History Doesn't Bode Well For New Commercial Cargo Preference Bill

HIGHLIGHTS:

• The recently introduced Energizing American Maritime Act is described as a bill "to require a certain percentage of liquefied natural gas and crude oil exports be transported on vessels documented under the laws of the United States, and for other purposes."
• The bill would amend the Natural Gas Act and the 2016 Consolidated Appropriations Act to require export of oil and gas to transport on 15 percent of U.S.-flag vessels during 2020-2024, and increasing to 30 percent beginning in 2025.
• Although the Trump Administration has brought in a new wave of proposed "Buy American" economic protectionism, historical trends and broad international trade policies align the odds against the introduction of commercial cargo preference.

Rep. John Garamendi (D-Calif.), joined by Reps. John Duncan (R-Tenn.) and Duncan Hunter (R-Calif.), recently introduced H.R. 1240, the Energizing American Maritime Act, described as a bill "to require a certain percentage of liquefied natural gas and crude oil exports be transported on vessels documented under the laws of the United States, and for other purposes."

Introduced on Feb. 28, 2017, the bill would amend the Natural Gas Act to require that any authorization by the Secretary of Energy for export of liquefied natural gas (LNG) would be conditioned on transport of 15 percent of such LNG cargoes on U.S.-flag vessels during 2020-2024, and increasing to 30 percent in 2025 and beyond. The bill would similarly amend the 2016 Consolidated Appropriations Act to require the President to condition approvals for crude oil exports from the United States upon reservation of similar percentages for U.S.-flag vessels. The bill imposes no U.S.-built or U.S.-ownership requirements. Thus, presumably any vessel, including a reflagged foreign-built ship, owned by a U.S. entity meeting minimum U.S. citizenship requirements for documentation, would qualify.

The bill states as its premise that "LNG is an explosive gas that can be hazardous to national import and export terminals and ports when mishandled," and "is a strategic national asset . . . which will be used to preserve the United States tanker fleet and skilled mariner workforce that are essential to national security" concluding that "for the safety and security of the United States, LNG should be exported on vessels documented under the laws of the United States."

Although the Trump Administration has brought in a new wave of proposed "Buy American" economic protectionism, historical trends and broad international trade policies align the odds against the introduction of commercial cargo preference.

Background

Cargo preference is a separate concept from cabotage. Cabotage, often referred to over-broadly as the "Jones Act" in the United States, is based on the geographical origin and destination of waterborne traffic. Cabotage is a global protectionist concept applied almost universally by shipping nations, although more recently loosened in some instances by reciprocal trade agreements. The United States has imposed various fairly aggressive forms of this concept since the first Congress met in 1789. Presently, the U.S. imposes a U.S.-flag, U.S.-built and 75 percent U.S.-ownership requirement on vessels moving people or goods between any two points in the U.S. or otherwise working within U.S. coastal waters. The Jones Act applies to domestic water transport of merchandise, and the Passenger Vessels Act covers commercial transport of persons. Several other statutes impose U.S. registry, construction, ownership and crewing requirements on vessels engaged in dredging, towing and fisheries in U.S. waters and adjacent jurisdictional areas, such as the Outer Continental Shelf. U.S. administrative agency (mainly Customs and Border Protection, and the Coast Guard) and court rulings on what constitutes cabotage transport and what vessels qualify as U.S.-owned or -built for such purpose are voluminous and exceedingly complex. Notably, since the new administration has taken office, Customs has announced a major reversal of certain historical precedents applicable to vessels providing construction and maintenance services in U.S. offshore oil industries, with the agency now proposing to reserve a broader swath of such work to U.S. vessels. U.S. courts have held that as protectionist statutes, cabotage provisions should be very broadly interpreted and strictly applied.

On the other hand, cargo preference is a policy requiring that shippers of U.S. government-controlled cargoes moving worldwide in foreign commerce reserve a portion of such shipments to U.S.-flag vessels. For more than a century, the United States has imposed varying U.S.-flag (but generally not U.S.-built or majority U.S.-owned) requirements for vessels carrying certain cargoes. These include military cargoes, required to be moved entirely on U.S.-flag ships under the Military Cargo Preference Act of 1904, 10 U.S.C. §2631; U.S. government-supplied goods and commodities such as donated food shipments, 50 percent of which are required to be carried by U.S.-flag ships under the Cargo Preference Act of 1954, 46 U.S.C. §55305; and U.S. export-import bank financed goods, which are required to be carried entirely by U.S.-flag ships under Public Resolution 17 of the 73rd Congress, 46 USC §55304, although the requirement is reduced to 50 percent if the importing nation gives certain reciprocal treatment to U.S.-flag ships.

The common theme for cargo preference applicability is that in each case the government paid for the cargo, and can dictate who the carrier will be, just as a private commercial shipper might select its carrier. This policy is consistent with the various "Buy American" rules in U.S. government procurement laws and regulations, such as the requirements that U.S. officials and contractors traveling on government supply business must use U.S. air carriers where available.

