Maritime Industry: Cargo Preference Laws--Estimated Costs and Effects
(Chapter Report, 11/30/94, GAO/RCED-95-34).

Cargo preference laws require that some government-owned or -financed
cargo shipped internationally be carried on U.S.-flag vessels.  Cargo
subject to these laws is known as preference cargo.  Cargo preference
laws boosted federal agencies' transportation costs by an estimated $578
million per year for fiscal years 1989 through 1993 because U.S.-flag
vessels generally charge more to carry cargo than their foreign-flag
vessel counterparts.  The effect of cargo preference laws on the U.S.
merchant marine industry is mixed.  On the one hand, the share of
international oceanborne cargo carried by U.S.-flag ships has declined
despite cargo preference laws because most oceanborne international
cargo is not subject to cargo preference laws.  On the other hand, these
laws appear to have a substantial impact on the U.S. merchant marine
industry by providing an incentive for vessels to remain in U.S. fleets.
GAO estimates that without preference cargo, up to two-thirds of the
U.S.-flag vessels engaged in international trade would leave the fleet,
with most either shutting down or reflagging to another country to save
costs.  This would directly affect about 6,000 U.S. shipboard jobs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-34
     TITLE:  Maritime Industry: Cargo Preference Laws--Estimated Costs 
             and Effects
      DATE:  11/30/94
   SUBJECT:  Cargo preference laws
             Maritime law
             Economic analysis
             Shipping industry
             Marine transportation costs
             Marine transportation operations
             Trade policies
             Merchant marine
             Cost effectiveness analysis
             International trade
IDENTIFIER:  Strategic Petroleum Reserve
             Food for Development Program
             USDA Food for Progress Program
             Persian Gulf War
             SPR
             
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Cover
================================================================ COVER


Report to Congressional Requesters

November 1994

MARITIME INDUSTRY - CARGO
PREFERENCE LAWS--ESTIMATED COSTS
AND EFFECTS

GAO/RCED-95-34

Cargo Preference Laws


Abbreviations
=============================================================== ABBREV

  AID - Agency for International Development
  CDS - construction-differential subsidy
  DOD - Department of Defense
  DOE - Department of Energy
  DWT - deadweight ton
  EUSC - Effective U.S.  Control
  GAO - General Accounting Office
  LNG - liquified natural gas
  MARAD - Maritime Administration
  ODS - operating-differential subsidy
  OMB - Office of Management and Budget
  RO/RO - roll-on/roll-off (ship)
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER



B-257957

November 30, 1994

The Honorable Hank Brown
The Honorable John C.  Danforth
The Honorable Charles E.  Grassley
The Honorable Don Nickles
The Honorable Malcolm Wallop
United States Senate

This report, prepared at your request, provides information on (1)
the cost to the federal government of laws requiring that certain
government cargo shipped internationally be carried on a U.S.-flag
vessel and (2) the effect of these cargo preference laws on the
merchant marine industry. 

As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 10 days after the date of this letter.  We will then send
copies to the Secretaries of Agriculture, Defense, Energy, and
Transportation; the Administrators of the Agency for International
Development and the Maritime Administration; and other interested
parties.  We will make copies available to others upon request. 

Please contact me at (202) 512-2834 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix IX. 

Kenneth M.  Mead
Director, Transportation
 Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Cargo preference laws require that certain government-owned or
-financed cargo shipped internationally (between a U.S.  port and a
foreign port) be carried on U.S.-flag vessels.\1

Cargo subject to these laws is known as preference cargo.  This
report responds to a request from several Senators to provide
information on (1) the cost to the federal government of cargo
preference laws and (2) the effect of cargo preference laws on the
U.S.  merchant marine industry.  Additionally, GAO is responding to
the Senators' request for information on various other aspects of the
merchant marine industry.  (See app.  VIII.)

The purpose of this report is to provide information on the costs and
effects of cargo preference laws.  It, therefore, does not make
conclusions regarding the desirability of cargo preference laws or
recommendations for changes that could be made to those laws. 


--------------------
\1 U.S.-flag vessels are registered in the United States and subject
to additional U.S.  laws and regulations that foreign-flag vessels
are not subject to. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Since the first cargo preference law--the Cargo Preference Act of
1904 (P.L.  198)--was passed, the Congress has repeatedly reaffirmed
its intent to promote a strong U.S.  merchant marine industry and has
passed cargo preference legislation in response to general downturns
in the merchant marine industry.  In general, the purposes of the
laws are to ensure a U.S.  merchant fleet sufficient to provide a
naval auxiliary in time of war or national emergency and to
participate substantially in the carriage of foreign and domestic
commerce. 

The primary cargo preference laws in effect today are (1) the Cargo
Preference Act of 1904, which generally requires that only U.S.-flag
vessels be used to transport supplies by sea for the U.S.  armed
forces and (2) the Merchant Marine Act of 1936 (P.L.  835), as
amended by the Cargo Preference Act of 1954 (P.L.  664), which
generally requires that at least 50 percent of any U.S. 
government-controlled cargo shipped by sea be carried on privately
owned U.S.-flag vessels.  In 1985, the Merchant Marine Act of 1936
was amended to require that 75 percent of certain foreign food aid be
shipped on privately owned U.S.-flag vessels.  The Maritime
Administration (MARAD) reports that the privately owned U.S. 
ocean-going commercial fleet is the ninth largest in the world by
deadweight tonnage, constituting about 3 percent of the world fleet's
tonnage.\2 The U.S.  fleet consists of about 371 U.S.-flag merchant
vessels of 1,000 gross tons and over.  MARAD reported that of the 371
vessels, 23 were inactive, 49 were chartered by the Department of
Defense (DOD), 134 were engaged in domestic trade, and 165 were
engaged in international trade.  The 165 vessels in international
trade are the vessels that carry preference cargo. 


--------------------
\2 Deadweight tonnage is the total lifting capacity of a ship,
expressed in long tons; a long ton equals 2,240 lbs.  Deadweight
tonnage is the difference between the displacement of the empty
vessel and the displacement of the vessel fully loaded. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Cargo preference laws increased federal agencies' transportation
costs by an estimated $578 million per year for fiscal years 1989
through 1993 because U.S.-flag vessels generally charge more to carry
cargo than their foreign-flag vessel counterparts.\3 The average is
about $710 million per year when the costs associated with the
Persian Gulf War are included.  Four federal agencies--DOD, the
Department of Agriculture (USDA), the Agency for International
Development (AID), and the Department of Energy (DOE)--are
responsible for more than 99 percent of preference cargo, by tonnage. 

The effect of cargo preference laws on the U.S.  merchant marine
industry is mixed.  On the one hand, the share of international
oceanborne cargo carried by U.S.-flag vessels has declined despite
cargo preference laws because most oceanborne international cargo is
not subject to cargo preference laws.  In 1992, for example, about 96
percent of oceanborne cargo was carried aboard foreign-flag vessels. 
On the other hand, these laws appear to have a substantial impact on
the U.S.  merchant marine industry by providing incentive for vessels
to remain in the U.S.  fleet.  GAO estimates that without preference
cargo, the equivalent of up to two-thirds of the 165 U.S.-flag
vessels engaged in international trade, by tonnage, would leave the
fleet.  Most of the vessels that would leave would either reflag to
another country to save costs or cease to operate if they are not
competitive.  This would directly affect about 6,000 U.S.  shipboard
jobs. 


--------------------
\3 Unless otherwise noted, all dollar figures are in constant 1993
dollars. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      THE COSTS OF CARGO
      PREFERENCE LAWS TO THE
      FEDERAL GOVERNMENT
-------------------------------------------------------- Chapter 0:4.1

Transporting cargo on U.S.-flag vessels is more expensive than doing
so on foreign-flag vessels largely because the former are required to
be crewed by U.S.  mariners, who generally receive higher wages and
other benefits and have higher manning-level requirements than
comparable foreign-flag vessels.  In addition, U.S.-flag vessels are
generally required to be built and encouraged to be maintained and
repaired in U.S.  shipyards, which generally charge more than foreign
shipyards.  These costs are passed on to federal agencies when they
use U.S.-flag vessels to ship international cargo.  For example, for
fiscal years 1989-93, DOD estimates that the additional
transportation costs of the preference cargo it shipped on U.S.-flag
vessels averaged about $350 million per year.  Most of DOD's
preference cargo supports troops stationed overseas.  The average is
about $482 million per year when the costs associated with the
Persian Gulf War are included. 

Other agencies that ship large amounts of preference cargo include
USDA, AID and DOE.  For fiscal years 1989-93, USDA and AID report
that the additional transportation costs of the preference cargo they
shipped on U.S.-flag vessels averaged about $200 million and $23
million per year, respectively.  Most of their preference cargo is
foreign aid.  GAO estimates, for fiscal years 1989-93, that DOE paid,
on average, less than $2 million per year in additional
transportation costs to ship oil for the Strategic Petroleum Reserve
on U.S.-flag vessels. 


      THE EFFECTS OF CARGO
      PREFERENCE LAWS ON THE U.S. 
      MERCHANT MARINE
-------------------------------------------------------- Chapter 0:4.2

Since World War II, there has been a dramatic increase in the amount
of international oceanborne cargo.  Most of the increase has been in
privately owned cargo that is not subject to cargo preference laws
and is, therefore, often shipped on less expensive foreign-flag
vessels.  As a result, the percentage of oceanborne international
cargo carried on foreign-flag vessels increased from 42 percent
following World War II to 96 percent in 1992. 

While U.S.-flag vessels carry only about 4 percent of all
international cargo, the percentage of cargo carried by U.S.-flag
vessels that is preference cargo is relatively large--33 percent in
1992.  Thus, although cargo preference laws have not significantly
affected the U.S.  share of oceanborne cargo, they have a significant
impact on the U.S.  merchant marine industry.  GAO measured this
impact by estimating that, in the absence of preference cargo, the
equivalent of between 61 and 68 percent, by tonnage, of the 165
U.S.-flag vessels engaged in international trade would leave the U.S. 
fleet.  Many of the vessels could be competitive in international
trade and would leave the U.S.  fleet in order to lower their costs. 
Others would be unable to compete and would cease operating, either
being scrapped or laid up.  GAO confirmed its results about which
vessels would leave the U.S.  fleet via a survey of 18 vessel
operators that controlled 112 of the 165 vessels engaged in
international trade. 

Approximately 6,000 mariners are employed aboard the vessels that GAO
estimates would leave the U.S.  fleet in the absence of preference
cargo.  This represents about 71 percent of the 8,500 shipboard jobs
that MARAD reported as being supported by the 165 vessels engaged in
international trade.  GAO believes that cargo preference laws do not
have a significant impact on the number of new ships built in U.S. 
shipyards because U.S.  shipyards delivered only one ocean-going
merchant vessel during fiscal years 1988-93.  However, the amount of
maintenance and repair work done at U.S.  shipyards would likely
decrease in the absence of preference cargo.  Industry
representatives whom GAO spoke with generally agreed with this
assessment. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report provides information on the costs and effects of cargo
preference laws.  It contains no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO discussed the contents of this report with the Chief,
Transportation Division of the Office of Procurement, AID; cognizant
officials of the Office of the Under Secretary of Defense for
Acquisition and Technology; the Director, Operations and Readiness
Division, Strategic Petroleum Reserves, DOE; and the Deputy
Administrator for Commodity Operations, USDA.  These agency officials
generally agreed with the facts presented and provided only minor
clarifications, which were incorporated where appropriate.  GAO also
discussed the contents of this report with the Deputy Administrator
for Inland Waterways and Great Lakes, MARAD, who generally agreed
with the facts presented but raised concerns about the accuracy of
DOD's cargo preference cost estimates.  However, these estimates are
DOD's official figures.  As requested, GAO did not obtain written
agency comments on a draft of this report. 


