Maritime Subsidies; M. Cohn

MichaelB. Cohn MARITIMESUBSIDIES: e:t~ OVERREGULATION THREE TRUISMS characterize a free market. First, production for the profit motive is production that is best. Noone. works harder or more efficiently to produce a good or ser vice than one desiring to further his economic standing. Second, money spent by one who earns it is money spent best. Third, the free market allocates resources best. The most efficient way for buyers and sellers to meet for business is in a free mar ket. The negative consequences of overriding these truisms may be ev idenced in the history of the Ameri can Merchant Marine. In the United States, preoccupa tion with our Merchant Marine dates back to 1789 when the very first act of the first Congress imposed a pro tective tariff on imported goods and allowed a ten percent reduction on goods imported on U ~S. vessels. A heavier port tonnage tax was also Dr. Cohn is Assistant Professor of Economics at the United States Merchant Marine Academy, Kings Point, New York.

182 levied on foreign built and owned vessels. Further, only vessels built in the United States could be regis tered under the American flag and this stipulation was to have serious . consequences. In those early days the maritime industry prospered. The availability of craftsmen and abundance of wood supplies made American ships less expensi ve and some of the best in the world market. 'Prior to the Civil War, American shipping reached its golden age, providing capital and income for the young nation. How ever, when metal vessels replaced wooden ones and steam-powered vessels replaced sailing ones, Amer ican shipbuilders were faced with higher construction costs. l These ex penditures and the restrictive legis lation of 1789, which prohibited the registration of foreign ships under the American flag, contributed to the decline of American trade on Amer ican vessels. From 1846 to 1914 the share of American trade carried on MARITIME SUBSIDIES: OVERREGULATION 183 U.S. vessels by weight, dropped from more than 80 percent to about 10 percent.

A severe shortage of ships oc curred during World War I as a re sult of both the Act of 1789 and the conditions imposed by the war. President Woodrow Wilson had sought legislation for government ownership and operation of fifty merchant vessels. This led to the Shipping Act of 1916, which was a first attempt to impose economic regulations on the maritime indus try and also established the U.S. Shipping Board that was authorized to spend $50 million to buy or lease 50 vessels. The government's efforts at ship ownership· proved very wasteful, costing $3.3 billion, as opposed to the $50 million which was initially planned. Although a wartime project, the .Board continued the building of vessels even after the armistice, and was left with a huge fleet to dispose of. The Merchant Marine Act of 1920 set a national policy that the U.S. should have an American-owned merchant marine to carry the ma jority of its commerce and autho rized the disposal of the wartime fleet. But the collapse of the ship ping· boom in 1922 left the nation with a supply of vessels in excess of demand. Some of the ships costing the government $200-250 a ton were sold for as little as $8 a ton. 2 The disposal of the war-built fleet also caused a cessation in the con struction of ocean-going v~ssels from 1922-1928. The Merchant Marine Actof 1928 provided subsidies to the industry under the guise of ocean mail contracts and established a construction loan fund. Both' these projects failed. Scandals accom panied payment of the subsidies and the need for ocean -going vessels dropped dramatically when the depression came: another failure of government intervention.

Merchant Marine Act of 1936 To remedy this situation, the Merchant Marine Act of 1936 pro vided direct subsidies to the indus try and established The U.S. Mari time Commission, whose authority included distribution of these subsi dies. Due to the wartime conditions, the 1936 act was not tested until the end of the 1940s. In 1950 the Mari time Commission was abolished, but eventually its functions were passed on to the Maritime Administration. The rationale behind the subsi dies was that they would allow American builders and operators to reach parity with foreign competi tors offering lower prices because of lower wage payments and subsidies they received from their govern ments. Since it is felt that a Mer chant Marine is essential to the na tion in case of war or other emergency, American subsidies are given, in the form of construction 184 THE FREEMAN March differential subsidies and operating differential subsidies. The huge sum of $9,161,838,288 was paid out from 1936-1980. The percentage of sub sidies to total receipts of interna tional ocean transportation has been declining, from 17.3 percent in 1965, to 11.9 percent in 1975, then to 7.83 percent in 1980.3 But despite their relative decline, their success has been slight indeed. For the same years mentioned, the share of U.S.

oceanborne trade, by value, aboard U.S. flag ships, has fallen from 21 percent to 18 percent and then to 14 percent respectively.4 Further Subsidies? In the post World War II period there has been a constant decline in the U.S. share of oceanborne trade. To stem this decline, Congress passed the Merchant Marine Act of 1970. This new act set policy goals and dealt with the entire fleet, but it was merely an update of the act of 1936. The frustration of Congress can be seen in this latest legislation. The Merchant Marine Act of 1970 estab lished a seven-member commission, known as the Commission of Amer ican Shipbuilding, to study the American shipbuilding industry's productivity and cost-cutting mea sures and then to make recommen dations to the President and to Congress. 5 It is not necessary to seek artifi cial means to improve productivity. The dynamics of a free market al ways hold true. Remove subsidies and restrictions from the industry.

Allow shipping firms to pool their cargoes and share their profits as foreign companies do. In short, al low the American companies to compete with the same freedom that foreign governments allow their shipping companies. The American worker has been the highest paid and most productive historically, and will increase his productivity if his wages depend on it. Shipping companies will always spend their own money more eco nomically than government subsi dies. If American companies are given the liberty that foreign com panies enjoy, they would best utilize the resources at their disposal to compete in the international mar ket. It is not necessary for a commis sion to tell us how to be more pro ductive, we need only turn to basic economic principles. ® -FOOTNOTESlClinton Whitehurst, Jr., ''A Maritime Policy and Program for the Eighties and Beyond," De fense Transportation Journal (February, 1982) 76-82.

2Paul Zeis, American Shipping Policy (Princeton, N.J.: Princeton University Press, 1938), pp. 95-98, 125-141, 154-165. 3Maritime Administration, Annual Report, 1980. 4StatisticalAbstracts ofthe United States 1981, Section 23, Transportation-Air and Water. 5Vol. 84, Statutes at Large, Public Law 91 469.