Present Status

The United States continues to depend primarily on oceanborne shipments for its international trade. As the world's largest trading nation, the United States exports and imports about one-fourth of global merchandise trade in value annually (over $2 trillion in 2000). The largest part of this merchandise trade - over 1.2 billion metric tons of cargo - is moved by water. Another billion tons of cargo, 24 percent of the Nation's total, is carried in domestic waterborne movements, which serve over 90 percent of the U.S. population. Based on current projections, by the year 2020 U.S. foreign trade in goods may grow to four times today's value and almost double its current tonnage, and inland waterways traffic will increase by one-third.

The United States once relied on a huge fleet of relatively small ships to provide the commercial and sealift shipping capacity appropriate for its trade. Since the end of World War II, the U.S.-flag merchant marine has been in a continual state of decline. The United States now ranks 18th in number of oceangoing vessels, having fallen from a top-ten ranking just a few years ago. The U.S.-flag merchant fleet ranks 12th on a deadweight tonnage basis. Today, the U.S. fleet's share of oceanborne commercial foreign trade, by weight, continues to be less than five percent. Other traditional maritime powers have experienced similar declines.

While the number of vessels in the U.S. fleet has shrunk, at the same time many nations have built an international maritime presence as a means of projecting visibility and earning hard currency. These registries may not require the same level of protection for seafarer health, welfare and safety as on U.S.-flag vessels. Often, foreign-flag vessel owners do not pay any corporate income taxes on revenues earned in U.S. foreign commerce, and the crews frequently do not pay income taxes to any country. By comparison, vessels operating under the U.S. flag are subject to all the taxes and regulatory laws applicable in the United States.

Changes in maritime technology and reductions in crew sizes have contributed to a contraction of the industry's supply of vessels and manpower. The average capacity of liner vessels in the U.S.-flag fleet is nearly 28,000 DWT, compared to 12,000 DWT in 1970. Even though the size of the U.S.-flag fleet has declined in recent years, the productivity of the fleet has improved substantially. Today, the U.S.-flag foreign trade liner fleet carries over 42 percent more cargo than in 1970, but in fewer, larger vessels. Today's fleet includes ships and barges, and also containers, chassis, computer-based data systems, rail and truck interchanges, warehouses, piers, cranes, terminals, and highly skilled people ashore and at sea. Technological advances have greatly improved the flow of cargo, resulting in virtually seamless movement of goods from origin to destination anywhere in the world. These advances have also been applied to the movement of military shipments.

The maritime issues and challenges facing the nation are significant and complex. The present and future ability of the U.S.-flag fleet to serve as a contributor to economic sovereignty and national security remains a challenge. Changes in world political trends and economies occur constantly. The 104th Congress understood the precarious situation the Nation faced when it overwhelmingly adopted the Maritime Security Act of 1996. This measure established the Maritime Security Program to support a fleet of militarily useful U.S.-flag commercial vessels and American-citizen crews necessary for the military and economic security of the Nation. Funding for the Maritime Security Program permits 47 oceangoing vessels to participate in the program.

Types of Merchant Ships

The U.S.-flag merchant marine is made up of a variety of vessel configurations for specialized and general cargo purposes. The following is an overall synopsis of the privately owned commercial self propelled and non-self propelled U.S.-flag fleet as of July 1, 2002, in terms of number of active and inactive vessels engaged in core areas of operation -- deep-sea foreign, deep-sea domestic, Great Lakes, and inland rivers:

Manpower Pool

The pool of skilled labor actively employed on U.S.-flag vessels is considered a national security asset, able to meet surge-shipping requirements during times of emergency. According to the U.S. Department of Labor, as of year-end 1998 an estimated 56,000 people were employed in the waterborne transportation industry. Approximately 30 percent of these employees worked onboard, merchant and civilian-manned military sealift vessels on the oceans and Great Lakes, 47 percent were engaged in the inland, dredging and piloting sectors, and the remaining personnel worked in the passenger, gaming, sightseeing and excursion vessel trades.

Cargo Carrying Capacity

As of July 1, 2002, the carrying capacity of the privately owned active and inactive commercial self-propelled and non self-propelled U.S.-flag fleet was estimated to be (in metric tons):

Taxes Paid by the Maritime Industry

In addition to federal and state corporate and personal income taxes, the commercial maritime industry pays a number of other federal taxes yearly in order to operate both domestically and internationally. According to a study updated by the U.S. General Accounting Office in September 1999, the commercial maritime industry was assessed $22 billion in fiscal year 1998, nearly double the assessment calculated in the agency's original study just seven years earlier. Eleven federal agencies were identified as levying a total of 124 diverse assessments, 85 of which are specific to and paid only by the maritime industry. Such taxes include the Harbor Maintenance Tax, vessel entry processing fees, vessel tonnage tax, and an inland waterways fuel tax. In 1998, the U.S. Supreme Court ruled that the export-related portion of the Harbor Maintenance Fee violated the constitutional provision of taxes imposed on exports.

