Every week, FreightWaves explores the archives of American Shipper’s nearly 70-year-old collection of shipping and maritime publications to showcase interesting freight stories of long ago.

This article from the February 1977 issue of American Shipper demonstrates the growing concern Americans had for foreign maritime policy after numerous mishaps on sea. 

Oil spills, groundings & collisions make U.S. citizens flag conscious

A ship was a ship was a ship was a ship in the eye of most American citizens until December and January newsbreaks made almost everyone acutely conscious of the distinction between flags of registry. Maritime unions can be counted on to use this awareness to make some points in Congress.

For the first time since the days of Clipper ships a hundred years ago, most Americans are conscious of the distinction between American and foreign flag ships.

The awareness was created by the series of oil spills, groundings, and collisions which received widespread news coverage from the time the Liberian tanker S/S Argo Merchant grounded off Nantucket in December. Maritime union leaders were quick to seize the opportunity to gain political support for pro-American flag legislation.

Maritime Administration officials also addressed the matter. As a member of outgoing-President Ford’s government, Maritime Administrator Robert J. Blackwell bluntly criticized flag of convenience operators before the Senate Commerce Committee.

Tax breaks

It’s time, suggested Blackwell, to “look at whether it is really wise maritime, environmental, and tax policy to allow Americans to own foreign flag ships registered in these flag of convenience countries and, at the same time, through our Internal Revenue Code (subpart F) give them a break on taxes.”

The most common flags of convenience registries are those of Panama and Liberia, where, says MarAd, U.S. citizens own 445 ships. The lax registration requirements and nominal taxation of shipping earnings in these two countries have given them enormous merchant fleets, and are extremely attractive to U.S. companies interested in shipping.

Because the Merchant Marine Act did not, until 1970, allow subsidies or other MarAd benefits to bulk or oil carriers, investors interested in this type of shipping invested in flag of convenience ships. MarAd is currently beginning to gear up for a major effort to expand the U.S. flag bulk carrying fleet, but these foreign flag ships pose a number of problems.

U.S. citizens applying for subsidy or financial assistance programs from MarAd are not allowed to own or operate foreign flag ships. In combination with much lower construction and operation costs associated with foreign flag operations, the restrictions on foreign to foreign trading for U.S. flag ships, and the tax disincentive for repatriation of shipping earnings, MarAd faces quite a problem in its bulk fleet promotion program.

These foreign flag operators “are doing nothing for the United States,” said Blackwell, “and we are giving them a tax break.”

“It makes no sense at all,” he added. With all the subsidies and financial assistance programs available through MarAd, said Blackwell, “there is no reason to go abroad any longer.” Tax advantages, he suggested, are the only important incentive to keep a ship under foreign registry and to continue to build ships for foreign registry.

Until the 1976 revision of the basic tax code, all foreign gross profits were tax deferred until repatriation to this country, effectively exempting a large fraction of these earnings; now, only those foreign shipping earnings that are reinvested abroad are so exempted. Given the amount of investment monies required for ship construction and operation, this is a fairly effective disincentive to bring earnings home.

The Commerce Committee does not have jurisdiction over tax matters, but Senator Russell Long of Louisiana, who chairs the Merchant Marine subcommittee of the Commerce Committee, is also chairman of the tax-writing Finance Committee, and may be proposing remedies for this situation in the next session.

Safety

Blackwell urged stiff enforcement of higher safety and operating standards for oil tankers, even to the point of excluding violators from U.S. ports. The United States should work multilateral negotiations to push for higher standards around the world, he added.

Blackwell also said that unless some form of cargo preference legislation, or extension of the Jones Act for domestic offshore trades, is passed — probably aiming at keeping foreign carriers out of the Virgin Islands trade — “there will be no tanker building in this country, nor will there be any abroad,” because of the current oversupply of oil tanker capacity.

U.S. flag tankers? 

What all this adds up to, in terms of MarAd’s future course, is a distinct risk that the agency will involve itself in essentially futile efforts to beef up a U.S. flag oil-carrying fleet.

The tax reforms indirectly suggested by Blackwell’s statement could serve to encourage bulk carriers, but, as one MarAd official pointed out, there are only limited funds. Oil tankers are very expensive, especially when built on the supertanker scale, and the facilities that would be required to handle such ships are expensive and almost nonexistent here.

“In a situation of worldwide tanker surplus,” said this MarAd official, “it would be ridiculous to devote our resources to expanding the tanker fleet.”

FreightWaves Classics articles look at various aspects of the transportation industry’s history. Click here to subscribe to our newsletter!

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