In a break with a half century of policy, Congress has authorized ship operators of the American merchant marine to acquire new vessels in foreign shipyards and still be eligible for federal subsidies to operate them.
The landmark legislation -- which was part of the 1982 budget act approved last month -- dealt a psychological and financial blow to the country's sagging commercial shipyards but delighted the equally troubled merchant fleet operators. It involves relatively small amounts of money and only a tiny percentage of the country's waterborne commerce, but it has enormous implications for the future of American maritime policy.
"It's a very major step," said a congressional staff aide who monitored the complex bill. "It's the first step toward cutting the umbilical cord between federal programs that aid the shipyards and federal programs that aid the fleet." That "umbilical cord," created by the 1936 Merchant Marine Act, until now has made federal subsidies for building and operating merchant ships available only for ships constructed in American yards.
With sales, workloads and employment in U.S. commercial shipyards declining, the yards opposed the change and succeeded in limiting its scope. But the ship operators convinced Congress that they should be allowed to reap the economic and technological advantages of ordering ships abroad.
In effect, Congress accepted the argument of the merchant fleet operators that their industry -- more than half the companies have gone out of business in the past decade -- needed more help than the shipyards, which may gain in Navy construction under the Reagan administration what they lose in merchant contracts.
"It's the most significant thing that has happened to the American merchant marine in years," said Albert E. May, executive vice president of the Council of American Flag Ship Operators. "We would prefer to build in the U.S., and we have done so," he said. "But there has been a technological revolution in the shipping industry, and we can't afford to subsidize the yards."
Edwin M. Hood, president of the Shipbuilders Council of America, the yards' trade association, told his members before Congress acted that adoption of the revised subsidy formula would "have critical bearing on future market opportunities for important segments of the U.S. shipbuilding industry. Moreover, in today's circumstances, it pits operator against builder."
The measure was adopted only because it was contained in the budget bill rather than in a separate piece of legislation, he said after the vote. If the bill "had gone to the floor in the traditional manner, "this provision would have been struck because Congress has always beaten it before," he said.
But the change in the law, known as the McCloskey Amendment after its sponsor, Rep. Pete McCloskey (R-Calif.), was adopted by the House Merchant Marine and Fisheries Committee as a cost-saving measure in the budget reconciliation process and was accepted by the Senate.
Most American-flag commercial vessels are not subsidized. Ships used in domestic coastal trade, on inland waterways and in offshore oil traffic are shielded by law from foreign competition and therefore are not eligible for subsidies. Most of the approximately 500 U.S.-flag vessels in the international merchant marine traffic, however, are subsdized in four ways.
The Federal Maritime Administration provides construction subsidies to compensate for the higher cost of building in American yards. It also provides operating subsidies, budgeted at $417 million for the 1982 fiscal year, for the life of the vessel to meet the higher cost of using American crews. In addtion, the government provides federally guaranteed loans to finance shipbuilding, which reduces the cost of borrowing, and grants tax deferrals on revenues that are plowed back into construction.
In its budget-cutting legislation, Congress eliminated construction subsidies for 1982 and assumed that they would be minimal in subsequent years. Because subsidized carriers are required to replace their vessels periodically, Congress authorized them for the next two years to order ships abroad.
The law says that "vessels constructed, reconstructed or modified pursuant to this section shall be deemed to have been United States-built for the purposes of this title."
It is not clear how many vessels actually will be built abroad and introduced into American-flag service as a result, because neither the loan guarantees nor the tax-deferral benefits will be available to foreign-built ships. Transportation Secteretary Drew Lewis will be able to propose changes in existing regulations to offer loan guarantees, but the shipyard operators persuaded the House Ways and Means Committee to assert jurisdiction over the tax-deferral benefits, thus denying them to the ship operators.
Hood, the president of the Shipbuilders Council, complained in his annual report that in building up its support fleet, the U.S. Navy is arranging to buy 11 "foreign-built vessels which should have been ordered from domestic shipbuilders more than three years ago." In one year U.S. commerical shipyards received orders for only seven new ships. A decade ago, they were obtaining 40 to 50 contracts a year.
He called it an "incredible situation" that could cost 30,000 jobs in the shipyards, a gloomy assessment that he said only would be worsened by adoption of the McCloskey amendment, and he held out little hope that the prospects for the commercial shipyards will improve for at least three years.