The 10 agencies for which taxes are collected include:

	Animal and Plant Health Inspection Service
	Centers for Disease Control and Prevention
	Coast Guard
	Customs Service
	Federal Communications Commission
	Federal Maritime Commission
	Grain Inspection Administration
	Internal Revenue Service
	Maritime Administration
	National Oceanic and Atmospheric Administration

The 105th and the 106th Congresses rejected an effort of the Office of Management and Budget to tax only commercial vessel operators for navigational assistance services, such as buoy placement and maintenance, vessel traffic services, and radio and satellite navigation systems.

Marine Insurance

The general principles of marine insurance are the same as with other types of insurance in that there are two parties: the assured and assurer (or carrier). The complex circumstances involved in sea and inland voyages require very specific arrangements for the provision of marine insurance. Generally, the marine policy may cover the risks of a single voyage or may insure for a certain period of time. Cargo is almost always insured by voyage. Vessels are usually insured for a certain duration of time, usually year by year. Cargo policies may be on a single lot or may be open to cover cargo as shipped by the insured. Hull insurance or vessel insurance may cover a ship or a whole fleet.

Hull and Machinery (H&M) Insurance

An H&M policy covers physical damage to the vessel, its machinery and equipment. In addition, the policy normally covers general average, salvage, sue and labor and collision liability. Coverage for a vessel under an H&M policy is written with a vessel value, which has been agreed upon between the owner and the underwriters of the policy. Most H&M policies include a deductible for partial losses. Often a shipowner may elect to cover a portion of the value of a vessel for total loss only. This is done using an increased value policy, which usually costs significantly less than a full form H&M policy. There are several factors taken into account when determining the rate being charged for an H&M policy. They include the type of vessel, the value, the owner/operators experience, the loss record, the size of the deductible and the intended trade. H&M policies can be written to cover a single vessel or an entire fleet.

There are several different types of H&M policies a vessel owner can purchase to insure his vessel:

	Navigation Policy -- provides coverage when vessels are used in maritime operations.
	Port Risk Policy -- used when a vessel is expected to be laid up or non-operational for an extended period of time.
	Builder's Risk Policy -- used to cover a ship being built from the time its keel is laid until the ship is completed and accepted by the owner including sea trials.
	War Risk Policy -- covers damage to the vessel for war and other risks excluded from the H&M policy by the War, Strikes, and Related Exclusions clause. This policy also covers damages caused by strikes, lockouts, labor disturbance riots and civil commotions, which may be important in a port environment.

Protection and Indemnity Insurance

A Protection and Indemnity (P&I) policy is purchased in conjunction with a hull insurance policy to provide liability protection not found in the hull policy. This type of coverage is usually placed either through a mutual P&I Club or with individual stock insurance companies.

The P&I policy provides coverage should an insured vessel cause damage to piers, wharves, bridges, cable or other fixed or removable objects. Also covered are the cost of raising, destroying or removing a wreck which is sunk and which constitutes a hazard to navigation; bodily injury, loss of life, and sickness of seamen, passengers, ship visitors, stevedores, etc; coverage for the repatriation expenses of seamen who become ill and/or injured during a voyage; and, collision risks not fully covered under a hull policy.

Further, the P&I policy provides coverage for damage to cargo caused by the insured vessel should the damage arise from the negligence of the vessel operator and for pollution risks. Operators often use this coverage to meet the requirements of the Coast Guard to obtain Certificates of Financial Responsibility. Domestically, many operators purchase pollution protection coverage through the Water Quality Insurance Syndicate (WQIS).

For those shipowners who are not members of a mutual P&I club, the amount of insurance provided in a P&I policy is usually equivalent to the amount of insurance on the hull of the vessel. This amount of insurance is usually adequate where the ship owner may limit his personal liability to the value of the hull. However, where the owner of the ship has privy or knowledge of the events or conditions that caused a loss, this limitation on the shipowner's liability may no longer be applicable. In those circumstances, an owner may purchase an Excess P&I policy.

Ocean Shipping

Companies

In 1996, the Congress enacted the Maritime Security Act establishing a 10-year promotional program for the U.S.-flag fleet, the Maritime Security Program (MSP). It replaced the operating-differential subsidy (ODS), a program authorized by the Merchant Marine Act of 1936 that sought to equalize the disparity in operating costs between American-flag ships and foreign competitors with respect to wages, insurance, and maintenance and repairs. MSP reduced by more than 50 percent the federal operating assistance payments for militarily useful U.S.-flag ships -- from a $225 million annual payment under the ODS program to $100 million under MSP. Payments to vessel operators are no longer based on collective-bargaining costs and the difference between the cost of operating a foreign-flag and an American-flag ship.

The 108th Congress, through the enactment of the Maritime Security Act of 2003, expanded the fleet from 47 to a total of 60 vessels. The legislation also called for additional funding for the program subject to annual appropriations.

MSP funding provides for the soon-to-be 60 U.S.-flag vessels to participate in the program. Companies presently awarded MSP operating agreements are: American President Lines, American Car Carriers, Central Gulf Lines, Farrell Lines, Intermarine Inc., Liberty Maritime, Lykes Lines, Maersk Line, OSG Car Carriers, and Waterman Steamship.