INTRODUCTION
============================================================ Chapter 1

The United States is the world's largest trading nation, with over $1
trillion in trade in 1993.  Nearly 50 percent of this trade, by
value, was transported by sea.  Throughout much of this century,
however, the U.S.  merchant marine industry has struggled to compete
effectively in the international market.  The U.S.  ocean-going fleet
is the ninth largest fleet in the world by deadweight tonnage,
comprising about 3 percent of the world fleet's tonnage.\4 The U.S. 
fleet, as of September 1993, comprised 371 privately owned vessels. 

U.S.-flag vessels are not competitive in international trade--cargo
carried between U.S.  and foreign ports or between foreign
ports--because they generally have higher operating and capital costs
than foreign-flag vessels.\5 (Foreign-flag vessels are restricted
from carrying cargo between domestic ports.) According to Maritime
Administration (MARAD) officials, crew costs account for the largest
portion of the difference between the operating costs of U.S.- and
foreign-flag vessels.\6 U.S.  crews receive higher wages and other
benefits, and U.S.-flag vessels have higher manning level
requirements than comparable foreign-flag vessels.  Also, because
U.S.  shipyards generally charge more to build and maintain vessels
than foreign shipyards, U.S.-flag vessels have higher capital and
maintenance costs. 

To help the U.S.  merchant marine industry compete, the Congress has
enacted a number of laws supporting the industry, including cargo
preference laws, which require that most government-owned or
-financed cargo that is shipped internationally be carried aboard
U.S.-flag vessels.  This cargo is known as preference cargo.  Cargo
preference laws guarantee a minimum amount of business for the U.S. 
merchant fleet; this additional business, in turn, promotes the
remainder of the maritime industry because U.S.-flag vessels are
required by law to be crewed by U.S.  mariners, are generally
required to be built in U.S.  shipyards, and are encouraged to be
maintained and repaired in U.S.  shipyards.\7

However, because U.S.-flag vessels often charge higher rates to
transport cargo than foreign-flag vessels, cargo preference laws
increase the government's transportation costs. 

Cargo preference laws have long been controversial both from an
economic and a political point of view.  The proponents of cargo
preference laws point to this nation's economic dependence on
waterborne transportation for international trade and the role that
merchant vessels play in transporting military supplies during
wartime.  They maintain that a strong merchant marine industry is
vital to the nation's economic and military security and that cargo
preference laws help to counter the subsidies that many foreign
countries provide to their merchant fleets. 

The opponents of cargo preference laws, on the other hand, argue that
cargo preference laws cost the government money, have not been
successful in maintaining a strong merchant marine industry, and do
not always support the most militarily useful vessels.  They also
point out that the additional transportation costs hamper federal
efforts to provide humanitarian aid overseas because the available
funds are diverted to the transportation of that aid, instead of
being used to purchase farm commodities and other types of aid. 


--------------------
\4 Deadweight tonnage is the total lifting capacity of a ship,
expressed in tons of 2,240 lbs.  It is the difference between the
displacement of the empty vessel and the displacement of the vessel
fully loaded. 

\5 U.S.-flag vessels are registered in the United States and are
subject to additional U.S.  laws and regulations to which
foreign-flag vessels are not.  They must be owned by U.S.  citizens,
corporations, or governments and must be crewed mainly by U.S. 
citizens. 

\6 MARAD is the federal agency responsible for promoting and
monitoring the maritime industry, and is also responsible for
monitoring federal agencies' compliance with cargo preference laws. 

\7 The Tariff Act of 1930 (P.L.  361) imposes a 50-percent tariff on
maintenance and repair work done on U.S.-flag vessels in foreign
shipyards.  Also, U.S.-flag vessels must either be built in the
United States or have been a U.S.-flag vessel for at least 3 years to
be eligible to carry preference cargo.  See 46 U.S.C.  App.  1241(b). 


   THE U.S.  MERCHANT MARINE FLEET
---------------------------------------------------------- Chapter 1:1

Recently, MARAD reported that U.S.  citizens, corporations, or the
federal government owns about 893 ocean-going vessels weighing 1,000
gross tons or more.\8 (See fig.  1.1.) Of the 893 vessels, 586 were
U.S.-flagged, and the remaining 307 were owned by U.S.  citizens or
corporations but were foreign-flagged.\9 Of the 586 U.S.-flag
vessels, MARAD reported that 371 were privately owned and 215 were
owned by the federal government.  Most of the privately owned vessels
are actively engaged in commerce, while most of the federally owned
vessels are in long-term storage--held in MARAD's custody in case
they are needed during a national emergency. 

   Figure 1.1:  Disposition of
   U.S.-Owned, Ocean-Going
   Merchant Ships

   (See figure in printed
   edition.)

Foreign-flagged vessels owned by U.S.  citizens or corporations, like
all foreign-flagged vessels, are subject to the laws of the foreign
country whose flag they fly, not the laws to which U.S.-flag vessels
are subject.  Sometimes, the laws of foreign countries include
significant obstacles to the requisition of the vessels by the United
States during national emergencies.  Of the 307 U.S.-owned but
foreign-flagged vessels, 219 are flagged in countries that do not
have policies disallowing the U.S.  government from requisitioning
these vessels during national emergencies.  The countries are the
Bahamas, Honduras, Liberia, the Marshall Islands, and Panama. 
U.S.-flag vessels registered in these countries are said to be under
"Effective U.S.  Control" (EUSC).  But according to MARAD officials,
there is no guarantee, should requisitioning be necessary, that these
nations will actually permit their vessels to be taken by the United
States.  And even if the United States is able to take foreign-flag
EUSC vessels, the foreign crews cannot be compelled to operate the
vessels, and the operators are not obligated to return the vessels to
the United States.  In addition, EUSC vessels are not subject to any
of the other laws or regulations that apply specifically to U.S.-flag
vessels. 

As of January 1993, the privately owned U.S.-flag vessels constituted
the ninth largest fleet in the world by deadweight tons (DWT).\10
These vessels have a carrying capacity of 18.8 million DWTs, which
comprises about 3 percent of the world fleet's tonnage.  Of the 371
privately owned U.S.-flag vessels, MARAD reported that 23 were
inactive, 49 were chartered by the Department of Defense (DOD), 134
were engaged in domestic trade, and 165 were engaged in international
trade.  Since all preference cargo is international, cargo preference
laws have the most direct effect on the portion of the U.S.  fleet
engaged in international trade.  (See app.  I for a list of vessel
operators who carried preference cargo in 1993.)


--------------------
\8 This excludes vessels designed primarily to operate on inland
waterways or the Great Lakes.  Gross tons measure the internal volume
of a ship.  One ton equals 100 cubic feet. 

\9 MARAD reported on U.S.-flag vessels as of September 30, 1993, and
foreign-flag vessels as of July 1, 1993. 

\10 DWT is a more accurate measure for comparing the size of fleets
because DWT measures a vessel's (or fleet's) carrying capacity, which
varies widely between vessels.  For example, with 19.4 million DWTs,
China's fleet is only slightly larger than the U.S.  fleet by
tonnage.  But China's fleet has over 1,200 vessels, which is more
than three times the number in the U.S.  fleet. 


   OPERATING AND CAPITAL COSTS OF
   U.S.-FLAG VESSELS
---------------------------------------------------------- Chapter 1:2

U.S.-flag vessels generally charge more to carry cargo than
foreign-flag vessels because they have higher operating and capital
costs.  MARAD officials identified several general reasons for this: 

Most of the higher costs are crew costs.\11 U.S.  crews receive
higher wages and other benefits, and U.S.-flag vessels have higher
manning-level requirements than comparable foreign-flag vessels. 

Approximately half of the U.S.  fleet is old and/or steam-powered. 
Of the 165 vessels engaged in international trade, about 50 percent
are within 5 years of the end of their statutory life expectancy,
which depending on the type of vessel is 20 or 25 years.\12 In
addition, steam-powered vessels are less efficient and use more fuel
than the newer diesel-powered vessels that comprise virtually all of
the foreign-flag vessels engaged in international trade with the
United States.\13

U.S.  shipyards generally charge more to build and maintain vessels
than foreign shipyards.  As a result, U.S.-flag vessels generally
have higher capital and maintenance costs.  Although not all
U.S.-flag ships were built in U.S.  shipyards, the Tariff Act of 1930
(P.L.  361) imposes a 50-percent tariff on the cost of maintenance
and nonemergency repairs performed on U.S.-flag vessels in foreign
shipyards. 


--------------------
\11 Appendix II provides information on the size and salaries of U.S. 
and foreign crews. 

\12 A vessel's statutory life expectancy is set forth in the Federal
Ship Mortgage Insurance Program, the Construction Differential
Subsidy program, the Operating Differential Subsidy program, and for
depreciation purposes in several sections of the Merchant Marine Act
of 1936 (P.L.  835), as amended. 

\13 Eighty-four of the 165 privately owned U.S.-flag vessels are
steam-powered. 


   THE REQUIREMENTS AND PURPOSES
   OF CARGO PREFERENCE LAWS
---------------------------------------------------------- Chapter 1:3

Since the passage of the first cargo preference law--the Cargo
Preference Act of 1904 (P.L.  198)--the Congress has, in response to
general downturns in the maritime industry, repeatedly reaffirmed its
intent to support the U.S.  merchant marine industry.\14

Following the 1904 act, several major cargo preference laws were
passed that guarantee cargo to U.S.-flag vessels; this guarantee was
intended to promote the merchant marine industry.  The 1904 act
generally requires that only U.S.-flag vessels be used to transport
supplies for the U.S.  armed forces by sea.  However, if the
President finds that the rate charged by those vessels is excessive
or otherwise unreasonable, contracts for transportation may be made
as otherwise provided by law. 

In 1934, the Congress passed Public Resolution 17, which requires
that all cargo financed by the Export-Import Bank be shipped on
U.S.-flag vessels, unless granted a waiver.  In 1936, the Congress
passed the Merchant Marine Act of 1936 (P.L.  835), which required
that a "substantial portion" of internationally shipped cargo be
transported on U.S.-flag vessels.  In 1954, the Congress passed the
Cargo Preference Act of 1954, which amended the Merchant Marine Act
of 1936 to require that at least 50 percent of any
government-controlled cargo shipped by sea be carried on privately
owned U.S.-flag vessels.  However, the 50-percent provision can be
waived if U.S.-flag vessels are not available at "fair and
reasonable" rates and in certain emergency situations.  And finally,
the Congress passed the Food Security Act of 1985 (P.L.  99-198),
which increased from 50 to 75 percent the percentage of food aid
cargo that the U.S.  Department of Agriculture (USDA) and the Agency
for International Development (AID) must ship on U.S.-flag vessels
(however, the act exempted other USDA cargo). 


