U.S. CABOTAGE LAWS: PROTECTIVE OR DAMAGING?

A STRATEGY TO IMPROVE CRUISE VESSEL 
COMPETITIVENESS AND TRAFFIC TO U.S. PORTS[1]  

Kathleen Magee
Magee.Kathleen@miis.edu

Master’s Project
Commercial Diplomacy
Monterey Institute of International Studies  

Advisors:
Professor William Arrocha
Professor Geza Feketekuty
Professor Bill Monning

Contents  

Foreword
Definitions of key terms
Acronyms
Scenario 
EXECUTIVE SUMMARY 
Issue
I. Introduction
I.A. The Role of the Cruise Industry
I.A.2 Domestic Port Economic Impact

II. Background: Understanding Flagging And Cabotage
II.A. International Shipping Requirements
II.B. Background and History of U.S. Cabotage
II.B.1 The Passenger Services Act
II.B.2 The Jones Act
II.B.3 Background on Flag Restrictive Laws in General
II.C. Political Stakeholder Background
II.C.1 Overview of Stakeholders Involved
II.C.1.1 The Jones Act Reform Coalition
II.C1.2 The Maritime Cabotage Task Force
II.C1.3 AFL-CIO Maritime Trades Department
II.D Legal Background
II.D.1 Domestic Legal Background
II.D.1.1 The Maritime Security Program
II.D.1.2 The Maritime Security Program II (MSP II)
II.D.2.1 More Citizenship Issues
II.E. Economic Background
II.E.1 The Barriers Faced By the U.S. Flagged Cruise Ships
II.E.2 The Foreign Competitive Advantage In Operating Ships
II.E.3 The Comparative Costs in Shipbuilding
II.E.4 The Impact of the Cruise Industry on Jobs
II.F. Background: Various International Trade Organizations
II.F.1 The OECD
II.F.2 The World Trade Organization (WTO)

III.A Comprehensive Analysis
III.A. Policy Analysis
III.A.1 Are Cruise Ships Used for National Defense?
III.A.2 Should Congress continue to rely on Cabotage as a method to protect U.S. ships from competition and preserve for use ships in times of war?
III.A.3 Why Should Cabotage be changed?
III.A.4 What Are The Reasons Cited For Being Pro-Cabotage?
III.A.4.1 National Security
III.A.4.2 Wages, Ship Safety, And Environment
III.A.4.2.1 Safety and Flages of Convenience
III.A.4.3 Environmental Standards
III.A.4.4 Title XI Loan Guarantee
III.A.5 Who Wants Cabotage Reform/Repeal?
III.A.5.1 The International Stakeholders Who Want Cabotage Reform/Repeal
III.A.5.1.1 The WTO
III.B. Legal Analysis
III.B.1 Cabotage Laws
III.B.1.a The Passenger Vessel Services Act
III.B.1.a.1 A Demonstration Of Foreign Flagged Cruise Itineraries Created Under The PVSA
III.B.1.a.1.1 Scenario 1
III.B.1.a.1.2 Scenario 2
III.B.1.b The Jones Act
III.B.1.c The Puerto Rico Passenger Ship Act
III.B.2 The Corporate Income Tax
III.B.3 An Example Of A Proposed Bill To Reform Cabotage Laws
III.B.3.1 The United States Cruise Vessel Act S.127
III.B.4 Special Bill To Which Provided DOD Funding to American Classics to Operate in Hawaii  
III.C. Economic Analysis
III.C.1 An Example of Revenues Redirected due to Cabotage
III.C.2 The Comparative Costs of Ship Operating
III.C.3 Ship Crewing Costs
III.C.4 An Economic Analysis Of The Differential In Capital Costs Between The U.S. Build And Flagged Cruise Ship And A Foreign Flagged And Build Cruise Ship
III.C.5 Economic Impact Study Findings on Reforming The PVSA
III.D. Commercial Analysis
III.D.1 Are Shipbuilding and Crewing Costs Too high?
III.D.2 Is The Cruise Market Growing?
III.D.3 What is the Largest Market for Cruise Ships?
III.D.4 Where are Cruise ships located?
III.D.5 Who are the Largest Players?
III.D.6 The Duration of Cruises
III.D.7 Summary of Commercial Analysis
III.E. Political Analysis
III.E.1 Who are the proponents of Cabotage?
III.E.1.1Legislators Who Represent Shipbuilding States  
III.E.2 Legislators Who Might Support Cabotage Reform
III.E.3 The Committees Who Would Hear Bills on Cabotage Reform or Repeal
III.E.3.1 The Senate Committee On Commerce, Science, and Transportation
III.E.3.2 The House Committee On Transportation and Infrastructure

