In his article "A New Maritime Subsidy Concept, (JofC, Aug. 26), Marc Felice suggests completely abandoning the current operating differential subsidy approach of subsidizing specific costs, largely wage costs, in favor of subsidies that would be tied to the amount of export cargo carried in U.S.-flag vessels.

This subsidy would not be related to any particular cost faced by the carrier. While this idea deserves examination, Mr. Felice is misleading in calling such subsidies "simple" and seems unaware of the potential for such a system to be more costly than a wage subsidy system. His subsidy concept also suffers from a failure to keep in mind the reasons for a subsidy program.If, as both the Liner Development Act of 1986 and Felice's plan propose, the current subsidy concept of "essential trade routes" is to be abandoned, then the remaining rationale for subsidy is that national security requires a sizable private merchant marine fleet and that the seafarers who work on that fleet should have a U.S. standard of living. Since the wages necessary to provide such a standard of living make U.S.-flag carriers non-competitive, subsidies become necessary.

The problems of cargo subsidy then became clear. Instead of subsidizing the wage costs that require subsidy, all factors of production including capital as well as labor would be subsidized. How would the level of such a subsidy be set? How can taxpayers be assured that the subsidy is enough to offset the labor cost disadvantage of U.S.-flag carriers and no more? The basis for determining the level of such a subsidy is not obvious.

There are other problems as well. On what basis will the "volume and value of such exports" be used to compute the subsidy? How will such a system distort the incentives of carriers with regard to the movement of different types of cargoes? How will the differential distances involved in various trade routes be factored into the subsidy formulas? Will these formulas then distort incentives to trade on particular routes? Why subsidize exports but not imports? How about preference cargoes? Will they attract subsidy as well?

Mr. Felice is correct that such a system will increase competition among carriers, but so would the Liner Development Act or any other scheme that allows carriers to enter trade routes or exit them at will. This aspect, not the export-cargo subsidy approach, is the principal feature of his plan which engenders competition.

Mr. Felice is correct that the practice of 100 percent subsidy of U.S.-foreign carrier wage differentials has a natural tendency to sap the bargaining aggressiveness of employers. At the same time, the proposal by Maritime Administrator John Gaughan to subsidize wages of less than the full crew or earlier government proposals to subsidize only a fraction of the differential between U.S. and foreign maritime wages are rightly opposed by unions and carriers because they guarantee a competitive disadvantage for U.S.-flag carriers no matter how vigorously they bargain with their employees.

In fact, it is not difficult to create a wage subsidy system that creates the possibility of full parity and also provides incentives for vigorous employer bargaining. The key is that the basis of the subsidy should be the wages paid by unsubsidized carriers, for example, those engaged in the domestic trade (Jones Act) fleet, and not the wages paid by the subsidized carriers themselves.

Under this kind of regime, the subsidized carriers can save on costs by keeping their wages as low as possible relative to those paid by carriers who do not receive the subsidy.

Each dollar of higher wages negotiated by the subsidized carrier would be another dollar out of that carrier's pocket. This is the essential feature missing from the current ODS wage subsidy system. Of course, the domestic trade carriers would not actually get the subsidy themselves so their incentive to bargain would be unaffected. At the same time, the costs of such a program would be limited almost exclusively to wage subsidy, the established principles by which such subsidies are calculated could be maintained, and the incentives of carriers to move particular varieties of cargo on particular trade routes would not be affected in unpredictable ways by complex new formulas.

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