--------------------
\14 The Merchant Marine Act of 1920 (P.L.  261) contains a provision,
known as the Jones Act, which requires that all domestic waterborne
trade be carried on U.S.-flag vessels.  Generally, however, only laws
that reserve international cargo for U.S.-flag vessels are referred
to as cargo preference laws.  Appendix III provides a historical
perspective on cargo preference laws since 1904. 


   SUPPORT OF THE U.S.  MERCHANT
   MARINE BY OTHER FEDERAL
   PROGRAMS
---------------------------------------------------------- Chapter 1:4

Besides cargo preference laws, a number of other programs were
designed to promote the U.S.  merchant marine industry.  To help
offset some of the higher operating and capital costs faced by
U.S.-flag carriers engaged in international trade, the Merchant
Marine Act of 1936 authorizes MARAD to pay operating-differential
subsidies (ODS) and construction-differential subsidies (CDS) to
operators of vessels in international trade.  Additionally, the Jones
Act restricts foreign-built U.S.-flag vessels from engaging in
domestic trade. 

ODS payments support the portion of the U.S.  fleet engaged in
international trade by offsetting the higher costs to operate
U.S.-flag vessels.  ODS recipients normally enter into 20-year
contracts with MARAD, during which time they may not engage in
domestic trade or reflag the vessel to another country, and their
subsidy will be reduced if they carry cargo between U.S.  ports as
part of a voyage involving foreign ports.  In fiscal year 1993, the
federal government provided 75 vessels with a total of $215.5 million
in ODS payments.\15 No new ODS contracts have been awarded since
1981. 

CDS are payments based on the difference in cost to construct vessels
in U.S shipyards and foreign shipyards.  Vessels built with CDS
payments may not reflag for 25 years (20 years for tankers), may not
enter into domestic trade (voyages with stops exclusively at U.S. 
ports), and must pay back a portion of the CDS if they carry cargo
between U.S.  ports as part of a voyage involving foreign ports. 
Although the program has not been eliminated, the last vessel built
under this program was contracted for in 1981 and delivered in 1984. 
Currently, 79 vessels are under CDS restrictions. 

All vessels in international trade provide either charter or liner
services.\16 Charter-service vessels do not have regularly scheduled
sailings, fixed routes, or fixed freight rates.  They typically carry
a shipload worth of cargo for only one or a few customers at the same
time.  Conversely, liner-service vessels have regularly scheduled
sailings on fixed routes at fixed freight rates.  They typically
carry small amounts of cargo for many customers at one time and will
sail even if not completely full.  Vessels providing charter service
cannot receive ODS payments while carrying preference cargo; vessels
providing liner service can.  Freight rates on liner-service vessels
typically are higher than those on charter-service vessels.  In
addition, most liner-service vessels, whether U.S.-flagged or
foreign-flagged, belong to shipping conferences.  Members of shipping
conferences agree to charge similar prices for similar services in
order to minimize price competition.  However, U.S.  law contains a
number of provisions that mitigate this effect. 


--------------------
\15 See appendix V for a list of ODS recipients and the funds they
received for fiscal years 1991-93. 

\16 We use the term charter service to include all nonliner service. 


   OTHER GAO REPORTS
---------------------------------------------------------- Chapter 1:5

In our 1994 report, Cargo Preference Requirements:  Objectives Not
Significantly Advanced When Used in U.S.  Food Aid Programs
(GAO/GGD-94-215, Sept.  29, 1994), we reported that the application
of cargo preference to food aid programs does not significantly
contribute to maintaining a naval auxiliary in time of war or
national emergency or to the carriage of domestic and foreign
commerce.  We also reported that cargo preference laws adversely
affect the operation of U.S.  food aid programs.  In our 1990 report,
Cargo Preference Requirements:  Their Impact on U.S.  Food Aid
Programs and the U.S.  Merchant Marine (GAO/NSIAD-90-174, June 19,
1990), we found that the differential between the food aid shipping
costs of U.S.- and foreign-flag vessels decreased by 50 percent per
ton between 1981 and 1989.  We also found that during this same time
period, despite an increase in the amount of government-owned or
-financed cargo shipped on U.S.-flag vessels, the number of U.S.-flag
vessels decreased.  Additionally, in 1984 we issued Economic Effects
of Cargo Preference Laws (GAO/OCE-84-3, Jan.  31, 1984).  In that
report, we estimated that in 1980, between 21 and 33 additional ships
and from 1,400 to 2,200 shipboard workers were employed because of
cargo preference laws and that those laws cost the federal government
between $71 million and $79 million (between $123.1 million and
$136.9 million, respectively, in constant 1993 dollars).  However,
that report did not include DOD in its analysis because DOD's policy
was (and is) to ship on U.S.-flag vessels even if cargo preference
laws were eliminated.\17


--------------------
\17 Although the January 1984 report excluded DOD from its analysis,
this report includes DOD to give a fuller account of the cost to the
federal government of reserving cargo for U.S.-flag vessels and the
impact that preference cargo has on the maritime industry. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:6

On April 29, 1993, Senators Hank Brown, John C.  Danforth, Charles E. 
Grassley, Don Nickles, and Malcolm Wallop asked us to provide
information on the cargo preference programs and related information
on the U.S.  merchant marine industry.  On the basis of subsequent
discussions with their staff, we agreed to provide information on the
cost to the federal government of cargo preference laws and their
effects on the U.S.  merchant marine industry along with certain
additional information.  This report does not make conclusions
regarding the desirability of cargo preference laws or
recommendations for changes that could be made to those laws. 
Additional details on our scope and methodology are contained in
appendix VIII.  We performed our review from June 1993 through
September 1994 in accordance with generally accepted government
auditing standards. 


THE COSTS OF CARGO PREFERENCE LAWS
TO THE FEDERAL GOVERNMENT
============================================================ Chapter 2

Because the cost to transport cargo on U.S.-flag vessels is generally
higher than it is on foreign-flag vessels, cargo preference laws add
directly to a federal agency's transportation costs.  Although cargo
preference laws apply to most federal agencies, four agencies--DOD,
USDA, AID, and the Department of Energy (DOE)--were responsible for
more than 99 percent of the 100 million tons of government cargo
shipped internationally during calendar years 1988 through 1992.  The
estimated additional costs for transporting preference cargo for
these agencies, including DOD's costs associated with the Persian
Gulf War, totaled, on average, about $710 million per year in fiscal
years 1989 through 1993.  (The average is about $578 million when the
costs associated with the Persian Gulf War are excluded.) The $710
million estimate is about 50 percent of the $1.4 billion spent
annually by the federal agencies to ship preference cargo on
U.S.-flag vessels. 

DOD maintains that its policy is to ship a substantial portion of its
cargo on U.S.-flag vessels and that it would continue this policy in
the absence of cargo preference laws.  However, because DOD ships
about 50 percent of the cargo subject to the preference laws, we have
included estimates of its additional transportation costs in order to
give a more complete picture of the cost to the federal government of
reserving cargo for U.S.-flag vessels even though DOD's portion might
continue without cargo preference laws.  DOD's cost estimate is based
on an approximation of the total cost to ship cargo on U.S.-flag
vessels and on judgmentally selected data on the cost to ship cargo
on foreign-flag vessels.  Because foreign-flag carriers do not
consistently bid for DOD cargo, the Department cannot ascertain what
rates foreign-flag vessels would have actually charged to carry its
cargo.  As a result, DOD's cost estimate is based on DOD officials'
expertise and judgment--DOD does not keep complete records that show
how it derived its estimates.  We did not independently verify these
figures. 

Table 2.1 shows each agency's estimated cost of reserving preference
cargo for U.S.-flag vessels in fiscal years 1989 through 1993.  MARAD
is included because it must, by law, pay a portion of USDA's food aid
transportation costs.\18



                          Table 2.1
           
                Estimates of the Cost of Cargo
                          Preference

             (1993 constant dollars in millions)


Agency      1989      1990      1991      1992       1993
--------  --------  --------  --------  --------  ----------
DOD\b       376       353       969       352        361
USDA        166       121       117       120        264
AID\         27        25        13        13         38
MARAD        50        24        36        52         62
DOE          1         4        0\c        2          2
 (Strate
 gic
 Petrole
 um
 Reserve
 )
Total       620       527      1,135      539        727
------------------------------------------------------------
\a Dollar figures for all agencies except AID are based on fiscal
year estimates.  Dollar figures for AID are based on calendar year
estimates. 

\b DOD's costs include the following costs related to the Persian
Gulf War (in constant 1993 dollars):  $8 million in fiscal year 1990,
$620 million in fiscal year 1991, and $31 million in fiscal year
1992. 

\c The Strategic Petroleum Reserve's purchasing activity was
suspended in August 1990 because of the unstable conditions in the
Persian Gulf, and therefore no shipments were made during 1991. 

Source:  Data submitted to the Office of Management and Budget,
federal budgets, AID, and GAO's analysis of data from DOE. 


--------------------
\18 The Food Security Act of 1985 requires the Secretary of
Transportation, who delegated responsibility to MARAD, to finance any
increased ocean freight charges resulting from the statutory increase
from 50 percent to 75 percent of the percentage of food aid cargo
carried on U.S.-flag vessels. 


   THE DEPARTMENT OF DEFENSE
---------------------------------------------------------- Chapter 2:1

DOD ships more preference cargo than any other federal
agency--approximately 50 percent of the total in 1988 through 1992. 
Almost all of the cargo that DOD ships is categorized as "troop
support." Troop support includes spare parts, food stuffs,
ammunition, commissary items, and privately owned vehicles.  In 1988
through 1992, DOD shipped about 51 million metric tons of cargo.  Of
this amount, 45 million tons (88 percent) was shipped on U.S.-flag
vessels.\19 DOD estimates that its additional transportation costs to
ship preference cargo on U.S.-flag vessels in fiscal years 1989
through 1993 was $2.4 billion, or an average of $482 million per year
for the last 5 years.\20 The average is about $350 million per year
when the costs associated with the Persian Gulf War are excluded. 


--------------------
\19 DOD did not ship 100 percent of its cargo on U.S.-flag vessels
because U.S.-flag vessels were not always available.  According to a
DOD official, this situation occurred especially for shipments
between foreign ports. 

\20 DOD officials explained that despite the fact that DOD ships a
significant amount of its cargo on liner-service vessels, which
generally charge the same rate to carry cargo whether the vessel is
U.S.-flag or foreign-flag, DOD still pays higher rates to ship cargo
on U.S.-flag vessels that provide liner services.  The officials
explained that DOD pays higher rates because of its policy to award
not more than 75 percent of its business to a single company on
certain routes and because of the limited competition between
U.S.-flag carriers for DOD's service contracts.  Service contacts
provide large shippers such as DOD with bulk discounts.  Under these
contracts, the shipper agrees to ship a specified quantity of cargo
over time, and the carrier agrees to provide space for this cargo at
a rate that is lower than the conference rate.  Although DOD awards
service contracts competitively, in several key markets, there are
only two U.S.  carriers large enough to compete for the contracts,
which restricts competition between the carriers.  DOD officials
maintain that this causes DOD to pay higher freight rates to ship
cargo on U.S.-flag liner-service vessels than it otherwise would. 