IV. Recommendations

V. Comprehensive Strategy
V.A. Domestic
V.A.1 The Coalition for Reform
V.A.2 Strategy for the Opposition
V.A.3 Financing The Campaign for Reform
V.A.4 Legislative
V.A.4.1.a Propose Bills
V.A.4.1.a.1 Draft Text
V.A.4.2 Committee Action
V.A.4.3 Vote
V.A.4.4 Presidential Action
V.A.4.5 Laws
V.B International Strategy
V.C Media Strategy to Reach Legislators
V.D Public Relations Strategy
V.D.1 Target Audience: Consumers
V.D.2 Target Audience: Business, Investors and Entrepreneurs
V.D.3 Target Audience: Labor
V.D.4 Other Audiences To Be Addressed

Appendix
Bibliography                                                                                                              

Foreword by Kathleen Magee:  

I chose the topic of cabotage because it affects my life personally and is so representative of such a broad array of constituents. My father works in shipping, and I remember sitting in on a very heated Jones Act debate with him when I was in high school.  The debate was held in a union hall in Tacoma involving Rob Quartel (who had run for a Senate seat and was at the time the founder and leader of the Jones Act Reform Coalition) versus the labor union.  

The (personally) difficult part of doing a project on U.S. cabotage laws, is that my father works for a Jones Act company, and is a supporter of the Jones Act.  In choosing to do the project, I had to form my own conclusions, and do research outside of what I had known personally.  What I found, is that the debate itself has many facets. In shipping circles, the debate takes on a deeper meaning.  Regardless of what side of the debate one finds oneself, the Act has roots to the beginnings of American history.  It contains elements of domestic economic policy, international trade policy, national security, local economic development and labor issues.   I personally found the discovery process is fascinating, and all I ask of readers is to think constructively, and to draw their own conclusions.  

Definitions  

Billet: A crew position on a ship. Generally speaking each billet supports the employment of two sailors, and each billet is matched by a room on the ship. Examples of billets are: captain, chief mate, 2^nd mate, 3^rd mate, etc.  

Cabotage. In shipping, the transport of goods or persons between ports within a single country. The term is from the French verb “caboter,” to sail between the capes.  

Cruise ship. A ship formerly associated with passenger transportation now almost exclusively used for entertainment.  

Dry dock: A basin for receiving a vessel for repairs, capable of being pumped dry (to repair vessel and scrape marine growth from bottom).  

Freighter: A ship designed to carry all types of general cargo, or "dry cargo."  

Jones Act. A statute requiring that vessels carrying goods or passengers between US ports must be built and documented in the United States and be, owned and operated by US citizens. The original Act dates from 1898, and was, subsequently incorporated into the Merchant Marine Act of 1920. Similar cabotage laws date from the earlier days of the American Republic.  

Longshoreman: A laborer who works at loading and discharging cargo.  

Master: A term for the captain, a holdover from the days when the captain was literally, and legally, the "master" of the ship and crew.  

Registry: The ship's certificate determining the ownership and nationality of the vessel.  

Tanker: A ship designed to carry various types of liquid cargo, from oil and gasoline to molasses, water, and vegetable oil.  

The Passenger Vessel Act of 1886.The act states, “That foreign vessels found transporting passengers between places or ports in the United States, when such passengers have been taken on board in the United States, shall be liable to a fine of two hundred dollars for every passenger landed.”   

Acronyms  

AAPA: Acronym for the American Association of Port Authorities  

LASH. Acronym for Lighter Aboard Ship. Describes a shipping system whereby barges are loaded at a port of embarkation (usually in shallow water) and floated to a mother ship upon which the barges are lifted and stowed.  The mother ship then makes the ocean crossing at high speed and discharges the barges at the port of disembarkation.  

MARAD: Maritime Administration, a promotional agency of the U.S. Department of Transportation.  

MCTF: the Maritime Cabotage Task Force, Coalition of shipbuilders, and unions which seeks to protect maritime cabotage laws.  

MEBA: Marine Engineers Beneficial Association. This is the oldest American maritime union, it represents engineering officers on many U.S. ships.  

NITL: National Industrial Transportation League, a coalition of American Industrial and Agricultural shipping interests.  Generally speaking these interests purchase shipping services and do not own ships themselves.  

RORO. Acronym for Roll-On Roll-Off.   This describes a shipping system whereby highway trailers or vehicles are driven aboard a ship via ramps, instead of being lifted aboard via cranes. These are particularly useful ships for short run commercial ferry service or longer run military moves of tracked and wheeled vehicles.
  

