United States Government Support for United States Ships:
Maritime nations’ governments have protected and supported their domestic maritime industry for national security and industrial policy reasons for centuries. Hence, United States has provided support to its private commercial maritime industry since 1789. Historically, United States could not easily exert its influence outside the United States without access to commercial cargo and passenger ships. United States realized this in the Spanish-American War and WW I. That is why United States count on domestically controlled fleet in times of war and national emergency. United States domestic industries which relied on international trade suffered economically even before the United States entered the WWI in 1917. Germans torpedoed commercial ships that reduced the number of available ships and drove up insurance rates. Afterwards, United States Congress has periodically enacted major legislation setting forth maritime policy objectives and establishing a number of support programs for the private merchant marine. United States Congress enacted:
- Shipping Act, 1916
- Merchant Marine Act, 1920
- Merchant Marine Act, 1936
- Merchant Marine Act, 1970
- Maritime Security Act, 2003
Until now, United States Government maintains a number of support programs intended to ensure the availability of ocean-going ship capacity to move goods and people referred to as sealift capacity. United States Government shipping support programs have proved critical to sustainment of a U.S.-flag fleet. It is hard U.S.-flag ships engaged in the foreign trade to compete with ships registered in open registries with substantial structural and legal operating and capital cost advantages. Furthermore, United States Government also maintains a number of programs and laws which are designed to promote United States shipbuilding. For example, United States build and United States rebuild requirements of the cabotage Jones Act. Ship build requirement applicable to U.S.-flag ships carrying United States Government cargoes and the 50% duty applicable to repairs on U.S.-flag ships performed outside of the United States.
Early 20th century, policy of the United States Government has been to support a privately-owned U.S.-flag commercial fleet instead of maintaining a large publicly owned fleet of cargo ships.
Merchant Marine Act 1936 Section 101, declares that it is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine, among other things, capable of serving as a naval and military auxiliary in time of war and national emergency.
Two main United States Government support programs for U.S.-flag ships engaged in the foreign trade:
- Maritime Security Program
- Cargo Preference Laws
In 1996, Maritime Security Program authorized to support 47 militarily useful privately-owned U.S.-flag commercial ships. Maritime Security Program reauthorized in 2003 until 2015 and reauthorized in 2010 until 2025. On 1 October 2005, Maritime Security Program increased to 60 ships. Maritime Security Program was further modified in 2012. Genesis of the Maritime Security Program is the Operating Differential Subsidy (ODS) program authorized in 1936 to support U.S.-flag ships in the foreign trade. Operating Differential Subsidy (ODS) program was successful in retaining ships under the U.S.-flag. But Operating Differential Subsidy (ODS) program became controversial over time because there was no cap on the payments made which were based on the difference between U.S.-flag and foreign flag operating costs. Maritime Security Program was designed to settle that controversy by fixing the payments made under the program to U.S.-flag ship owners. Maritime Security Act establishes ship eligibility criteria as well as ship ownership and operation criteria and requirements for Maritime Security Program. Qualifying ships are enrolled in Maritime Security Program. Afterwards, Maritime Security Program Operating Agreement is signed between the ship owner (bareboat charterer) and the United States Maritime Administration. Ship’s monthly payments are made by the Maritime Administration to the private party so long as the ship operates in a qualifying service. Generally, a ship is engaged in a qualifying service if it is operating in the United States foreign trade not under time charter to the United States Government. United States coastal (domestic) trade is not a qualifying trade and Maritime Security Program enrolled ships are prohibited from engaging in that trade. United States Government via United States Maritime Administration paid each contractor an annual support of $3.1 million per ship in 2013. United States Maritime Administration paid as long as the ship is in active commercial service and not on time charter to United States Government.
Maritime Security Act of 2005 explains that in order to be eligible to Maritime Security Program, a ships must be militarily useful as determined by the Secretary of Defense. A ship must be suitable for use by the United States for national defense or military purposes in time of war or national emergency. In order to be eligible for Maritime Security Program, a ship must also meet an initial age limitation:
- maximum age 10 years for tankers
- maximum age 25 years for Lighter Aboard Ships (LASH)
- maximum age 15 years for all other ships
In 1996, Maritime Security Program was first introduced and initial selections of ships were made. Maritime Security Program renewed in 2005, many ships were replaced by existing contract holders and many contracts were transferred from the initial contract holders to new persons. Replacement of ships and contractors requires the approval of the United States Maritime Administration and the United States Transportation Command. In 2005, when the Maritime Security Program was renewed, existing ships and contract holders were grandfathered into the new program. Till 2005, ships have been replaced in accordance with the commercial requirements of the contract holder with the United States Government’s approval. although the applicable regulations provide a process of awarding contracts pursuant to general notice.