   THE DEPARTMENT OF AGRICULTURE
   AND THE AGENCY FOR
   INTERNATIONAL DEVELOPMENT
---------------------------------------------------------- Chapter 2:2

USDA and AID are responsible for food assistance programs under which
U.S.  agricultural commodities are donated or sold abroad for
humanitarian and developmental purposes.  The food assistance is
provided primarily through five programs:  titles I, II, and III of
the Agricultural Trade Development and Assistance Act of 1954 (P.L. 
480, commonly called, collectively, the P.L.  480 program); section
416 of the Agricultural Act of 1949 (P.L.  439); and the Food for
Progress Act of 1985 (P.L.  99-198).  Although AID administers some
of the food aid programs, the transportation costs of these programs
that are borne by the federal government, and hence the additional
costs to ship on U.S.-flag vessels, are paid for through USDA and
MARAD appropriations. 

The title I program provides financing to developing countries to
purchase U.S.  agricultural commodities.  It is administered by USDA. 

The title II program donates packaged, processed, and bulk
commodities to the least-developed countries.  Commodities are used
directly to feed refugees and children as well as for other
authorized purposes.  It is administered by AID. 

The title III program (known as the Food for Development Program)
provides donations to governments to support long-term growth in
agriculture and related activities in the least-developed countries. 
It is administered by AID. 

The section 416 program donates bulk grain and other surplus
agricultural commodities to the least-developed countries.  It is
administered by USDA. 

The Food for Progress program provides agricultural commodities to
developing countries that have made commitments to expand free
enterprise in their agricultural economies.  It is administered by
USDA. 

In 1988 through 1992, USDA and AID shipped 36 million metric tons of
food aid.  Of the total amount, 27.5 million tons (approximately 77
percent) was shipped on U.S.-flag vessels.\21

These agencies, as well as MARAD, which must pay a portion of the
transportation costs, estimate that the additional transportation
costs to ship preference cargo on U.S.-flag vessels in fiscal years
1989 through 1993 was about $1 billion, or an average of $200 million
per year for the last 5 years.\22

Besides food aid, AID is also responsible for providing aid such as
generators, automobiles, corrugated metal, and lumber to developing
countries.  In 1988 through 1992, this cargo totaled about 5 million
metric tons.  Of this amount, 2.6 million metric tons (about 52
percent) was shipped on U.S.-flag vessels.  On the basis of the cost
to ship its cargo on U.S.-flag and foreign-flag vessels, AID
estimates that its additional transportation costs to ship preference
cargo on U.S.-flag vessels for calendar years 1989 through 1993 was
$116 million dollars, or an average of $23 million per year for the
last 5 years. 


--------------------
\21 The Food Security Act of 1985 requires that at least 75 percent
of government food aid provided to foreign countries under the five
programs listed above be shipped on U.S.-flag vessels. 

\22 USDA and AID developed an estimate of the additional
transportation costs of complying with cargo preference laws based,
in part, on the cost to ship the 25-percent food aid that is carried
by foreign-flag vessels.  We did not independently verify these cost
figures. 


   THE DEPARTMENT OF ENERGY
---------------------------------------------------------- Chapter 2:3

The Strategic Petroleum Reserve is a program administered by DOE to
store 750 million barrels of crude oil in salt domes along the U.S. 
Gulf Coast to guard against disruptions in international oil
supplies.\23 In 1988 through 1992, DOE reported that it shipped
approximately 7.6 million metric tons of oil.  Of this amount, 3.7
million tons (49 percent) was shipped on U.S.-flag vessels.\24 On the
basis of data that DOE provided us on the amount and cost of oil that
it shipped on U.S- and foreign-flag vessels, we estimate that the
Department's additional transportation costs to ship preference cargo
on U.S.-flag vessels for fiscal years 1989 through 1993 was
approximately $9 million dollars, or an average of less than $2
million per year for the last 5 years. 


--------------------
\23 As of August 1994, 592 million barrels of oil had been deposited
in salt mines. 

\24 During this time period, MARAD reports that the Strategic
Petroleum Reserve was in compliance with cargo preference laws every
year except 1990, when DOE was forced to suspend program activity
because of unstable conditions in the Persian Gulf. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:4

Cargo preference laws add directly to a federal agency's
transportation costs.  In fiscal years 1989 through 1993, the five
agencies responsible for the transportation costs of most of the
government's international cargo paid an estimated additional $3.5
billion in transportation costs to ship cargo on U.S.-flag vessels. 
However, DOD estimates that $659 million of this cost was related to
the Persian Gulf War.  The $3.5 billion estimate represents about 51
percent of the $6.9 billion spent to ship preference cargo on
U.S.-flag vessels. 


CARGO PREFERENCE LAWS AND THE U.S. 
MERCHANT MARINE
============================================================ Chapter 3

By guaranteeing business for U.S.-flag vessels, which (1) are
required to be crewed by U.S.  mariners, (2) are generally required
to be built in U.S.  shipyards, and (3) are encouraged to be
maintained in U.S.  shipyards, cargo preference laws promote the U.S. 
maritime industry.  However, their effect on the U.S.  merchant
marine industry is mixed.  Although cargo preference laws have not
had the effect of maintaining the share of international oceanborne
cargo carried by U.S.-flag vessels, the U.S.  fleet is dependent on
preference cargo for a significant portion of the international cargo
that it carries. 


   THE HISTORICAL IMPACT OF CARGO
   PREFERENCE LAWS ON THE U.S. 
   MERCHANT FLEET
---------------------------------------------------------- Chapter 3:1

Historically, cargo preference laws have not prevented a decline in
the share of oceanborne cargo carried by U.S.-flag vessels. 
Throughout most of this century, with the exception of the periods
immediately following World Wars I and II, the U.S.  fleet has
comprised a small percentage of the world fleet and carried a small
percentage of the United States' international cargo.  Additionally,
the amount of cargo reserved for U.S.-flag vessels has averaged only
5 percent of international cargo since 1961. 

As shown in figure III.1a (see app.  III), since 1906, the U.S. 
fleet has experienced significant growth only during the World Wars. 
In both instances, this growth was followed by extended periods of
decline.  The size of the U.S.  fleet increased from about 6 percent
of the world fleet's size, by gross tonnage, to 23 percent during and
immediately following World War I but steadily declined to about 13
percent just prior to World War II.  The relative size of the U.S. 
fleet increased again during World War II--to about 38 percent of the
world fleet's size in 1948, shortly after the war's end--but declined
steadily thereafter to about 3.9 percent of the 397 million gross
tons in the world fleet in 1992.  The relative decline in the U.S. 
fleet since 1948 can be attributed in large part to the 460-percent
increase in the size of the world fleet, even though the size of the
U.S.  fleet decreased about 42 percent during this time.  The decline
in the relative size of the U.S.  fleet also corresponds to the
decline in the percentage of international trade carried on U.S. 
ships.  As figure 3.1a shows, the percentage of international trade
carried on U.S.-flag ships was substantial following World Wars I and
II--49 percent and 58 percent, respectively--but declined immediately
thereafter.  In 1992, U.S.-flag vessels carried approximately 4
percent of the nation's oceanborne international trade. 

Additionally, figure 3.1b shows that since World War II, there has
been a dramatic increase in the amount of international oceanborne
cargo.  Most of the increase has been in privately owned cargo, which
is not subject to cargo preference laws and is often shipped on less
expensive foreign-flag vessels.  The amount of cargo reserved for
U.S.-flag vessels is a very small portion of total international
cargo and therefore has not contributed substantially to the total
share of cargo carried by U.S.-flag vessels.  As a percentage of
international cargo, preference cargo carried on U.S.-flag vessels
ranged from 11 percent in 1962-63 to less than 2 percent in 1992 and
averaged 5 percent during this time period. 

   Figure 3.1a:  U.S.  Oceanborne
   International Trade,
   1921-92--Percentage Carried on
   U.S.-Flag Vessels

   (See figure in printed
   edition.)

Note:  Data included privately and federally owned internationally
shipped cargo.  However, the comprehensiveness of the data varies by
year because of differences in sources. 

   Figure 3.1b:  U.S.  Oceanborne
   International Trade,
   1921-92--Metric Tons Carried on
   All Vessels

   (See figure in printed
   edition.)

Note:  Data included privately owned and federally owned
internationally shipped cargo.  However, the comprehensiveness of
data varies by year because of differences in sources. 


   THE IMPACT OF CARGO PREFERENCE
   LAWS ON THE U.S.  MARITIME
   INDUSTRY
---------------------------------------------------------- Chapter 3:2

While cargo preference laws do not appear to have significantly
affected the share of international oceanborne freight carried on
U.S.-flag vessels, we estimate that in the absence of preference
cargo, a significant portion of the U.S.  fleet would reflag or cease
operating.  This would significantly affect the number of shipboard
jobs on U.S.-flag vessels engaged in international trade.  However,
the impact on shipyards would be minimal. 


      IMPACT OF CARGO PREFERENCE
      LAWS ON THE U.S.  FLEET
-------------------------------------------------------- Chapter 3:2.1

The 165 vessels active in international trade on September 30, 1993,
have an aggregate carrying capacity of 7.3 million DWTs.  We estimate
that in the absence of preference cargo, vessels with a carrying
capacity of between 4.4 million and 5 million DWTs might leave the
active U.S.fleet.\25 Table 3.1 summarizes our findings. 



                          Table 3.1
           
           Estimated Effects on U.S. Fleet Engaged
               in International Trade if Cargo
                Preference Laws Are Eliminated

                     (DWTs in thousands)

Type of       leaving U.S.  remaining in
vessel           fleet       U.S. fleet
------------  ------------  ------------  ----  ------------
General           224            53          0  277
cargo

Bulk carrier      755            33         54  842

Tankers          1,289         1,863       227  3,379

Intermodal       2,164          399        237  2,800

Total            4,432         2,348       518  7,298
------------------------------------------------------------
Some of the vessels leaving the U.S.  fleet will likely be vessels
that have traditionally operated in the domestic trade but are
displaced by vessels from the international trade.  Vessels that
leave the U.S.  fleet will most likely either reflag to achieve cost
savings or cease operating (either being scrapped or laid up) if they
are not competitive.  Many of the vessels that reflag may continue to
be owned by a U.S.  parent company and may reflag to one of the five
countries that allow vessels owned by U.S.  citizens to be under
Effective U.S.  Control. 

Our analysis of the reduction of tonnage in the U.S.  fleet that
would occur if cargo preference laws and policy were eliminated is
based on the ability of the vessels to compete in the international
trade and, if eligible, to compete in domestic trade.  We included in
our analysis an examination of other factors, such as international
political considerations and the amount of preference cargo that
vessels have carried.  Additionally, we made the assumption that ODS
payments alone, in the absence of preference cargo, are generally not
sufficient to induce a carrier to remain U.S.-flagged.  We conducted
our analysis in consultation with MARAD officials and confirmed our
estimate about which vessels would leave the U.S.  fleet with
information obtained from 18 vessel operators that controlled 112 of
the 165 vessels engaged in international trade. 