The 1936 Act also authorized the construction-differential subsidy (CDS) program, which was designed to assist U.S.-flag vessel operators by helping to fund the difference in costs between having a ship built in a foreign shipyard and having the same ship constructed in a U.S. shipyard. The CDS program, while still authorized, has not been funded since 1981.

July 2002 Self-Propelled U.S.-Flag Deep-Sea Foreign Trades Vessel Fleet

Liner Trades

Liner or berth service is defined as a scheduled operation by a common carrier whose ships operate on a predetermined and fixed itinerary over a given route, at relatively regular intervals, and are advertised considerably before sailing in order to solicit cargo from the public. These common carriers provide transportation on fixed schedules and at rates (tariffs) made electronically available to the public. The liner fleet includes full containerships, partial containerships, lighter aboard ships (LASH), roll on/roll off (Ro/Ros), and barge-carrying vessels. Vessels in the liner trades carry high-value cargo as to its worth and multi-faceted cargo as to its physical description, including packaged goods and refrigerated fruit and vegetables. The U.S.-flag commercial fleet is a worldwide leader in innovative technologies in ocean shipping. Innovations include double-stack trains, seamless cargo tracking and identification technologies.

As of July 1, 2002, there were 127 private vessels (containerships, roll-on/roll-off, general cargo, multi-purpose, LASH vessels, and deck barges) in the active oceangoing U.S.-flag fleet serving the foreign trades. In addition, this trade was served by 136 non-self-propelled vessels in excess of 1,000 gross registered tons and 109 non-self-propelled vessels of less than 1,000 gross registered tons.

Shipping Conferences

One very important aspect inherent in the liner shipping industry is the conference system. Conferences, first formed in 1875 by the steamship lines to prevent predatory rate wars, are defined as associations of water common carriers which meet at stated intervals to discuss matters of interest and to set tariffs, or rates and rate structures. Members of the conference agree to abide by the rules of the conference with regard to the rates that will be charged. There are two types of conferences -- open and closed. A conference is closed if one can enter only by the consent of existing members of the conference. It is open if anyone can enter by meeting certain technical and financial standards. By statute, U.S.-flag shipping companies are required to join only open conferences.

Tramp Service

Non-liner service is comprised of tramp and other types of non-scheduled service, which do not conform to the criteria for a common carrier in liner service. A tramp ship, in traditional terms, is one that operates on an irregular or non-scheduled basis from one port of lading to one port of discharge, lifting one dry cargo commodity, usually of low value, without mark or count, and from one shipper to one consignee. Some vessels in irregular service, however, may carry mixed cargoes of bulk and packaged goods. The tramp operator does not usually hold himself out as a common carrier and his ship is free to operate anywhere on any terms, not infrequently being chartered out on time terms. Rates vary from day to day depending upon supply and demand.

Bulk Trades

The bulk shipping industry's economic environment is much different from the liner industry. Bulk shipping is much less structured and not organized along schedules but it is, in its own way, very disciplined. The bulk trades, mainly oil, chemicals, and dry raw materials, are structured to follow the cargoes. This means that an operator does not have a fixed schedule of sailings for his vessel and will employ it where and when he can get a cargo. Bulk service is generally not provided on a regularly scheduled basis, but rather as needed, on specialized ships transporting a specific commodity. Cargoes are shipped unpackaged either dry, such as grain and ore, or liquid, such as petroleum products.

The rate structure is not set in deliberations by a group of operators as they are in a liner conference framework. Rather, the rates are set by dictates of market forces of supply/demand for the commodity and for tonnage. Brokers are the key to making contracts and many contracts are executed over the telephone and by telegraph strictly on the verbal agreement of businessmen. In the bulk trades, bulk operators are contract carriers, either time or voyage chartered by the shipper.

Bulk carriers can be divided primarily into two principal types of ownership. The first is the proprietary owner, whose costs may be calculated as part of the corporation's operating expenses. To minimize those costs the proprietary owner may try to offer his ship for charter on the ballast leg of a voyage. The other type is the privately owned company, which sells its transportation service as the market dictates. Both types are not common carriers but contract carriers which charter ships on a long-term or short-term voyage or other basis

. Bulk operations in foreign trade include both dry cargo vessels (grain and coal carriers) and tankers (chemical or petroleum products).

Dry Bulk Fleet

As of July 1, 2002, there were 12 dry cargo vessels in the privately owned oceangoing active U.S.-flag fleet serving the foreign trades. These ships are specifically designed to transport vast amounts of cargoes such as sugar, grain, ore, coal, etc. Examples of dry bulk vessels include colliers and OBOs. In addition, there were 101 non-self-propelled vessels of 1,000 grt or greater and 106 non-self-propelled vessels of less than 1,000 gross registered tons serving the international trades.