United States Maritime Security Act sets forth eligibility criteria for Maritime Security Program contractors:
- contractor must either be a qualified United States citizen or must meet a citizenship exception
- ship may be owned by a qualified United States citizen trust (with foreign beneficiaries under certain conditions) if it is demise-chartered to a person eligible to document a ship in the United States, or a U.S.-flag ship may be operated by a person who operates or manages ships for the Department of Defense (or charters ships to United States Department of Defense) and has entered into a special security agreement with United States Department of Defense.
Maritime Security Program is not limited to United States citizens. Non-United States citizens can participate in Maritime Security Program under certain conditions. When Maritime Security Program was first authorized it was generally restricted to United States citizens. Later on, major U.S.-flag operators such as Sea-Land were acquired by Non-United States citizen companies and administrative rules were relaxed by the United States Maritime Administration. In 2005, United States Congress altered the rules.
Maritime Security Program ships does not have to be built in the United States. No such requirement under the law that ships be built in the United States and ships which have participated in Maritime Security Program have been built outside the United States. On the other hand, Maritime Security Program ship can not operate in United States domestic trade. Maritime Security Program enrolled ship may not receive the United States Government stipend for any day that the ship participates in the noncontiguous United States domestic trade. Mostly, Maritime Security Program enrolled ships have been built outside of the United States such that they are otherwise prohibited from engaging in the United States domestic trade rendering moot this noncontiguous trade limitation.
Maritime Security Program ships are committed to United States Government in times of national emergency. Maritime Security Program enrolled ships are required to enter into a Voluntary Intermodal Sealift Agreement with the United States Government whereby ship is committed to United States Government if the United States Government requests its full-time use of the ship.
Maritime Security Program contractors are also required to commit a portion of their worldwide intermodal assets pursuant to the VISA Agreement. When ships are requisitioned, they are chartered pursuant to a Ship Contingency Agreement which is a standard form agreement whereby ship owner and United States Government agree in advance as to the charter rate and other terms.
On the other hand, it is possible to enter into a VISA Agreement and commit ship capacity without having a Maritime Security Program ship. VISA program is open to anyone who is willing to commit a militarily useful U.S.-flag ship it owns or bareboat charters. In order to be eligible for VISA Agreement, ship must be owned by ship owner. Time charterer or ship manager cannot execute a VISA Agreement and commit a time-chartered or managed ship. United States Department of Defense has a policy of preferring VISA-enrolled ships over other non-enrolled U.S.-flag ships for cargo opportunities.
Maritime Security Program Agreements are transferable. Maritime Security Program Agreements are transferable with the permission of United States Maritime Administration and United States Transportation Command so long as the transferee qualifies under Maritime Security Program. If a ship is replaced, that new ship is at least as militarily useful as old ship.
A ship being documented under U.S.-flag must meet United States Coast Guard inspection standards and be inspected by the United States Coast Guard to those standards. United States Coast Guard inspection standards are more stringent and different than inspection standards imposed under international regulations and applied by most registries. Due to the high United States Coast Guard inspection standards, bringing a ship into compliance with the unique United States standards can add significant costs to the transfer of registry of a ship to the U.S. flag. In order to reduce those costs and encourage the re-flagging of militarily useful ships into the United States, Maritime Security Program offers an alternative inspection standard for such ships. United States Maritime Security Program provides that an otherwise qualifying ship automatically complies with United States standards if:
- Ship is classed by ABS (American Bureau of Shipping) or another acceptable classification society
- Ship complies with international standards
- Ship’s country of registry has not been identified by the United States Government as inadequately enforcing international ship regulations
Costs of complying with United States ship standards can be generally avoided by offering a ship to be re-flagged into U.S.-flag to the United States Maritime Administration for enrollment in the Maritime Security Program. Ships that qualify receive the benefit of Maritime Security Program’s international standards provision even if they are not actually enrolled in the Maritime Security Program. Hence, American ship owners whom are seeking to reflag non-U.S.-built ship into the United States registry should consider offering the ship for the Maritime Security Program.
Cargo Preference is a requirement to utilize a certain ship for certain cargoes. United States Government has adopted several cargo preference requirements over time which mandate that a percentage of United States Government cargoes must be transported in privately owned U.S.-flag commercial ships. Generally, cargo preference requirement provides that U.S.-flag ships need not be accorded the preference if they are not physically available to carry the cargo pursuant to the shipper’s requirements or if they are not available at fair and reasonable rates.