Because of the complexity of the issues, we did not include in our
analysis several considerations that might have caused us to
overestimate or underestimate the number of U.S.-flag vessels that
would leave the fleet.  The considerations that might have caused us
to overestimate the effect on the U.S.  fleet include the following
factors:  (1) U.S.-flag vessels need the permission of MARAD to
change the nationality of their registry and (2) some vessel owners
might keep their vessels under the U.S.  flag for nationalistic or
personal reasons.  Additionally, some vessels, although not
economically viable, may be militarily useful, prompting the U.S. 
government to purchase them instead of letting them be scrapped. 
This, however, would not affect our estimate of the number of vessels
that would leave the privately owned U.S.  fleet. 

However, we also did not include in our analysis the number of
vessels likely to leave the fleet regardless of the status of cargo
preference.  The fleet of privately owned, ocean-going vessels has
declined 16 percent (by DWTs) since 1988.  Additionally, nearly
one-quarter of the 165 vessels engaged in international trade have
already exceeded their statutory life expectancy, and another quarter
will do so within 5 years.  The statutory life of a vessel is 25
years, except for tankers, whose expectancy is 20 years. 


--------------------
\25 In reporting the results of our analysis, we are using DWTs to
de-emphasize the importance of individual vessels because of the wide
variance in carrying capacity between them and because some vessels
operating in the international trade may displace others in the
domestic trade instead of leaving the fleet. 


      TYPES OF VESSELS AFFECTED BY
      CARGO PREFERENCE LAWS
-------------------------------------------------------- Chapter 3:2.2

Four general types of vessels--general cargo ships, bulk carriers,
tankers, and intermodal ships--would be affected if cargo preference
laws and policy were eliminated.  General cargo ships are traditional
multipurpose freighters that carry nonuniform items packaged as
single parcels or assembled together on pallet boards.  Cargo is
typically lifted on or off the general cargo vessels using wire or
rope slings and a crane.  Bulk carriers are ships that carry
homogenous, unpacked cargo, usually in shipload lots.  If they are
designed to carry dry bulk commodities such as grain and ore, they
are classified as bulk carriers.  If they are designed to carry
liquid commodities such as oil and petroleum products, they are
classified as tankers.  Some tankers are specially designed to carry
liquified natural gas (LNG) and are called LNG tankers.  Intermodal
ships include container ships and roll-on/roll-off ships known as
RO/ROs.  Container ships are designed to carry cargo in standard-size
preloaded containers that permit rapid loading and unloading and
efficient transportation of cargo to and from the port area.  RO/ROs
are designed to permit trucks, trailers, and other vehicles carrying
cargo to drive on and off. 


      GENERAL CARGO VESSELS
-------------------------------------------------------- Chapter 3:2.3

MARAD reported that 18 general cargo vessels with a total of 282,000
DWTs are employed in international trade.  We believe that about 81
percent of these vessels, by tonnage, would leave the U.S.  fleet if
cargo preference laws and policy were eliminated; most would be
scrapped.  The vessels that would leave are steam-powered and unable
to compete effectively with the more efficiently configured
intermodal carriers.  Additionally, many of these vessels rely on
preference cargo for a substantial portion of their business.  The
vessels that would remain have specialized uses and/or are of a more
modern design. 



(See figure in printed edition.)Figure 3.2:  A General Cargo Vessel

Source:  MARAD. 


      BULK CARRIER VESSELS
-------------------------------------------------------- Chapter 3:2.4

MARAD reported that 17 bulk carriers with a total of 842,000 DWTs are
employed in international trade.  We believe that between 90 and 96
percent of these vessels, by tonnage, would leave the U.S.  active
fleet if cargo preference laws and policy were eliminated; many would
remain U.S.-owned but foreign-flagged.  Most of these vessels are
ineligible to enter domestic trade because they were built in foreign
shipyards or built with construction-differential subsidies.  Many
are relatively new (built in the mid-1980s) diesel-powered vessels
that could be competitive in international trade if they reduced
their operating costs by reflagging. 



(See figure in printed edition.)Figure 3.3:  A Bulk Carrier Vessel

Source:  MARAD. 


      TANKERS
-------------------------------------------------------- Chapter 3:2.5

MARAD reported 45 tankers employed in international trade with a
total of 3,384,000 DWTs.  We believe between 38 and 45 percent of
these vessels, by tonnage, would leave the U.S.  active fleet if
cargo preference laws and policy were eliminated.  Generally,
steam-powered tankers would likely be scrapped because they are not
competitive in international trade and are either ineligible to enter
the domestic trade or would not find sufficient business in the
domestic trade to remain in operation.  However, there are several
notable exceptions to potential scrapping.  We believe the LNG
tankers would remain U.S.-flagged because they do not receive ODS
subsidies and do not carry preference cargo.  Also, some of the
double-bottom tankers may be competitive in the domestic trade
because the Oil Pollution Act of 1990 (P.L.  101-380) phases out
these tankers at a slower rate than tankers with a single bottom. 
However, the double-bottom tankers will likely displace tankers of
similar size that are already operating in the domestic trade. 
Additionally, we believe it likely that the diesel-powered tankers
that operate without ODS subsidies and generally do not carry
preference cargo would be unaffected by changes to cargo preference
laws and would remain U.S.-flagged.  Also, several tankers would
continue operating for international political reasons having to do
with the Persian Gulf War.  Finally, several diesel-powered tankers
are or will soon be eligible to enter the domestic trade but could be
competitive internationally; consequently, we are unsure of what
would happen with them. 



(See figure in printed edition.)Figure 3.4:  A Tanker

Source:  MARAD. 


      INTERMODAL VESSELS
-------------------------------------------------------- Chapter 3:2.6

MARAD reported that 85 intermodal vessels with a total of 2,804,000
DWTs are employed in international trade.  If cargo preference laws
and policy were eliminated, we believe about 77 to 86 percent of the
vessels, by tonnage, would leave the U.S.  active fleet, many
remaining U.S.-owned but foreign-flagged.  We believe that many of
the steam-powered intermodal vessels not already engaged in domestic
trade would be scrapped because they would not be competitive in
international trade and the domestic trade has no room for
substantial additional tonnage, although it is uncertain whether none
would enter the domestic trade.  Most of the diesel-powered
intermodal vessels are foreign built and would be competitive in the
international trade.  We believe that many of these vessels would
reflag and most that remain U.S.-flagged would do so because of
international political considerations. 



(See figure in printed edition.)Figure 3.5:  An Intermodal Vessel

Source:  MARAD. 


      IMPACT OF CARGO PREFERENCE
      LAWS ON MARITIME EMPLOYMENT
-------------------------------------------------------- Chapter 3:2.7

If cargo preference laws and policy were eliminated, we estimate that
up to about 6,000 U.S.  mariners would lose their jobs aboard
U.S.-flag ships.  This is approximately 71 percent of the 8,500
mariners employed on the 165 U.S.-flag vessels that MARAD reported
are engaged in international trade.  Our estimate of the impact on
the maritime industry resulting from the elimination of cargo
preference laws and policy stems from our analysis of the number of
vessels we believe would have valid reasons to either reflag or leave
service entirely if cargo preference laws were eliminated.  On the
basis of the size of the crews on the vessels we believe would leave
the U.S.  fleet, we estimated the number of seafaring jobs that would
be lost.  On the basis of the information provided to us by MARAD,
the vessels associated with the 4.4 million to 5 million DWTs we
believe might leave the fleet if cargo preference laws were
eliminated support 2,600 to 3,000 billets (crew positions aboard a
vessel).  Since most mariners work aboard ship for 6 months of the
year, and taking into account sick leave and other reasons for their
not working full time, we estimate that 2.1 mariners are employed for
every billet. 


      IMPACT OF CARGO PREFERENCE
      LAWS ON SHIPYARDS
-------------------------------------------------------- Chapter 3:2.8

We do not anticipate that the elimination of cargo preference laws
and policy will significantly affect the number of vessels built in
U.S.  shipyards.  The workload at U.S.  shipyards is dominated by
federal contracts.  Fourteen privately owned U.S.  shipyards are
engaged in or seeking contracts for the construction of ocean-going
or Great Lakes vessels of over 1,000 gross tons.  Since 1983, 90
percent of the production workers employed by these shipyards, on
average, were engaged in Navy or Coast Guard ship construction or
repair.  Additionally, the number and deadweight tonnage of private
ocean-going merchant vessels built in U.S.  shipyards has declined
dramatically over the last 20 years.  (See fig.  3.6.) U.S. 
shipyards have delivered only one privately owned ocean-going
merchant vessels of 1,000 gross tons or larger in

   Figure 3.6:  Merchant Ships
   Delivered by U.S.  Shipyards,
   1973-93

   (See figure in printed
   edition.)

Source:  MARAD. 

We did not evaluate the effect of eliminating cargo preference laws
and policy on the amount of maintenance and repair performed at U.S. 
shipyards.  However, to the extent that U.S.-flag vessels reflag or
are scrapped, less maintenance and repair work will be done at U.S
shipyards because foreign-flag vessels have less incentive to use
U.S.  shipyards. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:3

The effect of cargo preference laws on the U.S.  merchant marine
industry is mixed.  Cargo preference laws appear to have had little
impact on maintaining the share of U.S.  oceanborne cargo carried
aboard U.S.-flag vessels, since most internationally shipped cargo is
owned by private citizens, not subject to cargo preference laws, and
thus shipped on less expensive foreign-flag vessels.  Nevertheless,
the U.S.  fleet is dependent on preference cargo for a significant
portion of the international cargo it carries.  While we cannot
estimate with precision the effects that eliminating cargo preference
laws would have on the merchant marine industry, we believe the
equivalent of up to two-thirds of the U.S.-flag vessels engaged in
international trade, by tonnage, would leave the U.S.  fleet.  This
would likely result in the elimination of about 6,000 U.S.  shipboard
jobs but would have a minimal impact on the U.S.  shipbuilding
industry. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 3:4

We discussed the contents of this report with the Chief,
Transportation Division of the Office of Procurement, AID; cognizant
officials of the Office of the Under Secretary of Defense for
Acquisition and Technology, DOD; the Director, Operations and
Readiness Division, Strategic Petroleum Reserve, DOE; and the Deputy
Administrator for Commodity Operations, USDA.  These agency officials
generally agreed with the facts, respective to their agencies,
contained in the report and provided only minor clarifications where
appropriate. 

Also, we met with the Deputy Administrator for Inland Waterways and
Great Lakes, MARAD, and other MARAD officials, who generally agreed
with the facts respective to their agency but believed that DOD does
not have the data necessary to accurately estimate its cargo
preference costs.  However, DOD's cargo preference cost estimates are
the official figures that DOD reported to the Office of Management
and Budget or that were published in the federal budget and are the
best estimates available.  (See ch.  2 for how the estimates were
derived.) We clarified this and other points raised by these
officials, where appropriate.  As requested, we did not obtain
written agency comments on a draft of this report. 


