The Reagan administration, breaking with decades of maritime policy and retreating from the longstanding policy of subsidizing a domestic merchant marine industry for national security reasons, is proposing to allow greatly expanded foreign construction and ownership of U.S. merchant vessels and create a new federally owned cargo fleet for defense purposes.
A far-reaching package of regulatory changes and tax breaks that the administration is developing to bolster the sagging U.S. maritime industry would encourage shipping lines to build and repair their vessels in foreign yards and allow American-flag vessels to be 75 percent foreign-owned. The program, which the administration is expected to propose formally next month, is circulating within the maritime industry.
As submitted by Transportation Secretary Drew Lewis to a meeting of the Cabinet Council on Commerce and Trade, the program would create a fleet of "defense-relevant multipurpose carriers" to be owned by the Defense Department.
That fleet, which would be "leased to ship operators," would give the military the sealift capacity that in the past the privately owned merchant fleet has been expected to provide in case of war, thereby countering an argument that the merchant fleet must be kept out of foreign control for security reasons.
The maritime program would also require oil shipments to the U.S. Virgin Islands to be carried in U.S.-flag tankers, exempt the salaries of merchant seamen from income tax and eliminate federal regulation of freight rates on cargoes carried between domestic ports.
As expected, the Department of Transportation is proposing to curtail the direct federal subsidies that have bolstered shipyards and commercial ship operators since 1936--subsidies that Congress has justified as much on national security grounds as economic grounds.
The administration, which has been signaling for some time that it wants to reduce the subsidy program, is circulating a detailed analysis by the Office of Management and Budget saying that more than $5 billion in subsidies pumped into the industry since 1970 was virtually wasted.
The study, also su program have been "negligible." It says the objectives of the subsidy programs--building up the merchant fleet, encouraging efficiency and increasing the market share for U.S. carriers--"have not been achieved" despite the ever-growing federal outlays.
The OMB analysis says "little evidence is available on economic grounds which would justify the provision of public support to the shipping and shipbuilding industries," and it challenges the favorite argument of the maritime industry and its friends in Congress by concluding that "national security arguments provide little justification for provision of public assistance to the merchant marine industries."
The federal government provides several forms of direct and indirect subsidies to shipbuilders and merchant ship operators. The most expensive, which pays ship operators the difference between the salaries of American crew members and the lower salaries of foreign hands, is costing $417 million this year and is projected to cost $454 million next year.
Construction subsidies, which make up the difference between the cost of building a ship in a U.S. yard and the much lower cost of building abroad, have already been dropped from the budget.
Merchant ships that have 20-year operating subsidy contracts would continue to be paid, according to proposals submitted to the same May 3 Cabinet Council meeting by Lewis, but the administration plans to issue no new contracts and to budget no further funds for construction costs.
The overall effect of the proposals, as Lewis acknowledged, is to favor the merchant ship operators at the expense of the U.S. commercial shipbuilders. Even with the additional work expected from the expansion of the Navy's fleet, Lewis' memo says, "it is expected that some of the 26 yards will not be able to remain in business."
Reagan campaigned on the promise to develop a maritime policy that would aid the shipbuilders and the sagging merchant marine, which has seen its share of U.S. foreign trade decline steadily since World War II.
According to a May 6 memo by Deputy Transportation Secretary Darrell M. Trent, "the administration has not yet accomplished these objectives"--an assessment that will not surprise the shipbuilders, maritime union officials and trade groups that have been openly grumbling about the administration's failure to promulgate the promised policy.
As outlined by Lewis in an "interim report," the policy will basically support the American-owned merchant fleet by tightening the Jones Act, which requires that cargo carried between U.S. ports be in U.S.-flag, American-crewed ships; by allowing the shipowners to build ships abroad and still register them in this country; by eliminating the 50 percent tariff on repair work performed abroad; and by relaxing some safety, insurance and pollution regulations to lower operating costs.
The proposal to exempt seafarers' salaries from income tax would permit the ship operators to pay lower wages, thus reducing the federal outlay of operating subsidies. Operating subsidies would continue to be available to American shipping companies using foreign-built vessels, a proposal already approved by a Senate committee and rejected by its House counterpart.
The entire program is still under review within the administration. Lewis has not said when the final package of proposals will be ready. Trent, his deputy, asked the administration's interagency review panel for quick approval of some "noncontroversial" elements "in order to signal some progress in the policy process."