Maritime Subsidies: Overregulation
MARCH 01, 1983 by MICHAEL B. COHN
Dr. Cohn is Assistant Professor of Economics at the United States Merchant Marine Academy, Kings Point, New York.
Three truisms characterize a free market. First, production for the profit motive is production that is best. No one works harder or more efficiently to produce a good or service 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 market. The negative consequences of overriding these truisms may be evidenced in the history of the American Merchant Marine.
In the United States, preoccupation with our Merchant Marine dates back to 1789 when the very first act of the first Congress imposed a protective tariff on imported goods and allowed a ten percent reduction on goods imported on U.S. vessels. A heavier port tonnage tax was also levied on foreign built and owned vessels. Further, only vessels built in the United States could be registered 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 expensive 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. However, when metal vessels replaced wooden ones and steam-powered vessels replaced sailing ones, American shipbuilders were faced with higher construction costs. These expenditures and the restrictive legislation of 1789, which prohibited the registration of foreign ships under the American flag, contributed to the decline of American trade on American vessels. From 1846 to 1914 the share of American trade carried on U.S. vessels by weight, dropped from more than 80 percent to about 10 percent.
A severe shortage of ships occurred during World War I as a result 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 industry 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 majority of its commerce and authorized the disposal of the wartime fleet. But the collapse of the shipping 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.
The disposal of the war-built fleet also caused a cessation in the construction of ocean-going vessels from 1922-1928. The Merchant Marine Act of 1928 provided subsidies to the industry under the guise of ocean-mail contracts and established a construction loan fund. Both these projects failed. Scandals accompanied 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 provided direct subsidies to the industry and established The U.S. Maritime Commission, whose authority included distribution of these subsidies. Due to the wartime conditions, the 1936 act was not tested until the end of the 1940s. In 1950 the Maritime Commission was abolished, but eventually its functions were passed on to the Maritime Administration.
The rationale behind the subsidies was that they would allow American builders and operators to reach parity with foreign competitors offering lower prices because of lower wage payments and subsidies they received from their governments. Since it is felt that a Merchant Marine is essential to the nation in case of war or other emergency, American subsidies are given, in the form of construction differential subsidies and operating differential subsidies. The huge sum of $9,161,838,288 was paid out from 1936-1980. The percentage of subsidies to total receipts of international ocean transportation has been declining, from 17.3 percent in 1965, to 11.9 percent in 1975, then to 7.83 percent in 1980. 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.
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 established a seven-member commission, known as the Commission of American Shipbuilding, to study the American shipbuilding industry’s productivity and cost-cutting mea sures and then to make recommendations to the President and to Congress.
It is not necessary to seek artificial means to improve productivity. The dynamics of a free market always 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, allow 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 economically than government subsidies. If American companies are given the liberty that foreign companies enjoy, they would best utilize the resources at their disposal to compete in the international market. It is not necessary for a commission to tell us how to be more productive, we need only turn to basic economic principles.