VESSEL OPERATORS WHO CARRIED
PREFERENCE CARGO
=========================================================== Appendix I

Table I.1 lists the vessel operators who carried preference cargo
during 1993 and the revenue they received for carrying that cargo.  A
separate column is included for the Department of Defense (DOD)
charter vessels because, under the terms of their agreement with DOD,
they are reimbursed for certain operating expenses (e.g., fuel and
port expenses) and thus, payments for these expenses are not
considered revenue.  In most other cases where vessels are not
chartered, the operator is paid a flat fee from which all operating
expenses must be paid. 



                          Table I.1
           
           Vessel Operators Who Carried Preference
                        Cargo, in 1993

                                  Revenue from
                                    preference  Revenue from
                                         cargo    preference
                                     excluding     cargo for
                                   DOD charter   DOD charter
Operator                             vessels\a     vessels\b
--------------------------------  ------------  ------------
Afram Line (USA), Co. LTD           $7,427,215   $38,046,557
Alaska Cargo Transport                                43,687
Alaska Hydro-Train                                    29,261
Alaska Marine Lines                                  225,692
Alaska Steamship                                       2,445
Amcol Line                                           524,490
American Auto Carriers                            32,435,747
American Gulf Shipping                            15,348,042
American Heavylift Shipping                        7,789,797
American Marine Corp.                             19,508,956
American President Lines LTD                      88,506,093
American Trading Production          4,135,985           341
 Corp.
American Transportation Lines           50,236    36,790,228
Bargebulk                                          1,413,747
Bloomfield SS Co.                    3,191,600           315
Blue Star Pace LTD                                    60,700
Boyer Alaska Barge                                     5,492
Bridge Shipping Co.                    653,627
Caminos Tugs                           558,000
Canal Barge                                        2,045,104
Carolina Atlantic Trans. Sacs.                        26,400
Central Barge and Towing                           2,331,510
Central Gulf S.S. Corp.             14,181,243
Coastal Carriers, Inc.                            12,600,106
Colonial Tankers Corp.                                   681
Cooperative Working Agreement                        335,279
Coordinated Caribbean Trans.,        1,303,942    13,792,111
 Inc.
Coscol Marine Corp.                                3,038,480
Cove Shipping Co.                                  3,628,499
Crest Tankers, Inc.                               14,128,428
Crowley                                              619,430
Crowley American                                  19,771,713
Crowley Caribbean                                  2,099,095
Crowley Marine Service                               366,844
Crowley Maritime Corp.               1,823,845       145,476
Cuban Caribbean                                    4,265,316
Dixie Fuels LTD                                    2,015,618
Dock Express Contractors, Inc.       4,743,692
EKLOE/EKLOF                                        3,819,477
Eimskip USA Inc.                                   1,948,799
Exxon Corp.                                           57,306
Falcon Tankers, Inc.                                 549,300
Farrell Lines, Inc.                               20,287,054
Foss Alaska Line                       426,025
Foster Towing                          717,693
Gulf & Atlantic Barge Co., Inc.                      869,256
Gulf Coast Transit Co.                            18,408,011
Hawaiian Independence Refinery                       299,090
Hawaiian Marine Lines, Inc.                           29,909
Hawaiian Tug and Barge Co., LTD         65,250
ISI                                                2,308,500
International Marine Carriers                        177,341
International Ship Management                        390,837
Island Maritime Agency                                 3,511
Joseph V. Steamship Corp.                             23,460
Keystone Shipping Co.                             25,075,680
LQM Associates Inc.                     24,995
Liberty Shipping Group, LTD                       91,696,362
Lykes Bros. SS Co., Inc.           187,108,481     7,282,833
Maersk                               7,057,772        96,171
Marine Transport Line               43,524,603    16,259,696
Maritime Overseas Corp.                           22,056,604
Martin Gas Corp.                                     380,008
Matson Lines                                         104,688
Matson Navigation Co.                             18,743,921
Moore-McCormack Marine Trans.                     26,263,377
New England Ind.                                      12,109
Nicholas Haye and Co.                                 74,337
North Seas Ferrys                                    584,827
Northland Service                                        952
OMI                                               66,136,235
Ocean Carriers, Inc.                   660,000
Ocean Line of Bermuda                  352,397       400,947
Ocean Ship Holding                                   694,600
Ocean Ships                         43,025,813
Osprey Ship Management               2,787,168
Otto Candies                                       1,553,172
PGM                                               10,442,981
Pacific Alaska Fuel Services,        4,788,842
 Inc.
Pacific Alaska Lines                                   5,314
Pacific-Gulf Marine                                  622,000
Penn-Attransco Corp.                              12,214,707
Percy Marine, Inc.                     209,936
Portal Energy Corp.                    229,610
Puerto Rican Maritime Shipping                         4,939
Puerto Rico Maritime Shipping                      3,503,424
 Auth.
RTM Lines                                              8,115
Rainbow Navigation, Inc.                           4,552,606
Red River Shipping                                 5,010,200
Samskip HF                                           761,298
Samson Tug & Barge                                 5,991,310
Sanara Lines                                          47,138
Sargent Marine, Inc.                               2,925,000
Sause Brothers Ocean Towing                           43,662
Sea Borne Lines, Inc.                  134,188
Sea-Land Service, Inc.               2,694,075   197,631,048
Seabarge Group                                    13,634,952
Seabridge Pacific Inc.                                 3,030
Sealift, Inc.                        8,688,522    20,550,375
Sheridan Transport                                   934,400
Showa Yusosen Co.                                     52,526
Somalia Tugs (Cory Towage &
 Murri International Salvage,        4,819,398
 Inc.)
South East Barge                                      98,520
South Pacific Interline                               12,942
States Steamship                                     305,996
Sunmar Shipping, Inc.                              3,295,248
Tek Marine                                             1,695
Tidewater, Inc.                                        6,776
Totem Ocean Trail. Express, Inc.                   7,182,363
Towing Services (Inter Hawaii        1,704,732
 Lifts-Hawaiian Tug and Barge
 Co., LTD; Dillingham Corp. of
 America; & Sause Bros. Ocean
 Towing Co.)
Trailer Bridge Inc.                                  184,916
Trailer Marine Transport Corp.                       493,076
Tri-Star                                           1,435,583
Trinidad Corp.                                    13,381,750
Tropic Sun Shipping Co., Inc.                             33
US Shipping Corp.                                    419,508
Van Ommeren Shipping                               4,409,582
Waterman Steamship Corp.                          73,928,738
Wessex Shipping Co.                                   47,500
Western Pioneer Co.                                       82
Young Brothers Ltd.                                  227,969
------------------------------------------------------------
\a Data are for fiscal year 1993. 

\b Data are for calendar year 1993. 

Source:  Maritime Administration and DOD. 


COMPARISON OF CREW SIZE AND SALARY
RANGE FOR U.S.-FLAG AND
FOREIGN-FLAG VESSELS
========================================================== Appendix II

Table II.1 contains information on the costs and size of crews for
vessels of different nationalities.  Daily crew costs are the total
costs, both direct and indirect, to an operator employing a crew
member.  This includes some or all of the following:  base wages,
overtime, allowances (such as work clothing allowances), training,
vacation and holiday pay, social benefits (such as contributions to
health insurance or social security), pension benefits, and travel
expenses (such as expenses paid by the operator to get the crew to
and from the vessel).\26



                          Table II.1
           
           Comparison of United States and Foreign
           Wage Costs for Various Types of Vessels

Type of        Nationality
vessel         of vessel       crew costs       Crew size
-------------  -------------  -------------  ---------------
Large, modern  United States    $9,800 -           21
 containership                   11,100
               European       2,200 -3,100       16 -18
               Asian          1,400 -3,000       11 -18
               Flag of        1,400 -2,100       18 -23
                convenience
Older          United States    13,200 -           35
 containership                   13,300
               European       2,200 -4,000       18 -21
               Asian          1,200 -2,000       17 -26
               Flag of        1,400 -2,200       24 -26
                convenience
General cargo  United States    12,700 -           34
                                 13,100
               European       2,500 -4,000       21 -26
               Asian          1,200 -1,400       18 -26
               Flag of        1,200 -2,100       25 -26
                convenience
Dry bulk       United States  6,400 -6,500         21
               Flag of            1,900            25
                convenience
Tanker         United States     9,200 -           26
                                 10,000
               Flag of            1,900            26
                convenience
------------------------------------------------------------
Note:  Wage rates are current as of January 1, 1993.  "Flag of
convenience" denotes registration of vessels in foreign countries
that offer favorable tax structures and regulations.  The leading
flag of convenience countries are the Bahamas, Liberia, Panama, and
Singapore. 

Source:  Maritime Administration. 


--------------------
\26 The Maritime Administration's data on foreign wage costs do not
always include all of these cost components. 


THE REQUIREMENTS AND PURPOSES OF
CARGO PREFERENCE LAWS
========================================================= Appendix III

The Congress passed the Cargo Preference Act of 1904 (P.L.  198) in
response to a shortage of U.S.-flag merchant vessels during the
Spanish-American War.  Because of that shortage, the United States
was forced to purchase foreign vessels crewed by foreign nationals
who, in some instances, refused to serve on U.S.-flag vessels.  In
addition, a foreign shipping company had just been awarded a contract
by the Secretary of War to ship coal to the Philippine Islands--then
the bulk of the U.S.  government's international cargo--and other
countries reserved their government- owned and government-financed
cargo for their vessels.  To increase the number of U.S-flag vessels
and to counter heavily subsidized and less expensively built and
operated foreign-flag vessels, the Congress decided to reserve
military cargo for U.S.-flag vessels unless the freight rates charged
are excessive or unreasonable. 

Despite the Cargo Preference Act of 1904, the U.S.  fleet did not
increase significantly in size until World War I.  Between 1916 and
1922, the U.S.  fleet increased from 2.9 million gross tons to 13.6
million gross tons.  (See fig.  III.1b.) The buildup, however, was
followed by a downturn that continued until World War II, even though
the Congress tried to mitigate the downturn with another major piece
of cargo preference legislation--the Merchant Marine Act of 1936
(P.L.  835). 

   Figure III.1A:  U.S.  and World
   Fleet Sizes, 1906-92--U.S. 
   Percentage of World Fleet by
   Tonnage

   (See figure in printed
   edition.)

Note:  WWI = World War I; WWII = World War II.  See appendix IV for
numerical data supporting graph. 

   Figure III.1B:  U.S.  and World
   Fleet Sizes in Gross Tons,
   1906-92

   (See figure in printed
   edition.)

Note:  WWI = World War I; WWII = World War II.  See appendix IV for
numerical data supporting graph. 

The stated purpose of the Merchant Marine Act of 1936 is to ensure a
U.S.  merchant fleet sufficient to provide a naval auxiliary during
times of war or national emergency and to participate substantially
in the carriage of foreign and domestic commerce.  It requires that a
"substantial portion" of civilian agencies' internationally shipped
cargo be carried aboard U.S.-flag vessels.  The act, however, did not
define the term substantial portion, and those agencies wishing to
avoid the provision were able to do so. 