SCENARIO

For the purposes of this project, I have positioned myself as a representative of the American Association of Port Authorities (AAPA).  The AAPA is an alliance representing the interests of 150 ports, 300 firms and individuals in the western hemisphere. The AAPA protects and advances the common interests of its diverse members through advocacy for government policies that expand opportunities for member ports.  The goal of the AAPA is to generate greater economic benefit for ports and port cities.  

From the perspective of the AAPA, I will present evidence as to why reform of U.S. cabotage should take place. My goal is to explore an approach to generate more cruise vessel traffic between U.S ports.  The proposed solution is the elimination or reform of cabotage laws, to enable more ships to travel between more U.S. ports, and bring more tourism dollars to coastal (port) towns. The increase in tourism will contribute to more jobs in and around these towns in the hospitality industry, and in other industries as well.
  

Memorandum

To: The President of the American Association of Port Authorities, Mr. Kurt Nagle
From: Kathleen Magee, deputy director port and maritime affairs
RE: The campaign to reform cabotage and increase cruise ship competitiveness
DATE: April 3, 2002  
 

EXECUTIVE SUMMARY

Issue

Ports in the United States have been losing cruise business.  The reason is two fold. First, few U.S. ports are visited by the most competitive cruise ships, the foreign flagged cruise ships, because they are restricted in their coastwise movement between U.S. ports.  Second, U.S. ports are losing cruise business because the most legally mobile ships, the U.S. flagged cruise ships are subjected to high cost requirements on shipbuilding and crewing.  These costly shipbuilding and crewing requirements render existing U.S. flagged cruise ships uncompetitive, and create a strong disincentive to flag U.S. .  It is the goal of the American Association of Port Authorities (AAPA) to reform U.S. cabotage laws as they apply to cruise ships in order to: increase the mobility of foreign flagged cruise ships; and while decreasing the costs of the U.S. cruise ships to make them more competitive. The desired result of this reform would be the increase in cruise vessel traffic to U.S. ports, and the increase in economic benefit and employment these visits bring. One port who would stand to benefit is Seattle , which due to cabotage restriction on foreign flagged movement has lost an enormous amount of business to Vancouver [3].  

However, in order to be successful with reform, it is necessary to take into account the interests of the opposition.  To date, the Pro-Cabotage movement has successfully defeated other attempts at cabotage.  The opposition is Pro-cabotage because they believe that cabotage will: maintain a ready reserve fleet of U.S. ships, sailors, and shipbuilding capability for times of war.  The Pro-cabotage coalition therefore consists of the shipbuilding unions, maritime unions, and defense interests.  For successful reform it is necessary to show that the U.S. ready reserve would be better preserved by lowering costs to compete with foreign competition, rather than increasing the restrictions which have accelerated the demise of the U.S. flag.
  

Background

The Pro-Cabotage movement believes that cabotage is necessary to protect the U.S. domestic shipping market and the jobs associated with the U.S. shipping industry from low cost foreign competition. The U.S. shipping industry is considered necessary for supplying a ready reserve of capable shipbuilders, U.S. ships, and capable captains and crew for use in times of war.  Cabotage defenders strongly believe that restrictions on ship coastwise movement; ownership; crewing; and shipbuilding, will help protect this ready reserve.  Cabotage restrictions are applied equally to cargo ships and passenger ships, without any distinction.

Unfortunately, American cabotage laws have not only eroded this reserve, but also hampered the economic growth associated with cruise ship traffic. This is because:

• Transportation and cruise services between U.S. ports are restricted to ships that are owned by Americans, built at relatively high cost U.S. shipyards and manned by higher cost U.S. citizen sailors and service workers.  These ships are subject to U.S. corporate taxation as if they are a domestic business, even though they may be involved in international trade.

• Foreign flagged and owned vessels are manned by international crews and are substantially less expensive to build and operate, however, these vessels may not call between two American ports without visiting a foreign port of call in between.  Often this creates such an onerous economic hardship and a logistical hardship due to a tight schedule, that non-U.S. flagged ships effectively cannot serve between two U.S. ports.

U.S. cabotage laws have provided such limited benefit to the U.S. cruise industry that despite a huge increase in the demand for cruise ship vacations by Americans; there are only a small handful of U.S. flag cruise ships; virtually no cruise ship building in the U.S.; and hardly any jobs available for U.S. sailors.  

The few remaining U.S. flagged cruise ships have survived by serving niche markets, which foreign flagged operators cannot enter. The following recommendations are made keeping in mind that with reform a balance must be struck to preserve those existing U.S. flag operators, while promoting economic benefit, while maintaining the necessary ready reserve.