Three cargo preference laws and requirements:
- Cargo Preference Act of 1904: reserves 100% of United States military cargoes to privately owned U.S.-flag ships so long as the ships are available at rates that are not excessive or unreasonable.
- Public Resolution: reserves 100% of cargoes to privately owned U.S.-flag ships with respect to export cargoes financed through United States Government loans so long as the ships are available in sufficient number, in sufficient tonnage capacity, on necessary schedules, or at reasonable rates.
- Cargo Preference Act of 1954: reserves 50% of civilian agency cargoes or where United States Government is engaged in financing in any way so long as the ships are available at fair and reasonable rates for commercial ships of the United States.
Aim of United States Cargo Preference:
The purpose of Cargo Preference is to provide a base of cargo for U.S.-flag ships to assist offset the higher cost of operating under U.S.-flag. Operating a ship under open registries would be cheaper. By doing so, ships will be available to United States Government in the event of war or national emergency. Cargo preference is critical to survival of a privately-owned U.S.-flag fleet engaged in United States foreign trade. Usually, ships enrolled in the Maritime Security Program are free to carry cargoes reserved to privately owned U.S.-flag ships and simultaneously receive Maritime Security Program stipend, except that no stipend can be paid by law if an enrolled ship carries more than 7,500 tons of civilian bulk preference cargoes.
U.S.-flag foreign-built ship may qualify to carry United States Government reserved cargoes, depending on which cargo reservation applies. U.S.-flag foreign-built ships can immediately upon reflagging transport cargoes reserved to U.S.-flag ships by the Cargo Preference Act of 1904 and Public Resolution. Nevertheless, Cargo Preference Act of 1954 prohibits foreign-built ships from obtaining the benefit of the cargo reservation for 3 years following registration under U.S.-flag, which is called three-year wait. On the other hand, ships that are enrolled in Maritime Security Program are not subject to the three-year wait. According to Public Resolution, there is no restriction on the foreign modification or rebuilt of a U.S.-flag ship. However, according to Cargo Preference Act 1954, ships that are rebuilt outside the United States, loses the cargo reservation and commences a new three-year wait to restore that preference. Generally, Cargo Preference Act 1904 has no foreign modification or rebuilding restriction, except that a ship being reflagged to United States registry for the purpose of entering into a time charter with the Department of Defense must have all of its reflagging or repair work done in the United States. Cargo preference requirements limits U.S.-flag rates in some way. United States Maritime Administration has enacted regulations which provide in the carriage of bulk cargoes for the establishment of rates based on the provision of detailed cost information to that agency.
Cargo Preference Act 1904, McCumber Amendment provides that U.S.-flag ship owners cannot charge United States Government any freight rate that is higher than freight rates paid for transporting like goods for private persons.
In 1866, United States Congress enacted a 50% tariff on the value of repairs performed abroad by U.S.-flag ships. Ad Valorem refers to value of U.S.-flag ship repairs out of United States.
U.S.-flag ship which has undergone for repairs at foreign shipyard (if there is no exemption), ship owner of U.S.-flag ship must pay the United States Government 50% of the value of the covered repairs upon return to the United States. United States Department of Homeland Security department Customs and Border Protection checks and administers U.S.-flag ship repair duty. United States has entered a free trade agreement with Canada and Singapore, in order to not to impose any duty or tariff on shipyard services. U.S.-flag ship must pay the United States Government 50% of the value of the covered repairs upon return to the United States, but not for emergency repairs or improvements and modifications. Besides, spare parts, equipment or paint job which are sourced from a non-duty place and are installed or applied in the foreign shipyard are not dutiable under the ship repair statute.
If U.S.-flag ship arrives in the United States two or more years after leaving the United States, U.S.-flag ship does not have to pay duty on any foreign ship repairs unless:
- those repairs were undertaken during the first six months after leaving United States
- U.S.-flag leave United States for the sole purpose of obtaining such repairs
Foreign Shipyard Repairs of a U.S.-flag Ship: In order to separate dutiable items (repairs), from non-dutiable items (improvements or parts), U.S.-flag ship owners should insist on detailed invoicing from foreign repairing shipyard sufficient to support a claim that only certain items in the overall project are dutiable. United States Customs and Border Protection controls and administers this ship repair duty. Usually, United States Customs and Border Protection does not accept bare allegations without proof of distinguishable invoice items. United States Customs and Border Protection regulations require a responsible U.S.-flag ship owner to file a ship repair entry and an application for relief within prescribed time periods.