Liquid Bulk Fleet

As of July 1, 2002, there were 17 liquid bulk vessels (tankers) in the privately owned oceangoing active U.S.-flag fleet serving the foreign trades, operated by the vessel-operating subsidiaries of major oil or other companies, or by independently operated companies. These ships are specifically designed to transport oil and other liquid cargoes. At times, tankers also carry grain. Examples of liquid bulk vessels include tankers, liquid natural gas (LNG), and liquid petroleum gas (LPG) carriers. In addition, there were 39 non-self-propelled vessels of 1,000 gross registered tons or greater and 3 non-self-propelled vessels of less than 1,000 gross registered tons serving the international trades.

Flags of Convenience

(FOC) All ships must be registered to one of the nations of the world in order that responsibility for violations of international law and convention may be assigned. These ships then fall under the jurisdiction of their nation of registry. Shipping concerns adopted the practice of shopping around for nations that would give them the best deal on taxes, wages, and legal restrictions. They "conveniently" register their ships with these countries, which include Liberia -- which has the world's largest shipping fleet -- Panama, Honduras, the Bahamas, Vanuatu, and the Marshall Islands.

International Maritime Organization

The International Maritime Organization (IMO), a specialized agency of the United Nations whose primary focus is maritime affairs, is responsible for measures to improve the safety of international shipping and prevent marine pollution from ships. It is also involved in legal matters, including liability and compensation issues and the facilitation of international maritime traffic. Established under a 1948 United Nations Convention that entered into force on March 17, 1958, IMO is open to membership by all states that are members of the United Nations and to other states in accordance with the admission procedures of the IMO Convention.

IMO consists of an Assembly, a Council, and five Committees: Maritime Safety Committee (MSC) - the senior technical body responsible for all matters affecting maritime safety; the Marine Environment Protection Committee (MEPC) - responsible for the prevention and control of pollution from ships; the Legal Committee; the Facilitation Committee; and, the Technical Cooperation Committee. The organization, which is based in London, England, currently has 162 member states and two associate members. The Secretary-General, William O'Neil of Canada, who is appointed by the Council and approved by the Assembly, heads the IMO Secretariat.

United States' Role

The U.S. Coast Guard, by appointment of the Department of State, leads U.S. delegations to IMO meetings while the Department of State leads the U.S. delegations to the Council and the Technical Cooperation Committee. In addition to the Coast Guard, U.S. delegations often include representatives from other U.S. agencies, such as the Maritime Administration, the Department of Defense, the National Oceanic and Atmospheric Administration, and the Environmental Protection Agency. Private sector representatives also serve on the U.S. delegation, including representatives of the Transportation Institute.

Since the late 1970s, the United States has taken the initiative to improve international standards for maritime safety and protection of the marine environment so as to provide a significant degree of protection for its waters, waterways, environmental resources, population, and property. Largely as a result of U.S. efforts, the international maritime community has become more uniformly regulated by increasingly comprehensive and stringent international standards. Over the past three decades, most of the vessel design, equipment, and operational standards adopted in IMO instruments have evolved to the point of substantial parity with U.S. requirements. And in 2002, the United States was instrumental in persuading the IMO to adopt a comprehensive regime to strengthen maritime security and prevent and suppress acts of terrorism against shipping.

IMO conventions are not automatically binding upon governments, since IMO only recommends the decisions to member governments for adoption. An IMO convention is not binding to the United States and industry until certain criteria are met. These include: official recommendation of the convention to the President by the State Department; ratification of the convention by the President upon the advice and consent of the Senate; domestic implementing legislation, if required; and promulgation of regulations by the Coast Guard, if required.

IMO Conventions and Protocols

Currently, IMO has adopted 40 conventions and protocols that are mandatory instruments for those countries that have become party to them. The majority of conventions adopted under the auspices of IMO or for which the organization is otherwise responsible falls into three main categories - maritime safety; the prevention of marine pollution; and, liability and compensation, especially in relation to damage caused by pollution. Outside of these major groupings are a number of other conventions dealing with facilitation, tonnage measurement, unlawful acts against shipping and salvage, etc. Some of the more important conventions of interest and importance to vessel operators and to which the United States is a signatory include:

The IMO has also developed 26 separate codes of safe practice, some of which are mandated through a specific convention and others of which are only recommendations, for example:

	International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code) - establishes safety management objectives and emphasizes the role of sound management in safety and pollution prevention. Compliance with the ISM Code is mandated by the SOLAS Convention, Chapter IX.
	International Ship and Port Facility Security Code (ISPS Code) -- details security-related requirements for governments, port authorities and shipping companies in a mandatory section (Part A), together with a series of guidelines about how to meet these requirements in a second non-mandatory section (Part B). The ISPS Code will come into force in July 2004.

In addition, IMO has approved or adopted hundreds of recommendations and guidelines in the form of resolutions, circulars, and manuals that further supplement or assist in the implementation of the conventions, protocols, and codes to improve maritime safety and the protection of the marine environment.

