Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

13. Memorandum From Secretary of the Treasury Blumenthal to President Carter¹

Washington, March 24, 1977

SUBJECT

• Cargo Preference Legislation (H.R. 1037)

Executive Summary

H.R. 1037 provides that 20% of the U.S. oceanborne oil imports will be carried by U.S. tankers, with the percentage rising to 30% by 1980.

The EPG has reviewed H.R. 1037 and is unanimous in opposing it for a number of reasons, including cost and inflationary impact, adverse impact on the Navy shipbuilding program, precedent for other countries, violation of treaties, and exacerbation of the world tanker service.

The EPG has also considered possible amendments to H.R. 1037, such as extended timetable of implementation, reduced preference percentages, construction subsidies, and allowance for foreign-built tanker participation. We have also considered supporting an amended H.R. 1037 in conjunction with reductions in the maritime subsidy program. The EPG was unanimous, again, that the bill will be unsatisfactory even in amended form.

During the campaign, you did make statements which maritime interests understand as commitments to support cargo preference. Some alternative initiatives to assist the maritime industry would mitigate adverse political reaction from a negative stand on cargo preference, and you may wish to consider such alternatives as described in this memorandum. The EPG has not staffed out in detail these proposals, but we felt it appropriate to seek your guidance before proceeding further. In any event we should not take a formal public position until there has been additional consultation with the Congress.

Options

The Options are:²

Option A: Oppose H.R. 1037 and take no further action.

Option B–1: Support H.R. 1037 with amendments.

Option B–2: Support H.R. 1037 with amendments in conjunction with reductions in the maritime subsidy program.

Option C: Seek postponement of legislative action. (EPG to give urgent consideration to possible new initiatives.)

Full discussion of these options follows.

Discussion of Options

H.R. 1037 provides that 20 percent of U.S. ocean-borne oil imports will be carried by U.S.-flag, U.S.-built tankers, with the preference percentage going to 25 on June 30, 1978, and to 30 on June 30, 1980. Three bills with similar provisions have been introduced in the Senate.

The Economic Policy Group (EPG) has reviewed H.R. 1037, and is unanimous in opposing it. Advantages and disadvantages considered by the EPG include:

Advantages

—Tanker Safety and Pollution Avoidance—Advantages are those which stem from existing superior U.S. standards. Future improvement of standards constitutes a separate issue.

—National Security—Advantage would lie in the capability to move essential oil imports in U.S.-flag rather than less reliable foreign-flag ships. U.S.-flag tanker fleet is inadequate for this purpose.

—Employment—Would generate 13,000 to 49,000 shipyard and supporting industry jobs, depending on the level of U.S. oil imports and the duration of the shipbuilding program, plus 2,100 to 4,800 seagoing jobs.

—Balance of Payments—Could improve the U.S. balance by $170 million to $250 million. Treasury notes that the reduction in net U.S. payments could create upward pressure on the exchange rate for the dollar, which would make U.S. exporters less competitive.

Disadvantages

—Cost and Inflationary Impact—Would cost an estimated $560 million/year as of 1985 (1976 dollars) at an import level of 8 million barrels/day and $1,030 million at 12 million barrels/day. Spread over total U.S. oil consumption, the additional cost would be .18 to .28 cents/gallon. Spread only over the reserved cargo, the cost would be 1.6 to 1.9 cents/gallon.

—Adverse Impact on Navy Shipbuilding Program—This was a reason for the veto of the similar 1974 bill. While not inevitable, it is a matter of some concern to DOD.

—Precedent for Other Countries—State feels that it would encourage the adoption of similar measures by other countries. Advocates note that many other countries already have cargo preference.

—Reversal of U.S. Policy—U.S. policy has favored free competition for commercial cargoes.

—Violation of Treaties—Would be inconsistent with existing U.S. obligations under more than 30 bilateral commercial treaties.

—Addition to World Tanker Surplus—Foreign tankers totalling more than 30 million DWT are not in layup. Tanker prices are much below U.S. tanker construction costs.

The EPG has considered possible amendments to H.R. 1037 to make it more acceptable. It is unanimous, however, in the view that the bill would be unsatisfactory even in amended form. Modifications considered include:

1. Extend implementation timetable—Would reduce near term cost impact and might mitigate foreign objection, but would fail to overcome basic objections.

2. Reduce ultimate preference percentages—Would reduce advantages and disadvantages proportionately.

3. Provide operating and construction differential subsidies for preference tankers—Would minimize direct consumer impact by transferring most of cost to the general taxpayer.

4. Allow some foreign-built tanker participation—Would materially reduce costs, potential impact on Navy program, and addition to world overtonnage. Would not obviate basic foreign policy objections.

