access to a total global, intermodal transportation network unrivaled by any other country in the world…including not only vessels, but also logistics management services, infrastructure, terminals and equipment, communications and cargo tracking networks, as well as well-trained, professional U.S. citizen seafarers.” — Gen. Charles T. Robertson Jr., USAF, commander in chief, U.S. Transportation Command, Maritime Trades Department, AFL-CIO Executive Board meeting, February 16, 1999.
- “Because sealift and airlift are the pivotal elements in the shift of U.S. military posture and strategy, the new MSP and VISA programs are prudent steps that provide insurance against not having the sealift capacity and capability, nor the civilian mariners when needed. Although such insurance is certainly not free, it is a relatively inexpensive way to manage risk in an uncertain environment…. My personal assessment is that the U.S. maritime industry will continue to play a significant role in the nation’s economic growth. Both the international and domestic fleets, along with revitalized ports and waterways, will be vital components of our transportation system and indispensable elements of our national security capability…. This great nation must continue to be a ‘maritime’ power for our own interest. Can anyone imagine the world’s only superpower and greatest trading nation without its own maritime industry?” — VADM Albert J. Herberger, USN (Ret.), former Maritime Administrator, Paul Hall Memorial Lecture, April 15, 1998.
- “Our national military strategy is a two-war strategy…. our role is to build war plans, and then put assets against it so that our combat forces can carry out our nation’s interest in two major regional contingencies while doing everything else we have to do in peacetime in small contingencies…. We commonly call it a two-war strategy, but we have slightly less than a one-war capability. With a reasonable degree of risk, this one-war capability carries out that two-war strategy. How can we do that? Well, it’s not only through the inherent agility of transportation forces being able to swing, but it’s also smart planning, smart execution and the outstanding leverage that is provided to us by our civilian partners when we mobilize…. We have a mission for our country that will never, ever go away. That’s why we have to have a robust shipbuilding and sealift industry. At Trans Com this whole idea is central to what we do…. The Maritime Security Program…. gives us the U.S.-flag presence we need in international shipping. It gives us that guarantee, that stability so we can get on and plan and execute and have the job security that’s all attached to that.” — Gen. Walter Kross, USAF, commander in chief, U.S. Transportation Command, Maritime Trades Department, AFL-CIO Convention, September 19, 1997.
- “Sealift is critical to the security of the United States. More to the point, sealift is absolutely critical to the sustainment of military operations…. It is absolutely crucial that we maintain America’s organic sealift capability. Sealift was a vital element in our success in DESERT STORM… and it was vital in Somalia. In fact, carrying troops and equipment to the front lines–from the sea–has been the foundation of our military successes since the Revolution…. We must continue our focus on building and maintaining the right sealift to ensure our forces have the tools necessary to defend America’s vital interests around the world…. the Maritime Security Act of 1996 goes a long way toward that end. With the overwhelming approval of the 104th Congress, President Clinton put us on course to protect American jobs and maintain a U.S. presence in international maritime trade, in both peacetime and wartime. Most importantly, the Maritime Security Act reaffirms America’s resolve to maintain a strong U.S.-flag presence on the high seas.” — Secretary of Navy John Dalton, Paul Hall Memorial Lecture, May 7, 1997.
- “Some of our Nation’s most distinguished current and former military leaders have said, time and again, that we must have U.S.-flag commercial ships and American-citizen crews to effectively and reliably meet our sustainment sealift requirements. I agree with their assessment. We must make sure that our soldiers, sailors, marines, and airmen will not have to count on foreign-flag ships to bring their supplies and ammunition to a hostile shore. They have also urged us to support the U.S.-flag merchant marine, because they know that the Government-owned Ready Reserve Force — the Pentagon’s rapid deployment fleet — relies absolutely on the availability of American-citizen merchant mariners to crew its ships. If there is no maritime employment, there will be no merchant mariners, and we will be forced to turn elsewhere. Foreign-flag ships and foreign crews have proven unreliable in the past, they have turned around and fled in the face of danger. The U.S.-flag merchant marine, on the other hand, has served with distinction and honor since the Revolutionary War.” — Majority Leader Trent Lott, Senate debate on H.R. 1350, the Maritime Security Act, September 19, 1996.
- “Military capability and surge sealift capability are, however, only two legs of the three legged stool for our advance deployed military force. The third leg is the ability to sustain these forces over extended periods of time, after we place them in foreign territory, far from home…. It was the U.S.-flag fleet which stepped into the gap and provided the sustainment sealift during the initial months of Desert Storm. These ships were fully crewed and ready to serve because they were operating in regular commercial service in the foreign waterborne commerce. These companies and mariners were ready when our Nation called, and they honored their contractual commitments to the Federal Government…[the U.S.-flag fleet] provides the link between those water-borne assets and the Department of Defense mobility structure.” — Sen. Ted Stevens, Senate debate on H.R. 1350, the Maritime Security Act, September 19, 1996.
- “This country, the sole remaining superpower, cannot be put in a position of relying on the goodwill of foreign nations to transport vital military cargo. And, we cannot rely on the goodwill of foreign nations to achieve the transportation of cargoes vital to our economic interests. It is not an acceptable or prudent national policy…. We must be able to ensure that U.S.-flag shipping is available to bring materiel and ammunition to soldiers who are defending our interests on foreign soil…in the past we have often taken for granted the role of the merchant marine in the economy and security of the United States. We cannot afford to do so today — nor can we suddenly rebuild a maritime capability in the future if we need it urgently…. We need a merchant marine in place that is strong and reliable in both peacetime and wartime.” — Sen. Daniel Inouye, Senate debate on H.R. 1350, the Maritime Security Act, September 19, 1996.
- “More recent events in the Persian Gulf area, where many of our closest allies have either refused to participate or refused to allow their soil to support American military operations, should make it very clear to everyone that we must have sealift fleets of vessels that we can count on under our flag and manned by Americans, and that is what this act does.” — Sen. Kay Bailey Hutchison, Senate debate on H.R. 1350, the Maritime Security Act, September 19, 1996.
- “While we pursue the essential modernization of our organic sealift fleet, we have not forgotten the importance of the U.S. maritime industry to our overall sealift capabilities. Just as we did in the Gulf War, Somalia, and most recently back to the Persian Gulf, we rely extensively on our commercial partners to support our worldwide commitments. In peacetime we ship over 16 million tons of DoD cargo using privately owned U.S.-flag ships manned by U.S. mariners, spending over $1.7 billion annually within the maritime industry. In wartime we depend upon the U.S. merchant fleet to support the flow of sustainment and ammunition cargoes and to provide the mariners necessary to man our organic ships.” — Gen. Robert L. Rutherford, USAF, commander in chief, U.S. Transportation Command, Senate Subcommittee on Surface Transportation and Merchant Marine hearing on the Maritime Security Act, July 26, 1995.
- “Since I became Chairman of the Joint Chiefs of Staff, I have come to appreciate first hand why our merchant marine has long been called the nation’s fourth arm of defense…The merchant marine and our maritime industry will be vital to our national security for many years to come.” — Gen. Colin Powell, chairman, Joints Chiefs of Staff, 1992.