Jones Act / Domestic Shipping

America's dependence on the seas has been integral to its economic health and survival as a nation. Similarly, because of the vastness of the nation, the expansive network of rivers, lakes, and canals is critical to the efficient transportation of natural resources, food, and manufactured goods from state to state and ultimately to market. Because of the importance of the merchant marine and the critical role that coastwise and inland waterway transportation plays in its economy, America has always made sound decisions about protecting the integrity of this system along with the vitality of our waterways.  

Thus, the Jones Act, titled after its sponsor Senator Wesley R. Jones, a Republican from Washington State, was passed as part of the Merchant Marine Act of 1920. This federal legislation specifies that domestic waterborne commerce between two points within the United States and subject to coastwise laws must be transported in vessels built in the United States, documented under the laws of the United States, and owned by the citizens of the United States.

Provisions such as these are not unique in the world, nor are they new to the United States. A recent survey conducted by the Maritime Administration, -- an agency of the Department of Transportation -- found that 47 nations have laws restricting foreign access to domestic trade. These similar cabotage laws -- from the French word caboter which means to sail coastwise or by the capes -- reserve a country's domestic maritime transportation for its own citizens. Cabotage principles are designed to guarantee the participation of a country's citizens in its own domestic trade. These laws foster the development of a merchant marine and give preference to local labor and industry. More importantly, they support national security and protect the domestic economy. Cabotage laws have been the norm since the early days of our nation. In 1789, the first Congress of the United States restricted registration for coastal trades and fisheries to U.S.-built and U.S.-owned vessels and gave these vessels preferential treatment with respect to tonnage taxes and cargo import duties. Additional cabotage laws were enacted during the intervening years between that first cabotage law and the enactment of the Jones Act over a century later. Variations of these cabotage laws exist today in the U.S. transportation, utility, and communications industries. Federal laws reserve other kinds of U.S. maritime activity to Americans -- including passenger ships, fishing in U.S. territorial waters, towing in U.S. harbors or between two points in the United States, salvage operations in the U.S., dredging in U.S. waters, and the exploitation of minerals and other energy resources within the 200 mile economic zone.

Maritime Administration
Survey of Fifty Three Maritime Nations

Source: U.S. Department of Transportation

The Jones Act fleet includes over 42,000 commercial vessels and annually transports approximately one billion tons of cargo. Based on the principle that cargo carried between U.S. ports is vital to the American economy, the Jones Act protects the nation's waterways from being turned over to foreign ships, owners, or crews.

Important Benefits of the Jones Act

• The Jones Act assures that the U. S. mainland and its offshore communities continue to have reliable domestic water transportation service subject to national control in times of emergency.

• Jones Act vessel construction and repair in U.S. shipyards assures the availability of the skilled professionals and the modern facilities needed in time of war or national emergency.

• Freight revenues earned by domestic carriers, shipyards, and repair yards are subject to taxes. Foreign owned carriers and shipyards are not!

• Because of these requirements for the U. S.-manned vessels, the American merchant mariner is kept employed and trained, while at the same time maintaining readiness to man essential vessels in times of war or national emergency. 

Jones Act vessels support a wide range of American industries. For ocean shipping, the coastwise and intercoastal fleet primarily employs crude oil and product tankers while the domestic offshore fleet mainly employs container vessels. For Great Lakes shipping, the Jones Act fleet carries iron ore, coal and limestone. Inland waterways shipping carries more domestic cargo than ocean shipping and Great Lakes shipping combined, transporting farm products, petroleum products, coal and non-metallic minerals, and chemical and allied products in bulk by barge.

Every State Benefits From Jones Act Trade

Jones Act cargo movement includes crude oil in coastal tankers from Alaska to California, grain via inland river barge from the Midwest to the Gulf Coast, metallic ores from Minnesota and Michigan in massive self-unloading Great Lakes vessels to Indiana and Ohio, inter-plant movement of chemicals and fertilizers along the Texas Gulf Coast, coal by barge from Appalachia to the Midwest, and merchandise to and from Alaska, Hawaii, and Puerto Rico.

On a value-of-cargo basis, 19 state-to-state flows account for 40 percent -- over $200 billion -- of Jones Act cargoes.

Domestic Jones Act Tonnage by State 2001

(thousand metric tons)

* Indicates ports and offshore anchorages where cargo is moved from one vessel to another

Source: U.S. Army Corps of Engineers

A Major Source of Employment

An estimated 124,000 U.S. citizens are engaged in a variety of Jones Act-related jobs including the crewing of vessels, the building and repair of those vessels, and the shore-side management and support of trade. On all American coasts, throughout the inland waterway system, and across the Great Lakes, Jones Act employment impacts the economic vitality of much of the United States.

The Jones Act Employs Approximately 124,000 Persons
on a Full-Time Equivalent Basis

Source: Mercer Management Consulting, Inc.  

A Large Contributor to the American Economy

The total direct economic activity associated with the Jones Act fleet is estimated at $15 billion each year. This includes $8 billion in other goods and services, excluding fuel, which are largely produced by American manufacturers and financial institutions. The Jones Act fleet transports about 1.1 billion tons of cargo worth approximately $222 billion at a cost of about $12 billion -- less than 6 percent of the value of the cargo. Approximately $1 billion of transportation and other services to meet the needs of offshore oil and gas operations is generated and $1 billion in other marine activities including dredging, patrols, and environmental services is generated by the Jones Act fleet.

