The Maritime Security Program (MSP) in an International Commercial Context: A Discussion

The Maritime Security Program (MSP) in an International Commercial Context: A Discussion

98-864 E
CRS Report for Congress
Received through the CRS Web
The Maritime Security Program (MSP) in an
International Commercial Context: A Discussion
Updated October 28, 1998
Stephen J Thompson
Specialist in Transportation
Economics Division
Congressional Research Service ˜ The Library of Congress

ABSTRACT
The Maritime Security Program (MSP) is a national defense sealift program that provides
commercial assistance to ocean ship operators, primarily containership operators. A rationale
for the commercial assistance is to assure a continuing presence of U.S.-flag ships in
international trade. Another rationale is to assure, in the event of a national defense need, the
availability of an adequate number of trained and experienced ship personnel who are U.S.
citizens to operate these and other ships. This report discusses the MSP in an international
commercial context. Maritime policies of other nations may adversely affect the U.S.-flag
containership industry. These policies could be addressed in international negotiations. This
report will be updated as warranted.

The Maritime Security Program (MSP) in an International
Commercial Context: A Discussion
Summary
The Maritime Security Program (MSP) is a national defense sealift program that
provides commercial assistance to ocean ship operators, primarily containership
operators. The MSP makes ships and ship crews, and the intermodal transportation
and communication network of the ship operator, available for sealift to the Depart-
ment of Defense upon request. These ship services, if required, would be compen-
sated at commercial rates. A substantial portion of ship crews for reserve ships for
military sealift are drawn from the trained and experienced ship crews associated with
U.S.-flag ships, many of which are in the MSP. The MSP is funded from the civilian
side of the federal budget, rather than from the military side. The MSP is
administered by the Maritime Administration (MARAD) in the U.S. Department of
Transportation, in consultation with the U.S. Department of Defense (DoD). The
MSP program was established in 1996 to replace the Operating Differential Subsidy
(ODS) program that was established in 1936.
The MSP provides $2.1 million per ship per year through FY2005. The MSP
is authorized at $100 million each year through FY2005, enough to fund 47 ships per
year through the life of the program. The program is subject to annual appropriations.
The Clinton Administration requested $97.650 million for the MSP for FY1999, and
Congress enacted that amount of funding. Forty-seven ships are in the MSP; 39 of
them are containerships. There are 57 privately owned, U.S.-flag containerships in
U.S. foreign trade, none in foreign-to-foreign trade, and 23 in domestic trade. All 47
ships qualified on the basis of military usefulness. Ten companies have ships in the
MSP.
U.S.-flag containerships transport 8.6% of U.S. ocean-borne commercial foreign
trade, measured in tons, and 9.9% measured by value. The U.S.-operated
containership fleet is significantly larger when foreign-flag ships controlled by U.S.
citizens are included. Since 1970, many nations have been increasing the size of their
merchant marine as a means of projecting visibility and earning hard currency.
One key rationale for the commercial assistance funding in the MSP is to assure
a continuing presence of U.S.-flag ships in international trade. The key rationale for
the MSP is to assure, in the event of a national defense need, the availability of an
adequate number of ships, and trained and experienced ship personnel who are U.S.
citizens to operate these and other ships. Some suggest that alternative approaches
to these goals would be preferable.
This report discusses the MSP in an international commercial context. Maritime
policies of other nations that may adversely affect the U.S.-flag containership industry
could be addressed in international negotiations. In such negotiations, the MSP may
be an issue. A U.S. response to such objections in the past has been that: (1) the
MSP is a small program having a largely military objective; (2) the United States
already has some of the most market-based national maritime policies among maritime
countries; and (3) the United States is ready to negotiate more market-based maritime
policies as soon as "a critical mass of countries" is willing to do the same.