Meanwhile, the downturn in the merchant marine continued until World
War II, when a second significant increase in the U.S.  fleet
occurred.  Although the United States emerged from World War II with
the largest fleet in the world--comprising 30.2 million gross tons
and over 36 percent of the world fleet's tonnage--by the time the
Congress passed the Cargo Preference Act of 1954 (P.L.  664), the
U.S.  fleet was again facing a downturn, and its size had declined to
about 31 percent of the world fleet's size.  (See figs.  III.1a and
III.1b.)

The Cargo Preference Act of 1954, which amends the Merchant Marine
Act of 1936, was passed to guarantee to privately owned U.S.-flag
vessels a substantial portion of international waterborne cargo,
which the Congress had proclaimed in previous statutes was necessary
for the maintenance of an adequate merchant fleet.  The act requires
that at least 50 percent of any government-owned and
government-financed cargo be carried on privately owned U.S.-flag
vessels. 

Despite the passage of cargo preference laws, the relative size of
the fleet continued to decline until the 1980s, when it leveled off
to about 4 percent of the world fleet's gross tonnage.  In 1992, the
U.S.  fleet comprised 15.5 million gross tons and 3.9 percent of the
world fleet's tonnage.  Congress's continued belief that a strong
merchant marine is needed resulted in the passage of the Food
Security Act of 1985 (P.L.  99-198).  In enacting this law, the
Congress declared that "a strong and active United States maritime
industry [is] vitally important to the economic well-being and
national security objectives of our Nation." The Food Security Act
increased the percentage of food aid cargo that the U.S.  Department
of Agriculture (USDA) and the Agency for International Development
(AID) ship on U.S.-flag vessels from 50 to 75 percent. 


NUMBER OF SHIPS AND TONNAGE BY
YEAR IN THE U.S.  AND WORLD FLEET
========================================================== Appendix IV

Table IV.1 provides information, by year, on the number of vessels in
the U.S.  and world merchant fleets, the total tonnage of the U.S. 
and world fleets, and the U.S.  share of the world fleet's tonnage by
year. 



                          Table IV.1
           
           Number of Ships and Tonnage in the U.S.
                  and World Fleets, by Year

                  (Gross tons in thousands)


                                                        U.S.
                                                    percenta
                                                       ge of
                                                       world
                                                       fleet
                U.S.     World      U.S.     World       (by
Year\a         fleet     fleet     fleet     fleet  tonnage)
----------  --------  --------  --------  --------  --------
1906               b         b     1,388    31,745      4.37
1907               b         b     1,503    33,970      4.42
1908               b         b     1,616    35,723      4.52
1909               b         b     1,619    36,473      4.44
1910               b         b     1,642    37,291      4.40
1911               b         b     1,715    38,782      4.42
1912               b         b     1,798    40,518      4.44
1913               b         b     1,972    43,079      4.58
1914               b         b     2,027    45,404      4.46
1915               b         b     2,580    45,729      5.64
1916               b         b     2,853    45,248      6.31
1917               b         b         c         c         c
1918               b         b         c         c         c
1919               b         b     9,773    47,897     20.40
1920               b         b    12,406    53,905     23.01
1921               b         b    13,511    58,846     22.96
1922               b         b    13,577    61,343     22.13
1923               b         b    13,426    62,335     21.54
1924               b         b    12,431    61,514     20.21
1925               b         b    11,932    62,380     19.13
1926               b         b    11,392    62,672     18.18
1927               b         b    11,171    63,267     17.66
1928               b         b    11,154    65,159     17.12
1929               b         b    11,036    66,407     16.62
1930               b         b    10,646    68,024     15.65
1931               b         b    10,356    68,723     15.07
1932               b         b    10,270    68,368     15.02
1933               b         b    10,088    66,628     15.14
1934               b         b     9,795    64,358     15.22
1935               b         b     9,665    63,727     15.17
1936               b         b     9,434    64,005     14.74
1937               b         b     9,347    65,271     14.32
1938               b         b     8,125    58,270     13.94
1939               b         b     8,910    68,509     13.01
1940               b         b         c         c         c
1941               b         b         c         c         c
1942               b         b         c         c         c
1943               b         b         c         c         c
1944               b         b         c         c         c
1945               b         b         c         c         c
1946               b         b         c         c         c
1947               b         b    30,166    83,514     36.12
1948           3,644    12,470    26,689    70,584     37.81
1949           3,514    12,765    25,977    72,532     35.81
1950           3,516    13,050    26,114    74,999     34.82
1951           3,477    13,466    25,769    77,424     33.28
1952           3,441    13,788    25,627    80,222     31.95
1953           3,440    14,172    25,749    83,375     30.88
1954           3,424    14,613    25,977    87,286     29.77
1955           3,324    14,952    25,358    90,955     27.88
1956           3,238    15,346    24,772    95,055     26.06
1957           3,032    15,916    23,468   101,017     23.23
1958           3,047    16,557    23,840   108,012     22.07
1959           3,047    17,106    24,220   115,015     21.06
1960           2,960    17,222    23,870   119,768     19.93
1961           2,810    17,338    23,018   123,576     18.63
1962           2,715    17,585    22,580   128,298     17.60
1963           2,691    17,917    22,692   134,434     16.88
1964           2,598    18,072    22,149   140,283     15.79
1965           2,449    18,096    21,203   146,698     14.45
1966           2,292    18,303    20,104   155,048     12.97
1967           2,209    18,386    19,495   164,066     11.88
1968           2,101    18,910    18,819   176,523     10.66
1969           2,013    19,415    18,373   189,480      9.70
1970           1,780    19,611    16,918   201,878      8.38
1971           1,579    19,980    15,529   211,401      7.35
1972           1,372    20,544    14,348   230,302      6.23
1973           1,150    21,009    13,111   250,543      5.23
1974             965    21,917    12,504   289,404      4.32
1975             891    22,591    12,301   333,042      3.69
1976             843    23,134    12,655   358,203      3.53
1977             846    23,902    13,388   375,828      3.56
1978             571    24,906    13,388   375,828      3.56
1979             879    24,427    14,681   378,909      3.87

1981             864    24,867    16,020   385,711      4.15
1982             853    25,110    15,976   392,379      4.07
1983             832    25,482    15,932   396,645      4.02
1984             788    25,579    15,713   395,325      3.97
1985             740    25,473    15,444   391,979      3.94
1986             737    25,424    16,034   395,056      4.06
1987             725    23,618    16,108   362,179      4.45
1988             709    23,307    16,983   361,132      4.70
1989             675    23,468    16,807   371,357      4.53
1990             655    22,983    16,265   366,764      4.43
1991             656    23,596    16,103   386,736      4.16
1992             642    23,943    15,466   397,225      3.89
------------------------------------------------------------
\a These statistics represent "snapshots" taken at different times
during the reporting year. 

\b Data on numbers of ship are not available for 1906-47. 

\c Data on tonnage are not available for 1917-18 and 1940-46. 

Source:  Department of Commerce and the Maritime Administration. 


RECIPIENTS OF
OPERATING-DIFFERENTIAL SUBSIDIES
=========================================================== Appendix V

Operating-differential subsidies (ODS) are paid to U.S.  ship
operators to place them at a parity with their foreign competitors. 
The subsidy is based on the difference between the fair and
reasonable cost of insurance, maintenance, repairs not compensated by
insurance, and wages of officers and crews and the estimated costs of
the same items if the vessels were operated under foreign registry. 
Not all recipients' subsidies are based on all of the above items. 
Table V.1 lists the ODS recipients, the amounts of subsidy each
company received, and the number of ships receiving a subsidy that
each ODS recipient operated, for fiscal years 1991-93. 



                          Table V.1
           
           Operating-Differential Subsidies by Ship
                Operator, Fiscal Years 1991-93

                    (Dollars in millions)


                                                      Number
                                                          of
                                                       ships
                                                       in FY
Vessel operators              1991\a  1992\a    1993    1993
----------------------------  ------  ------  ------  ------
American President Lines       $66.1   $77.0   $59.7      20
Farrell Lines Incorporated      14.9    15.9    16.1       4
First American Bulk              4.1     5.2     5.1       2
Lykes Bros. Steamship           75.0    59.3    78.0      23
Waterman Steamship              18.5    19.3    21.3       4
 Corporation
American Maritime Transport,     3.9     0.6     0.8       1
 Inc.
Aquarius Marine Company          4.5     4.5     3.6       2
Asco-falcon II Shipping          0.3       0       0       1
 Company
Atlas Marine Company             4.6     5.0     3.9       1
Brookville Shipping Inc.           0     1.3     0.6       1
Chestnut Shipping Company        3.2     4.0     3.1       3
Equity Carriers I, Inc.          0.4       0       0       1
Margate Shipping Company         9.6     9.9     9.0       3
Mormac Marine Transport,         7.7     9.2     5.6       3
 Inc.
Ocean Chemical Carriers,         2.1     1.5     3.5       1
 Inc.
Ocean Chemical Transport,        2.4     2.0     2.9       1
 Inc.
Vulcan Carriers, Ltd.            0.4     1.0     2.4       4
Total                         $217.6  $215.6  $215.5      75
------------------------------------------------------------
\a Dollar figures are not in constant FY 1993 dollars. 

Source:  Maritime Administration. 


THE U.S.  MERCHANT MARINE DURING
MILITARY CONFLICTS
========================================================== Appendix VI

According to the Maritime Administration (MARAD), except for the
Persian Gulf War, specific data on the historical use of U.S.-flag
and foreign-flag shipping in support of U.S.  or allied forces in
wartime circumstances are limited.  Information on the specific
numbers of ships and amount of cargo carried is not available in most
cases.  Data on foreign-flag shipping are even more limited. 
However, a general description of the role that U.S.-flag and
foreign-flag vessels played during the five principal conflicts in
which the United States has been involved in since 1904--World War I,
World War II, the Korean War, the Vietnam conflict, and the Persian
Gulf War--is available: 

During World War I, the United States used foreign-flag ships almost
entirely.  Only a small number of new U.S.-flag merchant vessels were
built and commissioned before World War I ended. 

During World War II, the U.S.-controlled vessels carried
approximately 75 percent of the cargo sent from the United States;
the other 25 percent was carried by ships of other allied nations. 
The total amount of cargo shipped between December 7, 1941, and the
capitulation of Japan was approximately 268.3 million long tons,\27
of which about 203.5 million tons consisted of dry cargo and 64.8
million tons consisted of petroleum products and other bulk liquids
(excluding bulk liquid cargo carried by War Shipping Administration
tankers for the Army and Navy).  The U.S.-flag merchant fleet carried
the great majority of military personnel and civilians moving
overseas and returning to the United States during and after the war. 

Practically all of the cargo sent from the United States to the Far
East to support the Korean War was carried on U.S.-flag ships.  The
total amount of cargo shipped from the United States to the Far East
was approximately 31.5 million measurement tons.\28 About 95 percent
of this was shipped by sea (80 percent on privately owned U.S.-flag
vessels and 15 percent on U.S.  government-owned vessels). 

During the Vietnam conflict, most of the dry cargo shipped to the war
area was carried on U.S.-flag vessels.  Approximately 85.7 million
measurement tons of dry cargo was shipped to the war area between
fiscal years 1965 and 1972 in U.S.-flag vessels (65 percent on
privately owned U.S.-flag ships and 35 percent on U.S. 
government-owned ships).  This is estimated to be about 97 percent of
all dry cargo shipped to Vietnam during those years.  Approximately
16 million measurement tons of bulk petroleum was shipped to the war
area during those same years, chiefly in foreign-flag ships because
of the unavailability of suitable U.S.-flag ships. 