The Jones Act is a Major Contributor to the U.S. Economy
(millions of dollars)

Jones Act Fleet: 41,419 Vessels
124,000 Jobs

Total: $14,874

Source: Mercer Management Consulting, Inc.

The 124,000 employees that are involved in Jones Act activities annually pay $1.1 billion in federal income taxes and $272 million in state taxes. In addition, the operators of Jones Act vessels and the shipbuilders and repairers that support them contribute about $300 million and $55 million in federal and state taxes, respectively, on their corporate profits. The reality is that a significant portion of this revenue would not enter the U.S. economy if the Jones Act did not exist and if foreign shipyards, crews, owners, and suppliers were operating within U.S. waters while purchasing goods and services outside of the U.S. The simplistic view of income taxes paid on Jones Act fleet operating profits underestimates the full effect of the Jones Act. Suppliers create jobs and earn profits on the goods and services they provide to Jones Act operators, resulting in even more tax revenue generated as a result of the Jones Act.

An American Tradition Worthy of Protection

Some have criticized the Jones Act, saying that it protects a more expensive mode of transportation that costs America more dollars. The reality is that the difference between U.S. and foreign costs for shipping can be explained entirely by the difference in costs related to taxation, regulation and labor costs, and working conditions.

Americans have a higher national standard of living, compensation, and working conditions. American workers and American companies have to meet national safety regulations. American employers have to adhere to strict U.S. laws. American companies, their employees, their vendors, and suppliers all have to pay American taxes. All of these costs directly impact shipping costs, and thus American shippers. No matter how streamlined and cost-effective their operations are, they will always be at a disadvantage when compared to foreign operators who do not have to play by comparable rules.

If the Jones Act was repealed, the U.S. would experience a devastating loss of maritime jobs -- a loss to the U.S. that is estimated at $15 billion in direct economic value. In addition to the economic damage that would result from the thousands of lost jobs, shipyards would stop investing in cost-efficient operations. Long-term shipping contracts would cease, thus the economy of scale built into those contracts would disappear. The current Jones Act fleet would begin to erode and defaults on federally-guaranteed mortgages would escalate dramatically, costing the federal government millions of dollars. Total exposure of the federal government and the owners of the vessels has been estimated to be over $1 billion, thus the government has a compelling financial incentive in seeing that the Jones Act fleet is not undermined and wiped out by foreign competition. 

By Necessity ... A Competitive and Innovative Industry

Jones Act marine transportation is fiercely competitive, with carriers competing for spot business and long term contracts. As a result, rates are naturally constrained. Interestingly enough, while general inflation has doubled and insurance and other costs of doing business have skyrocketed during the past ten years, Jones Act rates for petroleum products have remained fixed. In some markets, such as the inland grain trade on the greater Mississippi River system, a futures market exists to forward fix, speculate, and hedge grain barging commitments.

Jones Act marine transportation rates are also naturally limited by competition from other modes of transportation. In virtually every market, rising maritime shipping rates trigger customers to shift cargoes to other modes of transportation. On the flip side of the coin, Jones Act trade must remain competitive and keep its costs low in order to capture cargo from competing modes of transportation, such as oil product pipelines connecting the U.S. Gulf to the Mid-Atlantic states and western coal delivered to the southeast by rail. Foreign sourcing and transportation also imposes powerful rate ceilings on many cargo movements, such as the shipping of petroleum products on the Atlantic Seaboard.

At the same time, innovative production techniques have resulted in lower construction costs. For example, barge prices are lower today than they were a decade ago. Innovative technologies and economies of scale have been developed in order to meet vigorous competition. And all of this has occurred naturally within the industry, thus there is no requirement for the manipulation of outside forces in order to increase competition or innovation. It is already happening -- with very positive results for America and American taxpayers.

Buy American

The size and average 30-year life of the fleet used in Jones Act trade dictates that about 2,000 replacement vessels are required each year to maintain the fleet at its current capacity. With these 2,000+ Jones Act vessels being replaced each year, approximately 20,000 shipyard workers are employed through new vessel construction. In addition, 14,000 American jobs are created as a result of the maintenance and repair of existing vessels used in Jones Act trade. The "rule of thumb" for the Jones Act fleet is that new construction creates 10 shipyard jobs per "average" vessel.

Potential Jones Act Vessel Construction Schedule
and Shipyard Employment
(annual averages in five year increments)

Source: Mercer Management Consulting,Inc.

If foreign-flag ships were permitted to transport merchandise between two points in the United States, the foreign-flag operators would be able to avoid paying U.S. taxes! They would employ foreign citizens, not Americans. They would be subject to foreign construction and safety rules, not stringent American guidelines. Amending the Jones Act would result in the removal of a portion of the U.S. gross national product, adversely affecting the U.S. balance of payments.