Contents
The Maritime Security Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Program overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Commercial Conditions in the U.S. Containership Industry . . . . . . . . . . . . . . . . 4
Foreign Maritime Policies and the U.S.-Flag Containership Industry . . . . . . . . . 6
Possible Future International Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Maritime Security Program (MSP) in an
International Commercial Context: A Discussion
The Maritime Security Program (MSP) is a national defense sealift program that
provides commercial assistance to ocean ship operators, primarily containership

CRS-2
operators. A rationale for the commercial assistance is to assure a continuin
1
g
presence of U.S.-flag ships in international trade. Another rationale is to assure, in
the event of a national defense need, the availability of an adequate number of trained
and experienced ship personnel who are U.S. citizens to operate these and other ships.
This report discusses the MSP in an international commercial context. Maritime
policies of other nations may adversely affect the U.S.-flag containership industry.
These policies could be addressed in international negotiations.
The Maritime Security Program
Program Overview
The MSP makes ships and ship crews, and the intermodal transportation and
communication network of the ship operator, available for sealift to the Department
of Defense upon request. These ship services, if required, would be compensated at
commercial rates. A substantial portion of ship crews for reserve ships for military
sealift are drawn from the trained and experienced ship crews associated with U.S.-
flag ships, many of which are in the MSP. The MSP is funded from the civilian side
of the federal budget, rather than from the military side. The MSP is administered by
the Maritime Administration (MARAD) in the U.S. Department of Transportation,
in consultation with the U.S. Department of Defense (DoD).
The MSP program was established in 1996 to repl
2
ace the Operating Differential
Subsidy (ODS) program that was established in 1936. The ODS had the sam
3
e
purpose and form as the MSP, with 2 notable exceptions. First, the ODS required
ships in the program to serve specified traffic lanes at specified levels of service. The
ODS requirement to serve specified traffic lanes at specified levels of service reduced
the operating flexibility of ship operators to respond to changing market conditions.
The MSP does not require that ships serve specified traffic lanes or provide specified
levels of service. Second, the ODS reimbursed ship operators for their higher crew,
insurance, maintenance and repair costs.
4 ODS payments to ship operators averaged
$3.9 million per ship per year, compared to the MSP which pays a fixed amount of
$2.1 million per ship per year that is not indexed to keep up with inflation and that is
intended to compensate ship operators principally for the higher cost of employing
U.S.-citizen crews.5
Arlene E. Wilson and Jeanne J. Grimmett contributed to this report.
1
The Maritime Security Act of 1996, P.L. 104-239, October 8, 1996, 110 Stat. 3118.
2
June
3
29, 1936, ch. 858, 49 Stat. 1985. The Operating Differential Subsidy program is Title
VI, beginning at 49 Stat. 2001.
U.S.
4
Department of Transportation, Maritime Administration, A Report to Congress on U.S.
Maritime Policy, May 1998, p. 10.
5U.S. Department of Transportation, Maritime Administration, Report to the Chairman,
Senate Committee on Commerce, Science, and Transportation on the Issue of Introducing
(continued...)