(It is understood that U.S. maritime unions and shipbuilders would not object to some limited level of foreign-built tanker participation.)

During the election campaign, you made a number of statements understood and remembered by maritime interests as commitments to support cargo preference. Some of these statements were quite categorical. A decision against cargo preference, which is recommended by the EPG on economic and foreign policy grounds, would be viewed by the maritime unions, and probably by the AFL/CIO generally as the breaking of a promise. It is possible that some alternative initiative or combination of initiatives to assist the maritime industry would mitigate somewhat the anticipated adverse political reaction to a negative decision on cargo preference.

The EPG believes that under the stated circumstances the decision must be made by the President, and three basic options are worthy of consideration:

OPTION A—Oppose H.R. 1037 and take no further action.

OPTION B–1. Support H.R. 1037 with amendments. Would be consistent with campaign commitments. (An acceptable amendment package, including some combination of the four above noted suggested amendments, would have to be developed under this Option.)

B–2. Support H.R. 1037 with amendments in conjunction with reductions in the maritime subsidy program.

OPTION C—Seek postponement of legislative action pending development of the Administration position. We would then give urgent consideration within the EPG to new maritime initiatives other than cargo preferences.³ Potential initiatives include:

—Support legislative and regulatory initiatives to facilitate expansion of the U.S.-flag dry bulk carrier fleet. (There are currently only 16 active U.S.-flag dry bulkers.)

—Support “3rd Flag”⁴ legislation intended to eliminate predatory rate cutting practices of carriers, particularly Communist country carriers, who serve U.S. trades other than those with their own countries. Basic intent is to minimize Soviet merchant fleet inroads into U.S. foreign trade.

—Support “all-American” route for Alaskan north slope gas vice trans-Canada route. All-American route would generate significant U.S. employment and would involve as many as 11 large U.S.-built liquefied natural gas-carrying ships and more ships in future years operating between Alaska and the West Coast.

—Repeal U.S. Income Tax deferral provisions relating to shipping income received by foreign subsidiaries of U.S. corporations. This so-called “Subpart F” income exclusion constitutes a tax subsidy ($90 million to $140 million/year) to U.S.-owned foreign flag shipping.

—Support additional bilateral shipping agreements. Opposed by many in the Executive Branch as contrary to U.S. free competition policy, such agreements are increasingly common and provide substantial benefits to ship operators.

—Support extension of U.S. cabotage laws (Jones Act)⁵ to the Virgin Islands for oil. Legislation to effect this was reported out by the Senate Commerce Committee in 1976 and has been reintroduced. It would mean about 2,000 seagoing jobs and employment for about 25 tankers.

—Provide for additional contract manning of Navy support ships. Contract manning of over 100 fleet support ships now crewed by military personnel, plus some MSC ships now manned by civil service crews, would be technically feasible. Costs might be marginally higher, but this would strengthen the Navy–merchant marine bond and would be considered beneficial by the industry.

Thus far the EPG has formally reviewed only Options A and B, and has reached a negative conclusion in both cases. We have not yet staffed out in detail the various proposals under Option C, but we felt it appropriate to seek your guidance at this stage before proceeding further. I should note, however, that there are likely to be economic and foreign policy disadvantages to most if not all the potential initiatives listed under Option C.

You may wish to consult further with Secretary Kreps who has taken the lead in developing this issue. I would also advise that we not take a formal public position until there has been additional consultation with the Congress.

1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 14, 3/28/77 [1]. Confidential. Sent for action. A typed notation reads: “The President has seen.” Attached is an undated note from Carter to Eizenstat that reads: “Stu—Check w/ Congressional leaders or staffs. Then report to me. I want to build up MM [Merchant Marine] but with minimum adverse effect on consumers—HR 1037 may be best way—but I doubt it.” Hutcheson forwarded the memorandum to Eizenstat under cover of a March 28 note. (Ibid.)
2. Carter did not indicate his preference with respect to any of these options.
3. In a March 26 memorandum to Carter, Eizenstat indicated his support for Option C and suggested that if Carter decided in favor of Option C, he should consult selected Congressional representatives “to get their assessment of the strength of Congress’ commitment to Cargo Preference Legislation, as well as to give them a sense of involvement.” Eizenstat also advised a meeting between administration officials and maritime industry representatives “to explain why the Administration cannot support Cargo Preference and to discuss the alternatives we are interested in pursuing.” (Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 14, 3/28/77 [1])
4. “Third flag” shipping refers to the carriage of cargo between two countries by a ship that is registered in neither the exporting nor the importing country, but instead in a third country.
5. A reference to the cabotage regulations in the Merchant Marine Act of 1920 (often referred to as the Jones Act), which stipulate that cargo transported between U.S. ports must be carried in ships that are built and registered in the United States and owned and predominantly operated by Americans.