The ripple effect on the U.S. economy would extend far beyond the waterfront. Shipyards, their suppliers, their insurers, their employees, and the employees of their suppliers would suffer. Land transportation systems that now efficiently connect and coordinate with water transportation systems would encounter more complex problems in maintaining the smooth flow of domestic cargoes, which would, in turn, increase shipping costs. Terminating the Jones Act amounts to a shortsighted and "penny wise, pound foolish" decision if it comes to pass.

Foreign trade ministers oppose the Jones Act for very obvious economic reasons. They want to build ships in their own subsidized shipyards that would be used to transport the domestic commerce of the United States. Meanwhile, they do not "graciously" offer to terminate their own cabotage laws in exchange. And even if they did, the deal would not be equitable since America's domestic trade is far greater in size than the domestic markets of our foreign competitors.

Our Nation's Security Depends on the Jones Act

An undeniably vital aspect of the Jones Act is the range of national security benefits it affords the United States. First, the Jones Act fleet plays a vital role in maintaining the nation's economic security by ensuring that the United States controls its essential transportation assets and the related infrastructure in both peacetime and wartime. American-owned and American-manned ships ensure the safe transport of grain down the Mississippi, ore across the Great Lakes, coal from America's heartland, and more. Without the Jones Act, America's internal network of waterways would be vulnerable to foreign shippers who don't play by the same set of safety rules or adhere to important environmental standards. America's economy relies on an efficient system of shipping, thus with foreign vessel operators playing a role, our natural resources and goods, and citizens are subject to the whims of ship operators who have a lot less at stake.

Because of the Jones Act trade, American shipyards and repair yards efficiently operate during times of peace. As a result, when war places demands on these resources, they can be mobilized to repair, convert, and construct vessels for military use -- quickly and efficiently. At the same time, with the Jones Act in place, equipment manufacturers that supply the military are in business and ready to serve the nation when they are called upon to use their expertise to produce vital equipment for military needs.

In addition, the actual Jones Act vessels and Jones Act crews form a ready team of professionals who play a central role in meeting U.S defense needs when they emerge -- sometimes at a moment's notice. Without this ready fleet of ships and people, the U.S. taxpayer would bear the burden of building these ships and maintaining these highly technical capabilities over many years. It has been estimated that the Department of Defense would have to spend $800 million annually to maintain these resources. With the military budget under continued assault to streamline staffing and ship requirements, it is easy to see the importance of keeping the current cost-effective manning and shipping system intact through the Jones Act. The Jones Act fleet serves as an important adjunct to government-owned defense resources, without any burden of cost to the government and the American taxpayer. And real world demonstrations such as the Vietnam conflict and the Gulf War confirm the importance of Jones Act vessels in the mobilization of U.S. allies and in meeting logistics requirements.

"The Gulf War was a staggering logistical accomplishment... We moved more than 95 percent of all the equipment, supplies, and fuel by sea. And U.S.-flagged ships carried 80 percent of the ocean going cargo. We did it in record time and with a near-perfect safety record. We tapped the U.S. maritime industry and thousands of merchant mariners to help augment the government's strategic sealift forces."

VADN Francis R.Donovan,
USN Commander, Military Sealift Command, August 1992

Critical To Our Environment And To Our Safety

The regulations issued and enforced by the U.S. Coast Guard are the most effective in the world. Employing U.S. citizens and resident crews while navigating the coasts and rivers of America involves the reliance on people whose orientation is to obey the law, work hard, and have a personal stake in the environmental and economic well-being of the United States. Thus, communities from sea to shining sea are safer for having U.S. operators and U.S. merchant mariners serve the nation's maritime transportation needs. Thus, the Jones Act is vital to the environmental security of our nation.

The U.S. Merchant Marine must meet the stringent requirements of federal, state, and local laws that protect America's precious waterways and tidal areas. The U.S. Merchant Marine is required to meet stringent oversight inspections that have the highest standards in the world. Plus, because Jones Act carriers are liable for failures in performance by law, through insurance premiums, and through the pressure of demanding charterers, U.S. operators cannot cut corners or run a slipshod operation using untrained mariners. The introduction of foreign-flag ship operators into the American system invites disaster. Some foreign ships do not have the burden of following national guidelines that guarantee a well-maintained vessel that is constructed for superior safety. Foreign crews are often paid extremely low wages, receive few benefits, and work inhumane schedules. Many do not have the superior level of training or professionalism that characterizes the U.S. Merchant Marine. Thus, if the Jones Act is repealed, America's waterways will be heavily traveled by vessels and crews that do not perform to American standards -- nor will they have the incentive to do so.

If the Jones Act were to be terminated, the number of foreign-flag vessels carrying hazardous cargoes along our environmentally sensitive coastlines and within the harbors and waterways would increase beyond the already unacceptable level. Our nation's precious environment would be even more vulnerable to those whose operating systems are not up to our standards or within our control.