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A rationale for terminating the ODS and replacing it with the MSP was to
improve the operating flexibility and financial performance of ship operators, while
reducing the cost of the program to federal taxpayers. Only a few ships remain in the
ODS, and the year 2002 is the expiration date of the last contracts. Funding for ODS
payments to these ships is part of the omnibus appropriation legislation for FY1999
that Congress enacted during the week of October 19, 1998.
The MSP authorized $2.3 million per ship for FY1996, and it authorizes $2.1
6
million per ship per year for FY1997 through FY2005.7 The MSP is authorized at
$100 million each year through FY2005,8 enough to fund 47 ships per year through
the life of the program. The Clinton Administration requested $97.650 million for the
MSP for FY1999, and both the House and Senate passed bills to appropriate that
amount of funding.
Funding is subject to annual appropriations. The contracts with ship operators
are for one year and they renew automatically each year through the end of FY2005
provided adequate funding is available. The MSP allows ship operators to cancel
their contract without penalty.
Forty-seven ships9 are in the MSP; 39 of them are containerships. There are
10
57 privately owned, U.S.-flag containerships in U.S. foreign trade, none in foreign-to-
foreign trade, and 23 in domestic trade. Of the 23 privately owned, U.S.-fla
11
g
containerships in U.S. domestic trade, 22 are in non-contiguous U.S. trade, and 1 is
in U.S. coastal trade. Commercial conditions in the industry are discussed in further
(...continued)
5
Competitive Bidding to the Maritime Security Program (MSP), P.L. 104-239, June 1, 1997,
p. 2. As the title of this report indicates, the report discusses the issue of introducing
competitive bidding for MSP contracts. Another report on this topic is U.S. General
Accounting Office, Maritime Security Fleet; Factors to Consider Before Deciding to Select
Participants Competitively, September 1997, GAO Report Number GAO/NSIAD-97-246.
FY1996
6
funding under the MSP was moot because the MSP legislation was enacted after the
close of FY1996.
Section 2 of P.L. 104-239, at 110 Stat. 3120.
7
Section 2 of P.L. 104-239, at 110 Stat. 3126.
8
In
9
order to qualify, each selected ship must be registered in the United States (i.e., it must be
a U.S.-flag ship) within a year after being accepted. The ship must be kept in active
commercial service during the entire contract period.
10Five of the 8 non-containerships in the MSP are LASH (i.e., barge carrying) ships. The
other 3 non-containerships are roll-on roll-off ships (sometimes referred to as ro-ro ships).
Ro-ro ships are meant to carry wheeled vehicles and equipment that is loaded on the ship by
driving over a plank from the port to the ship. Source: U.S. Department of Transportation,
Maritime Administration, MARAD 97, p. 1.
U.S.
11
Department of Transportation, Maritime Administration, U.S. Merchant Marine Data
Sheet; Status as of July 1, 1998, p. 3.

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detail below. All 47 ships qualified on the basis of military usefulness. Te
12
n
companies have ships in the MSP. Twenty-one companies submitted applications
13
to participate in the program; they offered 94 ships for the program.14
Participation in the MSP requires committing 100% of the capacity of a ship to
participate in the Voluntary Intermodal Sealift Agreement (VISA). VISA provides
sealift support to the Department of Defense upon request, compensated at commer-
cial rates. MSP vessels provide approximately 137,000 TEUs (twenty-foot equivalent
units) of ship capacity to VISA; non-MSP ships that participate in the VIS
15
A
program provide an additional 28,000 TEUs.16
The MSP authorizing legislation permits the Secretary of Transportation
(typically acting through MARAD) to include ships in the MSP that he determines are
necessary to maintain a U.S. presence in international commercial shipping.17 The
rationales for this commercial assistance in the MSP are: (1) to assure a continuing
presence of U.S.-flag ships in international trade; and (2) to assure an adequate
number of trained and experienced ship crews who are U.S. citizens for use in
crewing these and other ships at the request of the Department of Defense,
compensated at commercial rates.
MARAD goals for the MSP over the next 10 years are to:18
! foster and maintain a United States merchant marine capable of meeting
economic and national security requirements;
! improve the vitality and competitiveness of the United States foreign-trade
liner fleet and the seafarers who serve on board the ships;
! reverse the decrease in the number of ships in the U.S.-flag fleet;
! stabilize the number of mariners available to crew U.S. merchant vessels;
12Memorandum from United States Transportation Command to the Director, Joint Staff,
Under Secretary of Defense (Acquisition and Technology), dated November 21, 1996. It
states “We are confident the ships selected [for the MSP] are highly militarily useful....”
MARAD 97
13
(cited in footnote 10) p. 1.
Ibid., p. 2.
14
TEU
15
refers to the size of a container that can hold cargo ready to be transported. TEUs are
a standardized measure (i.e., length in feet) of the size of containers. These containers
typically are intermodal units because they can be stowed on an aircraft or attached to a truck
chasis with wheels and then pulled by a truck over the highway.
16U.S. Department of Transportation, Maritime Administration, Maritime Administration,
Draft Strategic Plan, 1998-2002, December 1997, p. 21.
P.L. 104-239, Section 2, 110 Stat. 3119.
17
A Report to Congress on U.S. Maritime Policy
18
(cited in footnote 4) pp. 10-11.

