Cargo Preference Act
Encyclopedia
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
.
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." 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.
, 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.
The purpose of Cargo Preference is encapsulated in in the opening section of the Merchant Marine Act of 1936:
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:
The United States also maintains a merchant marine for purposes of national independence and pride. As then-Senator Barack Obama
stated in 2008:
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
. In 2008, preference cargoes accounted for 49.6 percent of all cargo carried by the U.S.-flag merchant fleet.
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.
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). 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.
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.
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."
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
.
Cargo Preference in the United States
United States law includes two main pieces of Cargo Preference legislation: The Cargo Preference Act of 1954 (the "1954 Act") pertaining to the carriage of civilian cargoes and the Military Cargo Preference Act of 1904 (the "1904 Act"), 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." 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.
1904 Act
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.1954 Act
The 1954 Act amended the Merchant Marine Act of 1936Merchant Marine Act of 1936
The Merchant Marine Act of 1936 is a United States federal law. Its purpose is "to further the development and maintenance of an adequate and well-balanced American merchant marine, to promote the commerce of the United States, to aid in the national defense, to repeal certain former legislation,...
, 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.
Purpose of Cargo Preference
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 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.
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.
The United States also maintains a merchant marine for purposes of national independence and pride. As then-Senator Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
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.
The Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...
(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
United States Merchant Marine
The United States Merchant Marine refers to the fleet of U.S. civilian-owned merchant vessels, operated by either the government or the private sector, that engage in commerce or transportation of goods and services in and out of the navigable waters of the United States. The Merchant Marine is...
. In 2008, preference cargoes accounted for 49.6 percent of all cargo carried by the U.S.-flag merchant fleet.
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
Flag of convenience
The term flag of convenience describes the business practice of registering a merchant ship in a sovereign state different from that of the ship's owners, and flying that state's civil ensign on the ship. Ships are registered under flags of convenience to reduce operating costs or avoid the...
" ("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
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, 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.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). 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.
Maritime interests, including USA Maritime
USA Maritime
USA Maritime is a coalition of carriers and maritime unions that are part of the U.S. Merchant Marine. The purpose of the coalition is to educate policy makers, the media, and the public about issues impacting the U.S. flag merchant marine and maritime industry...
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.
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
Food for Peace
Public Law 480 also known as Food for Peace is a funding avenue by which U.S. food can be used for overseas aid....
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."
Further reading
- Murray A. Bloom, The Cargo Preference Act of 1954 and Related Legislation, 39 Journal of Maritime Law & Comm. No. 3 at 289 (July 2008).