U.S. Cargo Preference in the Crosshairs

The Government Accounting Office (GAO) issued a June 2011 report about the high cost of the U.S. Food Aid program due to the requirement that preference be given to U.S.-flag carriers. The report said that U.S. taxpayers are paying an estimated $140 million each year in preferential transportation costs.

In fiscal 2010, the U.S. spent $2.3 billion to provide about 2.5 million metric tons of nonemergency food aid to needy countries. The GAO report indicated that during 2010 more than $300 million was used to procure and ship 542,000 metric tons of food assistance that was eventually monetized.

Monetization is controversial, but advocates call it a tool to meet development needs in developing countries. Critics say it’s a practice of converting cash to commodities and then back to cash, which is an inefficient use of resources that also impacts recipient countries. In 1985, the Merchant Marine Act of 1936 was amended to require that 75 percent of certain food aid must be transported by privately owned, U.S.-flagged ships.

Ultimately, the GAO report recommended amending the Cargo Preference Act of 1954 to eliminate a three-year waiting period for vessels acquiring U.S. flag registry before they are eligible to carry food aid. Why? Well, due to the declining fleet of U.S. ships, USAID and USDA must compete with the Department of Defense and other exporters for limited space, which has increased the shipping cost by $25 per ton over foreign operators. And the three-year waiting period was simply meant to help U.S. shipyards, who have only built two new flagged ships that are transporting food aid. And the three-year waiting period applies only to food aid and not to defense agencies and the U.S. Export-Import Bank.

“You see, I’ve got this thing and it’s golden…”

The U.S. government hands out over $170 billion annually for aid to U.S. corporations. Exporters and international investors get about $32 billion annually, and the Market Access Program provides federal funds to corporations for foreign advertising costs. Additionally, U.S. exporters get $1.3 billion in tax breaks on revenues earned on foreign revenues.

The agricultural industry gets about $790 million in subsidies for export enhancement programs, and another $300 million is provided to foreign purchasers of U.S. agricultural products by paying bonuses to the exporters to decrease the foreigners’ prices. Another $100 million in loan guarantees goes to foreign purchasers of U.S. agricultural commodities. Additionally, the industry gets another $90 million for overseas advertising costs.

U.S. arms manufacturers get about $10 billion annually in subsidies for foreign sales. And did you know the U.S. pays $14 million to South Pacific Island states so 45 U.S. tuna boats can fish there? The Export-Import Bank provides $100 billion in loan guarantees and another $742 million in subsidies to foreign purchasers of U.S. products. The U.S. International Trade Administration provides about $200 million to assist U.S. companies in their export efforts, and the Trade and Development Agency gives about $40 million in grants to U.S. companies for foreign economic development.

U.S. Government vs. Cargo Preference

The Ex-Im Bank is constraint by a $100 billion lending cap, with about $87 billion already on the books. The Obama Administration wants to increase Ex-Im lending from $20 billion to $32 billion annually, and there is a push to increase the $100 billion cap to $200 billion by 2015.

Meanwhile, there has been a push to exclude Ex-Im lending from cargo preference laws. Currently, the law only applies to all direct loans and guarantee transactions over $20 million or loans exceeding a repayment period over seven years. A major complaint by exporting companies operating with the assistance of Ex-Im loans is that they lose deals to foreigners because of the high cost of shipping under cargo preference provisions.

The fact is more than half of all global trade comes from G7 countries, and G7 members France, Italy and the U.S. all maintain cargo preference laws. The 2010 U.S. trade deficit was $497.8 billion, which is a 32.8% increase over the previous year. The U.S. has had persistent trade deficits for decades and the only way to decrease trade deficits is to reduce imports and increase exports. Moreover, it is disingenuous to put the loss of exporting deals and trade deficits on U.S. flag operators.

The fact is laissez-faire proponents like Senator John McCain, who has pushed for years to provide foreign companies uninhibited access to the U.S. economy, are responsible for creating trade deficits. American products simply cost more than products manufactured overseas. And foreign carriers are cheaper than U.S. flag operators because of health care benefits and tax advantages. The fact is, so what! Should the American standard of living be reduced in order to compete on world markets?

Meanwhile, in an argument to get rid of cargo preference laws, Cornell Professor Christopher B. Barrett states that in “seven major U.S. military operations—Vietnam, Grenada, Panama, the Persian Gulf, Bosnia, Afghanistan and Iraq—there have been no documented call-ups of civilian mariners. Meanwhile, the ships’ crews supported by cargo preference number only about 1,400, so the extra $140 million cost to U.S. taxpayers breaks down to about $100,000 per sailor.” It’s uninformed and ridiculous remarks like Barrett’s that mislead and misinform the general population and congressional neophytes.

The Obama Administration’s Step-Child – MARAD

On October 3 a number of maritime executives provided statements at a special meeting on cargo preference. MARAD Administrator Matsuda and his Chief Counsel, Denise Krepp, listened to industry executives asking the agency not to rewrite the laws but simply enforce them. The cargo preference department at MARAD has not had senior management oversight for quite some time now. Administrator Matsuda’s maritime experience has been limited to his current ‘on-the-job-training,’ and MARAD has ZERO bucks in the 2012 budget.

With a push to reduce budgets by the government, the potential rewriting of cargo preference does not bode well for the maritime sector. Congressman Elijah Cummings made sure the Department of Energy complied with cargo preference and they now state that on their Web site. The Obama Administration needs to ensure all agencies comply with the law.

The U.S. needs to reinvest in American manufacturing to create jobs, which will bring more balance to the trade deficit. And reinvest in the maritime sector, which will create jobs in the shipyards, on ships and bring more balance to the cost of cargo preference. A lot of subsidies are spent annually in making U.S. corporations competitive on world markets. Therefore, it is incumbent on the Obama Administration to leave cargo preference laws alone because in the scheme of government assistance, cargo preference costs very little and it creates jobs in an industry that gets ZERO subsidies.

Tony Munoz can be reached at [email protected]