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! achieve adequate manning of merchant vessels for national security needs
during a mobilization;
! ensure that sufficient civil maritime resources will be available to meet defense
deployment and essential economic requirements in support of our national
security strategy; and,
! ensure that the United States maintains the capability to respond unilaterally
to security threats in geographic areas not covered by alliance commitments,
and otherwise meets sealift requirements in the event of crisis or war.
Commercial Conditions in the U.S. Containership
Industry
U.S.-flag containerships transport 8.6% of U.S. ocean-borne commercial foreign
trade, measured in tons, and 9.9% measured by value. During the 1987 to 199
19
7
period, a high point was reached in 1989, when U.S.-flag containerships transported
19.1% of U.S. ocean-borne foreign trade measured in tons and 23.3% measured by
value. These percentages declined each year after 1989. The U.S.-operated
containership fleet is significantly larger when foreign-flag ships controlled by U.S.
citizens are included. For example, Sea-Land, a U.S.-based carrier, operated the
world’s largest fleet of containerships (196,000 TEUs) in 1996. Sea-Land’s position
(with 212,000 TEUs) dropped to number 2 in 1997. In first place in 1997 was Sea-
Land’s business partner, Maersk (with 244,000 TEUs). Sea-Land’s position would
have been number 3 in 1997 if the operations of Hanjin and DSR-Senator were
combined (at 222,000 TEUs). Hanjin bought a majority stake in DSR-Senato
20
r
during 1997.
The number of ships in the U.S.-flag, privately owned fleet of large oceangoing
vessels has been declining in recent decades. In 1970, there were more than 900
general cargo, dry bulk carriers and tankers in the U.S.-flag fleet, totaling over 15
million deadweight tons (DWT). Today, there are 209 U.S.-flag, privately owned
21
tanker, dry bulk and containerships, totaling over 11 million DWT. In addition, there
are 26 U.S.-flag, privately owned roll-on roll-off ships with over 500 thousand DWT,
and 24 ships of other types with
22
nearly 650 thousand DWT, for a combined total of
259 U.S.-flag, privately owned, large oceangoing ships with a combined carrying
capacity of over 12 million DWT.23
19These numbers are for 1996, the most current year for which numbers are available.
Source: MARAD 97 (cited in footnote 10) p. 52.
20American Shipper, September 1998, p. 78.
A Report to Congress on U.S. Maritime Policy
21
(cited in footnote 4) p. ii.
These
22
24 ships are comprised of breakbulk ships, partial containerships, refrigerated cargo
ships, barge carriers and specialized cargo ships.
23U.S. Merchant Marine Data Sheet; Status as of July 1, 1998 (cited in footnote 11) p. 2.