Recommendation

The following steps must be taken for the maximum positive economic effect of reform:  

1.      The Jones Act must have its requirements modified to allow:

a.)    The freedom to build U.S. domestic cruise vessels anywhere.[4]

b.)    The Citizenship requirement for the crew should allow for: the option of filling all non-navigation and non-engineering positions and the preponderance of hotel, service, and entertainment positions to be by crew that are either U.S. citizens or non-U.S. citizens.[5]

2.      The IRS tax-code should be amended to provide a personal income tax holiday to crew members when the cruise ship is engaged in international trade. The coalition should firmly support the proposed Merchant Marine Cost Parity Act of 2001 (H.R. 3262), which would provide such a tax holiday to U.S. sailors.

3.      Ammend the IRS tax code to provide an investment tax credit for any cruise ship operator building a ship in an American shipyard. The tax credit should be set at a rate that would adjust the final capital cost to a level similar to that of a foreign built ship.[6]

4.      It is recommended that PVSA be reformed to allow foreign flagged ships to serve all coastal ports. 

5.      Service between ports on U.S. inland waterways, including rivers, sounds, bays and lakes which are currently protected by PVSA and served by U.S. flag cruise operators will continue to be reserved for U.S. flagged operators.  The idea is to eliminate the foreign touch port, while requiring that a cruise vessel after serving an inland port serve its next port through international waters.[7]

6.      National Parks such as Glacier Bay shall continue to be reserved for U.S. flagged operators only.

ISSUE

The Problem with Cabotage[8]  

Ports in the United States are losing cruise vessel traffic to foreign ports because of restrictive cabotage laws such as the Passenger Vessel Services Act (PVSA) and the Jones Act. The main reasons are: restricted mobility of foreign flagged cruise ships between ports, and the higher costs associated with U.S. flagged ships complying with Cabotage laws. Although many attempts have been made to reform cabotage, these attempts have met with forceful resistance despite the current state of the U.S. flagged cruise ship fleet, and the compelling economic evidence that would warrant reform. The consequences of not reforming to U.S. port city economies is:  

• The loss of the most legally mobile cruise ships in the U.S. ; that is the U.S. flagged cruise ship.  These ships can legally call between any port but cannot compete in foreign markets with foreign ships due to substantially higher costs.

• The continual “pass up” of some coastal ports due to a schedule crunch induced by the need for Foreign flagged ships to reach a foreign port within a reasonable amount of time (a week).  This disadvantages consumers, particularly those living remotely from foreign “touch” ports.

• Loss of competition as cruise companies either go bankrupt or merge with one another.

• The continuing loss of cruise traffic to foreign ports, versus more attractive U.S. ports specifically due to the current cabotage requirement.

• The continuing loss of revenues and jobs associated with cruise traffic; which includes jobs in the ports, the hospitality industry, tourism industry, transportation industry, retail, etc.

The U.S. flagged ships are handicapped with higher imposed costs, the foreign flagged ships are handicapped with the foreign port call restriction.  

The situation will continue indefinitely unless the United States relieves its restraints on Foreign cruise vessel mobility between U.S. ports and alters its restrictive policies toward U.S. ships which help to create an economic disadvantage. The opportunity cost to the American Economy is substantial and will be discussed in the course of this paper.
 

Why Is This Issue important?
Simple, the Cruise industry creates jobs throughout the economy.  

Based on a 1993 study done by Price Waterhouse Coopers[9], the cruise industry provided 450,166 full time jobs, the break down of the total across the industries can be seen below.  By 1996 this number had increased to 584,878.  
 

The Cruise Industry Creates Jobs Throughout the Economy[10]  

• Jobs in transportation and utilities include shipboard employees, and airline personnel
• The service industry includes hotel workers and restaurant employees
• Manufacturing includes petroleum refiners, ship repair workers, and print shop workers
• Wholesale and retail trades include distributors providing food and beverages, and gift shop employees
• Agriculture includes ranchers and farmers who supply the cruise industry with their produce[11]

The United States is benefiting greatly from the cruise industry. However, it is important to remember that the United States is not benefiting as much as it could be.  

In a study done by Price Waterhouse Coopers, the amount of employment generated by Cruise related spending has grown by the year 2002 to 54.8% since 1997.  (See Chart titled “Estimated Jobs created. . .” below). Total wages and taxes to the U.S. economy paid by the cruise industry will be $570,000,000 in the year 2002.  It is important to remember that these figures represent the Cruise industry serving the U.S. market as a whole, U.S. flagged and foreign. 
 

Estimated Spending in the U.S. Economy Associated With the North American Passenger Cruise Industry, 2002 (In billions of dollars)[12]  

Estimated Jobs created by the Total Spending in the North American Passenger Cruise Industry 

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