During the Persian Gulf War, according to data collected by DOD, as
of March 10, 1991, approximately 2.9 million long tons of dry cargo
had been transported by sea.  Of this amount, 77.4 percent was
carried on U.S.-flag vessels and 22.6 percent was carried on
foreign-flag vessels charted by DOD.  The most recent breakdown of
participation by foreign-flag ships shows that DOD charted 186
foreign-flag ships from 35 allied nations for 208 total voyages.  The
major flags chartered were Cyprus, Greece, Norway, and Panama. 


--------------------
\27 A long ton equals 2,240 pounds. 

\28 A measurement ton is a volume measurement equal to a 40-ft. 
container box. 


MARAD'S "FAIR AND REASONABLE"
DETERMINATIONS
========================================================= Appendix VII

The Cargo Preference Act of 1954 requires civilian federal government
agencies to ship on U.S.-flag vessels only to the extent that such
vessels are available at "fair and reasonable rates." The fair and
reasonable provision helps ensure that U.S.-flag vessels do not
overcharge federal agencies required to ship on U.S.-flag vessels. 
MARAD will find a rate to be fair and reasonable if it is less than
or equal to MARAD's estimate of the cost of the voyage in question
plus a reasonable profit.  MARAD calculates fair and reasonable rates
for ships chartered to carry shiploads of bulk and packaged
agricultural commodities.  Rates are also determined for bulk
agricultural commodities carried by liner-service vessels.  For other
cargoes carried on liner-service vessels, conference rates are paid,
which MARAD maintains are inherently fair and reasonable. 

MARAD makes a separate cost estimate for each voyage that it is asked
to investigate.  It bases its estimate on operating cost information
supplied annually by the ship owner and certified by a corporate
officer and on information specific to the voyage in question. 
Additionally, MARAD factors the return trip into the cost of the
voyage.  MARAD assumes that the vessel will return empty of cargo. 
If the vessel does carry cargo on the return trip, it must report
this to MARAD, and MARAD will make an adjustment to the fair and
reasonable rate.  MARAD also allows for a reasonable profit on a
5-year running average derived from Fortune's top 50 U.S. 
transportation companies.  Currently, this profit factor is about 13
percent. 

MARAD requests shipowners to supply the following cost information
each year: 

Normal operating speed. 

Daily fuel consumption at normal operating speed. 

Daily fuel consumption while in port. 

Type of fuel used. 

Total capitalized vessel costs, for example, cost of vessel
acquisition. 

Vessel operating cost information for the prior calendar year. 

Number of vessel operating days for the vessels for the prior
calendar year (this information is used to determine daily operating
cost). 

Additionally, MARAD collects the following information for each
voyage for which a fair and reasonable rate is calculated: 

Port expenses for ports the vessel is scheduled to visit--for
example, fees for pilots and custom charges. 

Cargo expenses--for example, fees for stevedores and off-loading
equipment. 

Canal expenses--for example, fees for tolls. 

The current price of fuel. 


OBJECTIVES, SCOPE, AND METHODOLOGY
======================================================== Appendix VIII

On April 29, 1993, Senators Hank Brown, John C.  Danforth, Charles E. 
Grassley, Don Nickles, and Malcolm Wallop asked us to provide
information on the cargo preference programs and related information
on the U.S.  merchant marine industry.  On the basis of subsequent
discussions with their staff, we agreed to provide information on the
cost to the federal government of cargo preference laws and their
effects on the U.S.  merchant marine industry.  We also agreed to
provide information on the following: 

The number of non-U.S.-flag vessels owned by U.S.  citizens or
corporations.  (See ch.  1.)

The total oceanborne transportation costs to federal agencies for
preference cargo.  (See ch.  2.)

Operators of U.S.-flag vessels who carried preference cargo and the
revenue they received for doing so.  (See app.  I.)

Crew size and salary ranges for U.S.- and foreign-flag vessels.  (See
app.  II.)

The original intent of cargo preference laws.  (See app.  III.)

The number of vessels in the U.S.  and world fleet, the total tonnage
of the U.S.  and world merchant fleet, and the U.S.  share of the
world merchant fleet's tonnage by year.  (See app.  IV.)

The recipients of operating-differential subsidies and the amount of
funds they received for fiscal years 1991 through 1993.  (See app. 
V.)

The use of foreign-flag vessels during wartime circumstances since
1904.  (See app.  VI.)

How MARAD determines if the rates that U.S.-flag carriers charge the
federal government to ship cargo are "fair and reasonable." (See app. 
VII.)

This report does not make conclusions regarding the desirability of
cargo preference laws or recommendations for changes that could be
made to those laws. 

To determine the cost to the federal government of cargo preference
laws, we first determined which federal agencies ship the most
international cargo by tonnage.  Since 1988, four agencies--AID, DOD,
the Department of Energy (DOE), and USDA--shipped more than 99
percent of international government cargo.  MARAD collects this
information so that it can determine if the agencies are in
compliance with federal cargo preference laws.  We did not
independently verify the accuracy of the agencies' information. 

Next, we obtained data on the additional costs the agencies incurred
because of cargo preference laws requiring them to ship all or a
portion of their cargo on U.S.-flag vessels.  AID, DOD, and USDA
submit this information to the Office of Management and Budget (OMB)
for inclusion in the federal budget.  DOE was not requested to
develop an estimate because of the relatively small amount of cargo
it had shipped.  In chapter 2, we explained how these estimates were
derived and supported.  Also, MARAD is required to pay a portion of
the additional transportation costs for food aid programs
administered by AID and USDA, and this is included in the federal
budget. 

AID and USDA have developed procedures for estimating the additional
transportation costs they incur because of cargo preference laws. 
Although we did not independently verify them, we believe the
estimates are reasonably sound because their shipments are split
between U.S.- and foreign-flag ships, making possible a comparison of
rates for U.S.- and foreign-flag ships obtained under similar market
conditions. 

To estimate the additional transportation cost that DOE incurred
because of cargo preference laws, DOE provided us with data on the
amount of oil it shipped for the Strategic Petroleum Reserve program. 
For purposes of complying with cargo preference laws, DOE measures
the amount of oil it ships in long ton/miles (the number of miles a
long ton of oil has been shipped) to more accurately reflect the
broad geographical distances involved in transporting oil.  Because
DOE ships oil on both U.S.- and foreign-flag vessels, we were able to
calculate the cost per long ton/mile that U.S.- and foreign-flag
vessels charged to DOE.  We used this information to estimate DOE's
additional transportation costs.  We did not independently verify the
information DOE provided us. 

Unlike AID, DOE, and USDA, foreign-flag carriers do not consistently
bid for DOD cargo, making it impossible to base an estimate of DOD's
additional transportation costs on a comparison with historical data
on the rates that foreign-flag carriers would have charged DOD. 
Therefore, in order to develop a cost estimate for OMB, DOD officials
had to estimate the cost to ship its cargo on foreign-flag vessels. 
DOD officials told us that they base their estimate, to the extent
possible, on market data, including the operating costs and shipping
rates of foreign-flag carriers.  However, they told us that because
of the rate volatility in certain market sectors, they are forced to
rely significantly on their judgment and knowledge of the market for
their final analysis.  As a result, the process is not well
documented, and we were unable to independently verify their
estimate. 

DOD maintains that its policy is to ship a substantial portion of its
cargo on U.S.-flag vessels and that it would continue this policy in
the absence of cargo preference laws.  However, because DOD ships
about 50 percent of the cargo subject to preference laws, we included
estimates of its additional transportation costs in our report in
order to give a fuller account of the cost to the federal government
of reserving cargo for U.S.-flag vessels. 

We measured the effect of no longer reserving cargo on U.S.-flag
vessels by first estimating the number of U.S.-flag vessels that
would likely stop carrying international cargo (either by being
scrapped, reflagged or replacing vessels in the domestic trade) if
cargo preference laws and policy were eliminated.  The deadweight
tonnage of these vessels is the estimate of the tonnage that would
leave the U.S.  fleet if cargo preference laws and policy were
eliminated.  Again, because DOD ships such a large portion of the
cargo subject to the preference laws, we included the Department in
our analysis to provide a fuller picture of how cargo preference laws
affect the merchant marine industry.  If, however, DOD's policy were
to remain intact, the actual impact on the maritime industry of
eliminating cargo preference laws would be less than we estimate. 

We based our analysis of the number of vessels likely to leave the
fleet on (1) the relative ability of classes of vessels to compete in
the international and domestic markets without preference cargo; (2)
specific attributes of vessels, such as whether they had a
specialized use, if and when any legal restrictions on reflagging or
entering the domestic trade would be lifted, and whether the vessels
carried substantial amounts of preference cargo or operated mainly in
the domestic trade; and (3) other pertinent considerations, such as
international political considerations that would likely cause
vessels to remain U.S.-flagged.  We conducted our analysis in
consultation with MARAD officials, who have access to proprietary
information, and confirmed our estimate about which vessels would
leave the U.S.  fleet by comparing our results with information
obtained from 18 vessel operators that controlled 112 of the 165
vessels engaged in international trade. 

We made the assumption that ODS alone, in the absence of cargo
preference laws, is generally not sufficient to induce a carrier to
remain U.S.-flagged.  We made this assumption about ODS payments
because of the following: 

ODS payments do not fully offset the higher costs to operate
U.S.-flag vessels.  For example, some crew costs are not covered by
ODS subsidies. 

Recipients are faced with certain restrictions.  For example, ODS
recipients are generally restricted from owning foreign-flag vessels
or vessels that operate in domestic trade; in the case of liner
services, they are restricted in the geographic areas in which they
may operate. 

Program increases ODS recipients' costs.  For example, recipients are
burdened with additional administrative costs. 

Additionally, MARAD officials told us that many owners with ODS
contracts prefer not to receive any ODS compensation for maintenance
and repair because receiving such compensation requires that all of
the ship's maintenance and repair be performed in U.S shipyards.  The
officials said that shipowners find it less costly to have a vessel's
maintenance and repair performed at foreign shipyards, even though
U.S.-flag ships are subject to a 50-percent tax on the cost of
maintenance and repair performed at foreign shipyards. 

Next, to estimate the effect of cargo preference laws on merchant
mariners, MARAD provided us with information on the size of the crews
on the ships we believe would leave the international trade.  To
estimate the effects on the U.S.  shipbuilding industry, we obtained
information about new ship deliveries from MARAD and analyzed laws
and regulations intended to support the shipbuilding industry.  We
confirmed these results with industry representatives. 

Finally, our analysis of the original intent of cargo preference laws
is based on the purposes and requirements found in relevant statutes
and other sources.  Information on the use of U.S.- and foreign-flag
vessels during wartime was provided to us by MARAD and was not
independently verified. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Allen Li, Associate Director
Emi Nakamura, Assistant Director
Steven R.  Gazda, Assignment Manager
Charles T.  Egan, Evaluator-in-Charge

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