After 20 months of discussions, most U.S. liner companies - among them the three largest containership operators - are in agreement in their support of new subsidy rules: The Liner Development Act of 1986 (Senate Bill 2662), a bill that would reform the Operating Differential Subsidy (ODS) system for liner carriers.
S. 2662 would authorize the secretary of transportation to enter into new operating differential subsidy contracts and to amend existing ones. All liner operators would be eligible for the subsidy, which would pay for wage differentials of seagoing personnel only. The current system of "essential trade routes" and the contractually fixed number of sailings on these routes - both requirements for ODS eligibility - would be abolished. U.S. carriers would be eligible for ODS even to the extent of operating foreign-built vessels. They would have two years to re-flag foreign-flag ships in their system.Almost everybody in the maritime industry, including labor, agrees the current ODS system, established before the advent of containerization, is outmoded and in need of wide-ranging reform. Representing a compromise between a great variety of interests, S. 2662 is thought by many to be the vehicle for such reform. It has, to varying degrees, the support of all U.S. liner operators and also that of the Seafarers International Union.
It does not have the support of the Reagan administration. Maritime Administrator John Gaughan has warned that the bill lacks safeguards to keep operating costs down. He pointed out that ODS should be limited to crew sizes ''needed for safe operations."
Mr. Gaughan's warning is well taken, although it addresses only a relatively minor issue. We don't believe that in today's economic climate, featherbedding could still be possible to the extent of becoming a vexing and burdensome problem.
But we can well imagine another, much more worrisome scenario spawned by S. 2662: At contract negotiations between management and union, the union's demands for higher wages could be virtually unlimited. Union negotiators would tell management that it doesn't have to worry, as ODS would pay for the raise. Management, using the same argument, would have no incentive to oppose the union's wage demands. Negotiations would become a mere formality, there would be no real bargaining, and the government, or rather the taxpayer, would pick up the tab.
A Washington, D.C., source closely involved in the formulation of the proposed bill admitted, on condition of anonymity, that there is awareness of such a scenario and that there is indeed great concern that union wage demands might get out of hand. A provision is, therefore, planned for the proposed bill that would stipulate that if wage increases subject to ODS are out of line with general wage increases in the industrial community, carriers won't get the full benefit of the differential.
This still leaves the union free to act at will but it would penalize the carrier who, for competitive reasons, probably would be forced to agree to wage demands higher than covered by ODS.
Under these circumstances, the support of S. 2662 by the carriers is puzzling - to say the least.
To replace one subsidy system with another might eliminate some old problems; but it will create new ones. S. 2662 is not the solution. What is needed is an entirely novel approach. One that totally ignores the outmoded and unworkable subsidy concept and in its place establishes a support system more responsive and better suited to the requirements of today's capital- intensive liner shipping.
Said Mr. Gaughan in recent testimony before the Senate Merchant Marine Subcommittee: "We are continuing to assess with the industry what system will maximize free market operations, permit U.S.-flag carrier flexibility to compete with foreign carriers, enable U.S.-flag carriers to recapture lost market share, be fair to all U.S.-flag operators and strike a fair return for the national interest."
The key words are: "national interest." A solution must be found that does not just satisfy the parochial interests of the liner companies, nor those of the unions. But one from which the entire nation will benefit.
We suggest ODS be entirely eliminated - to be replaced by a simple subsidy based on the dollar value of U.S. export commodities carried in U.S. bottoms. This subsidy would be paid to all U.S. carriers, without any further qualification requirements, for any movement of U.S. manufactured goods exported from the United States to any foreign country. The amount of such subsidy to be determined according to the volume and value of such exports carried by each individual steamship line. The subsidy received by each carrier to be expanded as it sees fit, without any further accountability to and control by government.
The bottom line: The more exports an operator carriers in his ships, the greater the subsidy he will receive.
Needless to say such a program would unleash real, stiff competition among carriers, and at the same time give shippers/exporters the benefit of the lowest tariffs. Yet it still would not lead to indiscriminate rate-cutting. The Federal Maritime Commission would watch over the rate levels to ensure - as that agency is supposed to do now - that these rate levels remain at all times compensatory. As far as foreign-flag operators in the U.S. trades are concerned, they would remain competitive rate-wise, the more so as their operating costs are always lower than those of the U.S. flag.
Under such a system, U.S. ocean carriers would have the incentive to seek new export markets for U.S. goods aggressively - a task that they are well equipped to perform through their many offices and representatives abroad. They would actively help, guide and counsel U.S. exporters in securing more business.
The end-result not only would be a stronger U.S. export market, with the resultant increase in outbound cargo on U.S.-flag ships; the really important payoff would be a more favorable U.S. trade balance - and that, indeed, would be in the "national interest."
Marc Felice, former editor of Transport 2000, is a frequent contributor to The Journal of Commerce.