Much has appeared in the public press in recent months about the phenomenal growth of the Merchant Fleet of the Republic of Panama, and considerable discussion as to its disproportionate character. As a substantial number of these vessels are owned directly or indirectly by United States capital, and were transferred to Panamanian register, or were given such registration at time of completion in this country, it is natural that the reasons or motives underlying this action should be of wide interest here.
Panama now has the fourth largest oceangoing fleet in the world, exceeded only by the United States, Great Britain, and Norway, in that order. If only private shipping is considered, the positions of the United States and Great Britain would be reversed. Lloyds Register shows the Panama fleet (as of September, 1953) as 606 vessels of 3,740,451 gross tons.
The vast preponderance of Panamanian ships in which American capital is invested are not directly owned but are the property of and are operated by the foreign affiliates of American corporations with heavy investments abroad. A representative of one of these American corporations told a Senate Committee that much of their foreign business has no physical contact with the United States at all. He said oil produced in Venezuela may be refined in the West Indies and marketed in Europe, without ever touching this country. He testified that Panama was selected for registration "because of the close relationship with the U. S. Government; because of the presence of the Panama Canal; and perhaps additional security and additional assumption of having the ships available in the time of national emergency."
Testimony was given some time prior that Panama's ships had been transferred from 33 different countries-47% from the United States. Undoubtedly this large percentage is due to the sale of U. S. Government war- built vessels (668 to United States citizens and 1130 to foreign buyers), both United States and foreign buyers subsequently transferring a number to Panamanian Registry.
The question with which we are most deeply concerned is whether permitting United States owned ships to be registered under a foreign flag is in the public and national interest, including national defense. But first we should examine the reasons or motives which cause the United States private shipowner to take this action. It has been contended that the causes are: (1) wage differential; (2) ship repair costs; (3) inspection and regulation; and (4) taxes. Labor naturally stresses the last three items, while admitting before a Senate Committee that perhaps 90% of the economic handicap consists of the wage differential.
There is no dispute from any reliable source that United States shipowners greatly prefer to operate their vessels under our flag, with citizen officers and crews. Both management and labor have testified to this effect. A large American shipowning group advised the Senate Committee investigating the subject on February 23, 1950:
“This Federation is in favor of as large, as modern, and as prosperous an American Merchant Marine operating under the American flag as can be supported by business available to it, at rates which will support American wages and American Standards.”
and on February 21, 1950:
"... in all but a few cases the interest of United States citizens in vessels registered under foreign flag is through their investment in foreign enterprises.”
It is also generally admitted that economic factors are the controlling causes of foreign registration. These factors, however, seem so powerful in many cases as to leave little alternative.
Examining them briefly, we find:
(1) Wages
From both owners and labor it has been testified before a Senate Committee that the increase in over-all operating cost of a United States registered vessel over a similar foreign (Panama) one is 25% to 35%, and that wages represent 90% to 95% of this economic disadvantage. It was also testified that this difference will amount to more than $100,000 per year for a Liberty freighter, and more than double that amount for large, fast tankers. If we accept this undisputed testimony, it appears that higher wages, together with some other items of operating costs, destroy the competitive ability of such vessels while transporting international cargoes.
(2) Ship Repair Costs
The cost of ship repairs in the United States is generally conceded as approximately double similar foreign costs. This is the result of higher wages to shipyard workers, and a high ratio of labor compared with new construction. It follows generally the pattern of sea-going wages. As foreign ships may have their repairs made abroad, while United States ships may not, except in emergencies and then only to the extent necessary for a safe voyage home (or upon the payment of 50% customs duty), this item makes up a substantial part of the remaining 5% or 10% handicap suffered by American flag vessels.
(3) Inspection and Regulation
While it is true that the maritime laws of Panama are far from complete, they nevertheless require at time of original registration that the vessel be classed with one of the three internationally recognized classification societies (American Bureau, Lloyd’s, or Bureau Veritas) which in turn require the vessel to be sound and seaworthy and to comply with all safety and other regulations. Not only must the vessel be so classed, but we have it on the authority of the Panama Government to the International Labor Office in Geneva, that additional certificates by Lloyd’s on efficiency of radio; seaworthiness, inspection of machinery, loadline, etc., are required. To insure that the vessels maintain the standards of their classification, these societies carry out inspections and periodical surveys to make certain that the vessel at all times fully complies. They maintain surveyors at all important world ports for these purposes. While some question has been raised as to guaranteeing the continuance of this classification society registration, there is also testimony before the Senate Committee that the Panamanian Consuls would not clear the ship for sea unless the classification requirements were met.