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The productivity of the privately owned, U.S.-flag fleet has improved sub-
stantially since 1970. The U.S.-flag liner fleet engaged in foreign trade in 1995
carried over 42% more cargo than in 1970. It did so in far
24
fewer, but larger, vessels.
The average capacity of U.S.-flag liner vessels has grown from 12,000 DWT in 1970
to nearly 28,000 DWT today. Today, “30 ships can car
25
ry in a year what it took well
over 100 ships to carry 30 years ago.” Further growth in ship productivity i
26
s
expected. In 1995, 35% of containerships calling at U.S. ports exceeded 4,000 TEUs,
and by the year 2010, 60% are expected to exceed this size. “Ships, particularl
27
y
containerships serving major liner trades, are expected to increase in size, moving
toward a capacity of 10,000 TEUs.”28
Only the United Kingdom, Norway, Japan, and Liberia had larger fleets than the
United States in 1970. The United States and these other 4 nations combined had
more than half the capacity of the world merchant fleet of 300 million DWT. The
total worldwide containership capacity at the end of 1997 was 4 million TEUs. Each
of the 5 largest carriers had about 5% of the world market. No single carrie
29
r
controlled more than 8% of the world market. Another 30 companies each held about
1% of the world market. “Even today, after the recent round of mergers, the shipping
industry can still be considered highly fragmented.”30 Between now and the year
2002, “American carriers will continue to own and/or operate both U.S.-and foreign-
flag ships in international trade.”31
A Report to Congress on U.S. Maritime Policy
24
(cited in footnote 4) p. ii.
Ibid.
25
26Maritime Administration, Draft Strategic Plan, 1998-2002 (cited in footnote 16) p. 1.
A Report to Congress on U.S. Maritime Policy
27
(cited in footnote 4) p. iii.
28Maritime Administration, Draft Strategic Plan, 1998-2002 (cited in footnote 16) p. 12.
29American Shipper, September 1998, p. 78.
Ibid.
30
31Maritime Administration, Draft Strategic Plan, 1998-2002 (cited in footnote 16) p. 12.

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Foreign Maritime Policies and the U.S.-Flag
Containership Industry
Since 1970, many nations have been increasing the size of their merchant marine
as a means of projecting visibility and earning hard currency, while the percent o
32
f
U.S. ocean-bourne international trade carried by the U.S.-flag fleet has been declining.
Principal reasons for the decline may include the following:33
! The level of protection for seafarer health, welfare and safety may be lower
on non-U.S. flag ships.
! The regulatory framework in several countries, including key U.S. trading
partners, may restrict free market access, or otherwise permit discriminatory
practices against U.S.-flag vessels in international trade, thus enabling foreign
vessels to operate at lower cost, or with substantial preferential treatment
compared to U.S.-flag carriers.
! Foreign-flag ship operators often do not pay corporate income taxes.
! Foreign-flag ship crews often pay no personal income tax.
! The only U.S. corporate or income taxes paid by foreign-flag owners are
taxes paid on their U.S. shore-based facilities and personnel, which in many
cases are nonexistent. By comparison, vessels operating under the U.S.-flag
are subject to all the taxes and regulatory laws applicable in the United States.
Possible Future International Negotiations
World Trade Organization (WTO) provisions do not cover transportation
services, although inclusion of transportation services under the WTO has been a goal
of international negotiations in which the United States has participated for several
years. For example, the United States and other countries participated unsuccessfully
in negotiations having the goal of including maritime transportation services under the
General Agreement on Trade in Services (GATS) during the Uruguay Round.
Subsequently, a Negotiating Group on Maritime Transport Services (NGMTS) was
created to carry out negotiations in the maritime transportation services sector within
the GATS framework. The negotiations were to be comprehensive in scope, aiming
at commitments in international shipping, auxiliary services (such as ship repairs and
ship crews), and access to port facilities, leading to the elimination of restrictions by
a fixed date. Domestic ocean shipping was excluded from the topics subject t
34
o
negotiation. The group was directed to conclude negotiations and make a final
A Report to Congress on U.S. Maritime Policy
32
(cited in footnote 4) p. ii.
Ibid.
33
Statement from the Office of the U.S. Trade Representative, February 1, 1996.
34

