In the 1920s, when it was illegal for U.S. ships to serve alcohol, an American line put two of its cruise ships under the flag of Panama. Today, major shipowners from Norway to Japan register some of their ships under "flags of convenience," not because of liquor laws, but because it saves money on wages and taxes.
One of the ships flying a "flag of convenience," the Sungari, was struck by an Iranian missile on Thursday. The Sungari, which flies the Liberian flag but is owned by a New York company, sustained damage to a cargo hold but there were no injuries.
"A ship like that costs about $700,000 a year to operate, with British officers and a mostly Filipino crew," said Philip J. Loree, director of the Federation of American Controlled Shipping.
"If they came into an American port, they would have to have all American officers and 75 percent American crews. That would raise the cost to about $3.4 million a year," he said.
But U.S. ships flying "flags of convenience" forgo the U.S. protection that is automatic for U.S.-flagged ships. And that has become more of an issue since Iran and Iraq, locked in a 7-year-old war, began attacking neutral shipping in the Persian Gulf.
American owners of ships flying other countries' flags met recently with Undersecretary of State Michael H. Armacost to ask for protection, but there has been no public indication that the administration is ready to grant it.
A ship owned by an American company can employ a foreign crew, pay foreign wages and dock in the United States as long as it flies another country's flag. European countries and Japan have similar restrictions.
As a result, Panama has 3,960 ships in its merchant marine, second only to Japan with 4,062, according to the Association of Norwegian Shipowners. The Soviet Union is third with 2,718 and Liberia fourth with 1,523.
Although Panama and Liberia are the main sources of flags of convenience, there recently has been a move toward the Bahamas and to Vanuatu, a new island nation in the South Pacific.
As of July 1, U.S. companies had 429 merchant ships registered in other countries, 227 of them in Liberia. And 454 fly the U.S. flag but, according to the U.S. Maritime Administration, only 363 of them were active. Fifty-seven are registered in Britain or British colonies.
American-owned ships also fly the flags of 18 other countries, from Honduras to Singapore.
American shipowners have other advantages besides low-pay crews in registering their vessels in a country with easier regulations. Safety requirements may be less strict. An American ship must be repaired in an American port or pay a 50 percent duty on work done in other countries.
Until last year's tax law, American shipowners did not have to pay taxes if they reinvested earnings in new ships. Now they do pay taxes.
Some governments have found ways of keeping ships under their own flags but ease tax and manning requirements. British ships, for example, are now often registered in Gibraltar or the Isle of Man. Both are part of Britain, but different regulations apply.