A very large part of United States-owned Panama-registered tonnage is engaged in the foreign operations of American capital invested abroad. Interests which engage in such enterprises are usually experienced and responsible. It is difficult to believe that they would allow the “class” of their vessels to lapse. Marine insurance companies will not insure, or continue the insurance of, oceangoing vessels unless “class” is maintained. There is testimony to the effect that these responsible American interests maintained conditions, both with respect to physical condition of the vessel and crew comforts aboard, parallel with their United States registered ships. They appear to be forced to foreign registry in their foreign operations to meet competition.
(4) Taxes
The question of taxes as an advantage to Panamanian registration has been raised. Panama has no income tax, and the only tax payable by such shipping is about $1.00 per ton at time of registry, and 100 per ton per year thereafter, plus some minor consular charges. The earnings of these vessels are, however, taxable in the United States at the income tax rate in effect at the time the earnings are brought home. The owner can, of course, defer calling his earnings home until the tax rate seems to him most advantageous —if he is willing and able to postpone their receipt. He could invest them abroad, but they would eventually be taxable whenever brought home, along with the other returns from such investment. It appears that the prospect of loss of tax revenue to the United States Treasury is small, only varying with the applicable income rate from year to year. The United States corporate excess profits tax during the war years did not apply to dividends received from foreign corporations. To be perfectly fair about it, from a national economic standpoint we must also weigh the important probability that the tax source might be completely dried up through diversion of the business to foreign owners or foreign charterers. I am one who believes that encouragement of United States capital to do business abroad—within certain well defined and controlled limits—is a wise move and in the public interest.
On the economic side, therefore, it appears obvious that the maintenance of American standards of wages and living cannot be made applicable to American-owned enterprises operating abroad, where the products or services are sold competitively in the world market. Responsible representatives of United States capital invested abroad have testified that their ocean-shipping requirements, under present day conditions, would have to be surrendered to foreign-owned foreign-flag-shipping—by contract or charter—if United States registration were required.
We have now examined the economics and the motives. But the all important national interest, i.e., national defense, remains. As we apparently must have these United States- owned ships under foreign register or not at all, where does the national interest lie? It seems to me that the United States owners of such vessels, no doubt with some government encouragement, have done reasonably well under the circumstances.
Hemispheric co-operation is promoted by having such ships registered with one of our good friend neighbors, if they may not, for uncontrollable causes, fly the Stars and Stripes and be manned at all times by a citizen crew. It is most unlikely that Panama would, in an emergency, be found on the side of our opponents. The availability to us of American-owned ships of Latin-American registry in an emergency is not just a theory. The record of the Senate Committee shows that in the last war all such Panamanian registry ships of a large American corporation, which today number 21 vessels, were immediately made available for war services on the same terms as those applying to American ships, and this is not an isolated case.
Testifying before a Senate Committee on February 28, 1950, Admiral W. M. Callaghan said:
“The Department of the Navy has been designated to represent the Department of Defense—
“There is an understanding with at least one of the Latin American Governments which provides for the return to United States registry in the event of an emergency of American-owned vessels documented in that country. The Navy Department, therefore, considers that American-owned ships under the flags of such a country, are potentially available on request of the United States Government in time of war. . . .”
In response to a Senatorial question the Admiral said, “That country is Panama.”
While an argument may be made as to the power of the Government of the Republic of Panama to make good 100% on this commitment, it does not appear that it can be contended reasonably that the policy now in effect does not greatly improve our prospects of vessel availability versus a prohibition against such foreign registration.
Being a naval officer, it is perhaps not surprising that I find myself on the side of Admiral Callaghan, the Navy and Defense Departments.
Logistics equal Transportation
Transportation equals Logistics