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report, including a date for implementation of the results of the negotiations, not later
than June 1996.35
Forty-two WTO members participated in the NGMTS, and another 15 members
were observers. In July 1995, the European Union (EU), Canada, Australia, New
Zealand, and Japan presented offers or resubmitted their Uruguay Round offers
36
.
In December 1995, 7 countries (Brazil, Chile, Colombia, the Ivory Coast, Korea,
Mexico, and Nigeria) announced plans to present offers. Other countries included
maritime commitments in their GATS schedules. The United States did not make an
offer. The U.S. position was that it would consider submitting an offer only if offers
from “a critical mass of countries” would result in substantially liberalized trade in
maritime services.37
Participating countries also produced a draft model schedule for achieving
commitments in various maritime sub-sectors that would address standard GATS
objectives such as market access and national treatment. The U.S. view was that the
draft model was deficient because it did not provide an opportunity for participants
to schedule market access and national treatment commitments in multi-modal trans-
portation services. Many participating countries reacted positively to a U.S. proposal
to improve the draft model schedule, but a consensus (the level of agreement
consistent with GATS negotiations) was not achieved.38
During these negotiations, the U.S. took the position that “the United States
already maintains a high level of access in its maritime sector — as indicated by the
96% of our foreign trade that is carried in foreign-flag vessels — and needs to main-
tain its support programs, small as they are, to help assure the availability of national
flag tonnage for sealift purposes.”39
WTO member governments agreed on June 28, 1996, to suspend negotiations
on maritime transport services, and to resume them at the time of the next round of
comprehensive negotiations on trade in services that was mandated to begin in the
year 2000. “The decision to suspend the negotiations was strongly supported b
40
y
MARAD and other members of the U.S. delegation.” Participating government
41
s
agreed that commitments could be modified up to the end of July 1996. They further
agreed that after that date, governments would not apply any measures affecting trade
in maritime transportation services in such a manner as to improve their negotiating
position, except in response to measures applied by other countries. Governments are
Ibid.
35
An
36
offer consists of the concessions that a country is willing to make in the particular area
of negotiations.
Statement from the Office of the U.S. Trade Representative, February 1, 1996.
37
Ibid.
38
A Report to Congress on U.S. Maritime Policy
39
(cited in footnote 4) pp. 29.
Press Release 51, July 1, 1996, from the Office of the U.S. Trade Representative.
40
A Report to Congress on U.S. Maritime Policy
41
(cited in footnote 4) pp. 29.

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free to apply measures that maintain or improve the liberalization of maritime
transportation services.42
A strategic goal of MARAD for the period 1998-2002, is to:43
negotiate agreements, understandings and arrangements to reduce barriers that
restrict access to foreign transportation markets, add to costs, limit revenues, and
impede efficient operations of the U.S. maritime industry in international trade;
and negotiate reciprocal foreign market access treatment for U.S. carriers in
international trade, including landside access to port facilities, the ability to
establish connecting truck and rail services, and access to foreign trade cargoes.
MARAD has had, and continues to have, bilateral negotiations with various
nations on various issues, most notably perhaps in a current context are on-going
negotiations regarding China’s prohibition on virtually all foreign transportation
company operations in China. MARAD’s strategic goal regarding negotiations during
the period 1998-2002 affirms its commitment to such negotiations. Additionally, as
discussed above, multinational negotiations, probably under the auspices of the World
Trade Organization, might eventually result in changing some of the maritime policies
of other nations that may adversely affect the U.S.-flag containership industry. Such
trade liberalization would promote the maritime policy that Congress enunciated in
Section 14 of the Maritime Security Act.44
In such negotiations, the MSP may be raised as an issue by foreign governments.
A U.S. response to such objections in the past has been that: (1) the MSP is a small
program having a largely military objective; (2) the United States already has some
of the most market-based national maritime policies among maritime countries; and
(3) the United States is ready to negotiate more market-based maritime policies as
soon as "a critical mass of countries" is willing to do the same.
Press Release 51, July 1, 1996, from the Office of the U.S. Trade Representative.
42
Maritime
43
Administration,Draft Strategic Plan, 1998-2002 (cited in footnote 16) pp. 27-28.
P.L. 104-239 (cited in footnote 2), at 110 Stat. 3137.
44