Vital To America's Future

The Jones Act has been integral to the economic and national security of our nation since it began. Today, the Jones Act offers a clear way to preserve the millions of dollars of tax income gained from Jones Act trade and fleets. The Jones Act employs thousands of Americans through shipping and shipping support activities across the nation. The Jones Act fleet is a competitive and innovative industry that continues to provide America with high quality and cost-effective services from coast to coast. The Jones Act ensures a ship building and ship repair resource that can be mobilized quickly in times of war. The Jones Act guarantees a professional and ready force of merchant mariners who are vital to America's ability to supply our military forces -- bringing food, equipment, and ammunition needed to sustain a conflict in distant lands. The Jones Act ensures that our nation's waterways are traveled by well-built ships that meet American safety and environmental standards. The Jones Act facilitates America's complex and streamlined system of transportation of goods that is invaluable to a strong economy.

America cannot afford to lose control of the movement of crude oil in coastal tankers from Alaska to California ... grain via inland river barge from the midwest to the Gulf Coast ... metallic ores from Minnesota and Michigan on Great Lakes vessels to Ohio ... coal by barge from Appalachia ... and goods to and from Alaska, Hawaii, and Puerto Rico. American citizens residing across the vast reaches of this nation expect and deserve the broad-reaching benefits of our nation's current high standard of shipping and professionalism that is guaranteed by the Jones Act.

The Jones Act is an American tradition founded on common sense; an American tradition that protects economic superiority and national security through quality shipping and unparalleled professionalism. Cabotage laws have enabled America to become the economic force of the world while securing the safety of our vast national network of inland waterways and coastwise trade. The Jones Act has served America well during the better part of this century, fostering a superior and streamlined system of transportation that is so critical to our nation's economic health and fostering the professionalism of a team of merchant mariners second to none. The Jones Act has had a dramatic impact on America's past. It has brought us to a position of strength today. It will continue to serve America well in its future.

For further information about the Jones Act, please visit the Maritime Cabotage Task Force

Domestic Shipping

This segment of the American merchant marine that operates on the Great Lakes, the inland waterways, and in the coastwise, intercoastal, and domestic offshore trades carries a combined total of over one billion short tons of cargo each year. The major products moving in the domestic trade are crude petroleum, raw materials, coal, chemicals, and farm products. Traditional liner cargoes and manufactured products move between the contiguous 48 states and Alaska, Hawaii and Puerto Rico. In order to maintain market share, the domestic fleet must compete successfully with alternative modes of inland transportation, including railroads, trucking, and occasionally, airfreight. It is a vital component of the overall transportation network that serves our country.

In 2002, the Jones Act fleet comprises more than 41,000 vessels and associated equipment, including approximately 5,000 tugs and 30,000 barges, needed to carry this cargo and 80 million passengers annually. These vessels range from the largest of containerships to small, dry cargo barges including tankers, dredging vessels, and passenger ships. To move these commodities and passengers, the fleet has doubled in size since 1965 based on the number of large vessels in the fleet. During the same timeframe, productivity has more that tripled, increasing at an annual rate 2-4 times greater than America business on the whole.

The U.S. domestic fleet plays a vital role in sustaining the national maritime infrastructure that supports U.S. maritime and naval power. For example, 87 percent of all U.S.-flagged shipboard employment opportunities are found in the U.S. privately owned, domestic fleet; that fleet provides over 70 percent of the new construction opportunity for U.S. shipbuilders; and 97 percent of all cargo moving on U.S.-flag vessels moves on vessels operating under the coastwise laws.

Domestic waterborne services offer the Nation a number of benefits:

• Relatively low transportation costs, especially for low-value/lb. commodities that are often in close proximity to the domestic waters.
• Historically determined location of major industrial centers close to or along domestic waters.
• Relief of congestion at land- and air-based facilities during national emergencies.

Domestic Deep-Sea Trades (Coastwise and Non-Contiguous)

The major segments of the domestic deep-sea trade are the contiguous and non-contiguous trades. The major non-contiguous trades are between the mainland and Alaska, Hawaii, Puerto Rico, Guam, and the islands of Wake and Midway. The contiguous routes consist of the coastwise traffic along the Atlantic, Gulf and Pacific Coasts.

Cargo in the domestic deep-sea trade is predominantly industrial, principally petroleum and dry bulk products. In 2000, more than 226 million metric tons of cargo was transported via the domestic deep-sea trade. Petroleum products accounted for 50 percent, crude petroleum for 21 percent, chemicals for 6 percent and coal for 6 percent. Manufactured products that move primarily in non-contiguous trades and food products accounted for the remainder. As of July 1, 2002, the self-propelled and non self-propelled commercial deep-sea domestic fleet was comprised of:

Inland Trade

America's inland network consists of 12,000 miles of waterways. In 2000, more than 691 million metric tons of freight was moved on the inland waterways, handling 60 percent of the Nation's grain exports, 25 percent of the chemical and petroleum exports, and over 20 percent of the domestic coal shipments. Like the Great Lakes, the northern-most inland waters are subject to prohibitive freezing conditions in the winter.

As of July 2002, the industry serving this trade was composed of: