Cargo Preference Act

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The Cargo Preference Act or Cargo Preference refers generally to legal requirements for the carriage of government-impelled cargoes on the vessels flagged within the registry of that government for the purpose of promoting a national merchant marine. Cargo Preference is commonplace among the world's seafaring nations, including Australia, Brazil, France, Japan, Taiwan.[1]

Cargo Preference in the United States[edit]

United States law includes two main pieces of Cargo Preference legislation: The Cargo Preference Act of 1954 [2] (the "1954 Act") pertaining to the carriage of civilian cargoes and the Military Cargo Preference Act of 1904 (the "1904 Act"),[3] which governs military cargoes.

Cargo preference is administered by the United States Maritime Administration ("MARAD"). Originally, MARAD provided advice to shipper agencies, without being able to compel compliance. Finding the arrangement unsatisfactory, Congress passed the Merchant Marine Act of 1970, Pub. L. No. 91-469, which authorized MARAD to issue regulations governing cargo preference shipments by the other agencies. Section 27 of the 1970 Act added explicit cargo preference authority, which was amended in 2008 to provide MARAD with the authority to (a) "direct agencies to require the transportation in United States-flagged vessels of cargo shipments not otherwise subject to [Cargo Preference] in equivalent amounts to cargo determined to have been shipped on foreign carriers in violation of [Cargo Preference]" and (b) "impose on any person that violates [the Cargo Preference Act or a MARAD implementing regulation], a civil penalty of not more than $25,000 for each violation willfully and knowingly committed, with each day of a continuing violation following the date of shipment to be a separate violation." [4] Although cargo preference contains exceptions where U.S.-flag vessels are unavailable, as discussed infra, shipper agencies may determine non-availability only with MARAD concurrence.[5]

1904 Act[edit]

The 1904 Act requires that 100% of cargoes "bought for the Army, Navy, Air Force, or Marine Corps" be carried on board U.S.-flag vessels. Charges for such transportation are limited to "charges made for transporting like goods for private persons" and where the Government finds that such charges are "excessive or unreasonable" it may contract for such transportation as otherwise provided by law.[6]

1954 Act[edit]

The 1954 Act amended the Merchant Marine Act of 1936, P.L. to incorporate a new section 901(b) to require U.S.-flag vessel participation in the carriage of United States Government impelled cargoes. The 1954 Act requires that 50% of the volume of government-impelled cargoes be transported in privately owned U.S.-registered vessels, but only to the extent that such vessels are reasonably available at fair and reasonable rates.[7]

Purpose of Cargo Preference[edit]

Throughout its history, the United States has depended upon a viable merchant marine for its economic and military national security. During two wars, the United States Government found itself unable to respond to pressing economic and military needs, and therefore built a legal framework to fortify the merchant marine as a bulwark against future failures. The purpose of Cargo Preference is encapsulated in the opening section of the Merchant Marine Act of 1936:

It is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine (A) sufficient to carry its domestic water-borne commerce and a substantial portion of the water-borne export and foreign commerce of the United States and to provide shipping service on all routes essential for maintaining the flow of such domestic and foreign water-borne commerce at all times, (B) capable of serving as a naval and military auxiliary in time of war or national emergency, (C) owned and operated under the United States Flag by citizens of the United States insofar as may be practicable, and (D) composed of the best-equipped, safest, and most suitable types of vessels, constructed in the United States and manned with a trained and efficient citizen personnel.[8]

Thus, the merchant marine is intended to provide national security, firstly by supporting U.S. commerce, and secondly by providing sealift capacity for use in wars or in emergencies such as the recent Katrina disaster. This is further delineated by National Security Directive 28, issued by the White House in 1989, which still governs sealift policy. It states that:

Sealift is essential both to executing this country's forward defense strategy and to maintaining a wartime economy. The United States' national sealift objective is to ensure that sufficient military and civil maritime resources will be available to meet defense deployment, and essential economic requirements in support of our national security strategy. . . . In coordination with the Department of Defense, the Department of Transportation will determine the capacity of our merchant marine industries to support essential industrial activity during wartime.[9]

The United States also maintains a merchant marine for purposes of national independence and pride. As then-Senator Barack Obama stated in 2008:

A strong U.S.-flag commercial fleet needs our nation's cargo preference laws. Whether it is carrying needed goods to those overseas in distress or moving government-generated cargo, American mariners aboard American ships make sure the job is done. People around the world look to the U.S. flag as a symbol of hope and determination. Ships flying Old Glory with American crews are important icons of our resolve.[10]

The Government Accountability Office (formerly the General Accounting Office) and economists Nathan Associates and Promar International have conducted studies which determined that Cargo Preference is essential to the maintenance of the U.S. Merchant Marine.[11] In 2008, preference cargoes accounted for 49.6 percent of all cargo carried by the U.S.-flag merchant fleet.[12]

The U.S. fleet depends upon Cargo Preference because U.S. laws, regulations, and taxes place it at a competitive disadvantage relative to so-called "Open Register" or "Flag of Convenience" ("FOC") fleets, from nations such as Panama, the Bahamas, and Liberia, which impose minimal tax and regulatory burdens. Additionally, many of the fleets competing on the high seas enjoy high levels of State participation and subsidy, such as the China Ocean Shipping Company, now one of the world's largest liner shipping companies.

Cargo Preference and Food Aid[edit]

As a civilian agency government-impelled cargo, U.S. humanitarian assistance shipped overseas as food aid is subject to the requirements of Cargo Preference. Under provisions of the Food Security Act of 1985,[13] certain agricultural cargoes and programs were exempted from cargo preference, and the U.S. flag carriage requirement was increased by 25% for others, meaning that 75% of such cargoes should be carried in U.S. bottoms.[14]

The Food Security Act of 1985 also added the requirement that MARAD reimburse the shipper agencies, the United States Agency for International Development and the United States Department of Agriculture, for the extra cost, if any, of using U.S.-flag vessels (Incremental Ocean Freight Differential) and also for any amount by which the cost of ocean transportation exceeds more than 20% of the cost of (a) food purchases and (b) ocean transportation costs for these programs (Excess Ocean Freight Differential).[15] However, the Bipartisan Budget Act of 2013 eliminates the provision in existing law which requires MARAD to reimburse the Department of Agriculture (USDA) and the U.S. Agency for International Development (USAID) for “excess freight” costs associated with having to transport at least half of food aid on US-flagged ships.[16] The additional costs that would have to be paid by USAID and USDA for their programs would result in fewer people helped by these food aid programs. According to MARAD and US Agency for International Development officials, the Excess Ocean Freight Differential is usually the larger component. Under these programs, as with other Cargo Preference shipments, U.S.-flag carriers are limited to what the U.S. Maritime Administration determines to be "fair and reasonable" rates.[17]

Maritime interests, including USA Maritime strongly support cargo preference, but shippers and other longtime opponents of Cargo Preference have argued that it slows transit times for aid cargo, increases the costs of shipping U.S. commodities, and potentially reduces the volume of food aid available. A GAO report found that shipments of food aid on U.S.-flag vessels did little to meet the law’s objective of helping to maintain a U.S. merchant marine and those cargo preference requirements adversely affected operations of the food aid programs, chiefly by raising the cost of ocean transportation and reducing the volume of commodities that can be shipped.[18] An analysis in 2010 of the effects of cargo preference requirements on food aid programs found that they did not succeed in meeting the law’s objectives of maintaining a U.S. merchant marine and that eliminating cargo preference could enable an increase in food aid commodities provided.[19]

Food aid program stakeholders, including maritime and agricultural interests, advocate in favor of food aid every year during the U.S. budget process, helping keep the United States Food for Peace program the leading source of humanitarian aid globally. Andrew Natsios, former USAID Administrator, cautioned that when the Europeans uncoupled food aid from their constituents, the overall budget line decreased significantly: "Relying on cash food aid will not work," he said. "Look at the numbers from Europe: After the Commission and member states began moving to cash, their contributions fell by 40 percent." [20] However, Natsios testified before Congress that "in the last ten years, the US government, through the Food for Peace program, has spent more on transporting, storing, and distributing the food to other regions of the world than on the food itself." He argued that reforms need to be implemented and said "no other industry benefits more from current US food aid policy than the U.S. flagged shipping industry, which is probably why they are the strongest opponents to reform."[21]

References[edit]

  1. ^ Subcomm. On Coast Guard and Maritime Transportation Staff, Memo to Members of the Subcomm. On Coast Guard and Maritime Transp., U.S. House of Representatives, Re Hearing on the "Status of U.S.-flagged Vessels in U.S.-Foreign Trade" at 4-5 (July 19, 2010).
  2. ^ 46 U.S.C. § 55305
  3. ^ 10 U.S.C. § 2631
  4. ^ 46 U.S.C. § 55305
  5. ^ America Cargo Transport Corp. v. United States, No. CO5-393JLR (W.D. Wash, Nov. 5, 2007); Farrell Lines Inc. v. Dep't of Agriculture, Civ. No. 1:98CV02046 (D.D.C. Sept. 17, 1998).
  6. ^ Id.
  7. ^ 46 C.F.R. §§ 381.5 (agencies shall ship U.S.-flag except when "U.S.-flag vessels are not available at fair and reasonable rates for U.S.-flag commercial vessels" or "there is a substantially valid reason for fixing foreign-flag vessels first.") & 382.3 (limitation of U.S.-flag carriers to fair and reasonable rates determined by the U.S. Maritime Administration).
  8. ^ S. Rep. No. 91-1080, 1970 U.S.C.C.A.N. 4188 (quoting § 101 of the Merchant Marine Act of 1936).
  9. ^ National Security Directive 28 (Oct. 5, 1989).
  10. ^ Letter from Sen. Barack Obama to Presidents of Maritime Unions, available at http://www.maritimetrades.org/article.php?sid=18&pid=992.
  11. ^ Nathan Associates, "Economic Analysis of Federal Support for the Private Merchant Marine" (1995); Promar International, Impacts on the U.S. Economy of Shipping International Food Aid at i-ii (June 2010); General Accounting Office, "Maritime Industry: Cargo Preference Laws—Estimated Costs and Effects," GAO/RCED-95-34 (Nov. 1994); General Accounting Office, Report to the Chairman, Committee on Merchant Marine and Fisheries, House of Representatives, "Economic Effects of Cargo Preference Laws" at Headnote (Jan. 31, 1984).
  12. ^ Subcomm. On Coast Guard and Maritime Transportation Staff, Memo to Members of the Subcomm. On Coast Guard and Maritime Transp., U.S. House of Representatives, Re Hearing on the "Status of U.S.-flagged Vessels in U.S.-Foreign Trade" at 4-5 (July 19, 2010).
  13. ^ Pub. Lo. No. 99-198, 99 Stat. 1490, Dec. 23, 1985
  14. ^ 46 U.S.C. § 55313
  15. ^ 46 U.S.C. § 55316.
  16. ^ http://budget.house.gov/uploadedfiles/murray-ryan_leg_text.pdf
  17. ^ 46 C.F.R. §§ 381.5 (agencies shall ship U.S. flag except when "U.S.-flag vessels are not available at fair and reasonable rates for U.S.-flag commercial vessels" or "there is a substantially valid reason for fixing foreign-flag vessels first.") & 382.3 (limitation of U.S.-flag carriers to fair and reasonable rates determined by the U.S. Maritime Administration).
  18. ^ GAO, Cargo Preference Requirements: Objectives Not Met When Applied to Food Aid Programs, September 29,1994, available at http://archive.gao.gov/t2pbat2/152624.pdf
  19. ^ Elizabeth R. Bageant, Christopher B. Barrett, and Erin Lentz, “Food Aid and Agricultural Cargo Preference,” Policy Brief, Cornell University, Charles H. Dyson School of Applied Economics and Management, November 2010, viewed at http://dyson.cornell.edu/faculty_sites/cbb2/Papers/ACP_-_policy_brief_Nov_2010_Final.pdf
  20. ^ Will Lynch, InterAction: American Council for Voluntary International Action, "Making Food Aid Work" (May 22, 2006). As Lynch observed, "With the new millennium, the EU phased out in-kind food and soon after, its food program funding program plummeted. School feeding and agricultural programs were cut. Cash for local purchase of food was substituted for imported food aid, but that program was largely used to support emergency feeding programs." Id. See also James Lutzweiler, World Vision Food Security and Food Programming Advisor, "Much ado about food aid: Misdirection in the midst of plenty" (Jan. 19 2006) (delivered at Overseas Development Institute Conference "Cash and Emergency Response") ("The EU has already demonstrated a cut in aid to any type of food aid program. Since shifting to a cash-based concept of food security, the EU's contribution to global food aid has decreased by 40 percent. Is there a correlation between cash-based aid and a reduction in food aid? The volume of food aid worldwide has plummeted from 15 million metric tons in 1999 to 7.5 million metric tons last year, and the portion of aid dedicated to agricultural development has dropped sharply from 12 percent in the early 1980s to roughly 4 percent today. Ironically, this has happened despite a dramatic increase in Overseas Development Assistance to nearly $80 billion annually.").
  21. ^ Testimony of Andrew S. Natsios, Professor George H.W. Bush School of Government at Texas A and M University, House Committee on Foreign Affairs, Hearing on June 12, 2013 at 10:00 am. “Modernizing U.S. International Food Aid Programs: Reaching More for Less” viewed at http://docs.house.gov/meetings/FA/FA00/20130612/100967/HHRG-113-FA00-Wstate-NatsiosA-20130612.pdf

Further reading[edit]

  • Murray A. Bloom, The Cargo Preference Act of 1954 and Related Legislation, 39 Journal of Maritime Law & Comm. No. 3 at 289 (July 2008).