In contrast to cabotage, the rules for cargo preference are fairly simple. All U.S. cargo preference statutes contain a provision allowing use of foreign vessels if U.S.-flag ships are not available at fair and reasonable rates. However, the statute leaves the determination of whether U.S.-flag ships are available to the discretion of the U.S. Maritime Administration (MARAD), an agency within the U.S. Department of Transportation. The concept of “availability” of U.S.-flag vessels has also been strained. For example, MARAD held shipment of structural steel from Japan to Superior, Wis., for a federally-financed highway bridge that could not be shipped on a Japanese vessel that offered to take it directly to the jobsite at low cost, when a U.S.-flag liner carrier offered to take the cargo at higher cost to a Gulf port from which costly barge and overland rail transport would be required.

Extension of the Preference Concept to Commercial Cargoes

Cargo preference has run into trouble when Congress or administrative agencies seek to extend it to commercial cargoes (i.e., shipments not owned or financed directly or indirectly by the U.S. government). Initially, there is usually strong pushback from affected industries that would face higher cost and less shipping flexibility if subjected to cargo preference. Some prior aggressive MARAD interpretations have had mixed results. MARAD attempts in the 1970s to apply the 1954 Cargo Preference Act to shipments of fuel to power plants supplying electricity to federal government customers and military bases did not get far. Efforts to apply cargo preference to indirectly controlled government cargoes also give rise to contentious issues of freedom of contract and retaliation under international trade agreements.

The high-water mark for the commercial cargo preference concept was the Energy Transportation Security Act (ETSA) of 1974, S. 2089 and H. R. 8193 in the 93rd Congress, which proposed that initially 20 percent ­– and eventually 30 percent – of all U.S. petroleum imports must be carried by U.S.-flag tankers. This came on the heels of a Nixon-era push to expand U.S.-flag shipping and shipyards under the now little-remembered Merchant Marine Act of 1970 that extended government shipbuilding and operating subsidies, and Title XI loan guarantees to bulk vessels. The rationale of the ETSA was that in the turbulent times of Mideast wars, OPEC embargoes and soaring oil prices, the U.S. needed reliable U.S. shipowners and U.S. citizen-crewed vessels to assure vital energy cargoes would be delivered, and to protect the environment in the wake of several notorious tanker casualties (many also forget this was a Nixon priority). The ETSA faced strong opposition on the basis of the alleged enormous inflationary impact, higher energy prices and retaliation by other trading nations, especially the major U.S. trade partners with shipping interests, such as Europe, Japan and Korea. The ETSA passed the Democratic-controlled Congress, although President Gerald Ford "pocket-vetoed" the bill. It was reintroduced in the subsequent session of Congress, but never progressed beyond committee thereafter.

Since that era, commercial cargo preference has not reappeared in any serious form. There have been many marginal expansions of cabotage, including extension to ocean incineration and various offshore oil projects; but these are all nominally tied to geography (i.e., U.S. domestic origin and destination).

H.R. 1240: A New Opportunity for Commercial Cargo Preference?

While prior U.S. efforts at expanding "Buy American" requirements in the international shipping sector have not been successful, the Trump Administration has shown a willingness to propose ambitious protectionist measures, even where economics and major U.S. industries and consumer interests may react with stiff opposition. In particular, the administration issued an Executive Order on Jan. 24, 2017, potentially imposing a requirement that only U.S.-manufactured pipe be used on new oil pipelines and future repair and maintenance projects for domestic lines. This initiative has a ways to go before becoming a reality, but it is groundbreaking in its attempt to extend protection to purely private sector activity (although federal approvals are involved for some pipelines) previously untouched by source nationality restrictions.

The Garamendi bill harkens back to one venerable "nexus" concept of cargo preference – the notion that governments can only impose the flag reservation for government-owned or -financed shipments or traffic in which the government otherwise has a bona fide national security interest. Reduced to the basics, as expressed by one Congressional sponsor of the 1954 Cargo Preference Act, "if we are going to give this country away, we should at least have the privilege of carrying it away ourselves."

In mild distinction to purely commercial cargoes, such as the oil imports covered by the 1974 ETSA, LNG and crude exports do require a U.S. governmental approval. The express purpose of H.R. 1240 to assure safe handling of dangerous commodities likely will be countered with the fact that the U.S. as a port state imposes safety regulations on both U.S. and foreign-flag vessels without distinction. In addition, there is currently not sufficient U.S.-flag tonnage and possibly some shortage of U.S.-qualified officers and crew to cover a large volume of LNG and oil shipping within a rapid phase-in period. Unlike cabotage restrictions and some prior cargo preference laws, H.R. 1240 does not impose a U.S.-built requirement, but reflagging of foreign tonnage can be technically problematic and cost prohibitive. H.R. 1240, unlike its predecessors, does not have an exemption for situations in which U.S.-flag vessels are not available at reasonable cost.

More problematic, however, may be the simple economics of the oil and gas industry. With multiple global sources contending for nearly every tender, and most transactions decided on thin pricing differentials as small as pennies per ton, U.S. exporters facing mandatory booking of higher-cost shipping will be at a competitive disadvantage, especially over longer shipping distances such as U.S.-Europe or U.S.-Asia.

So it remains to be seen whether the new and ambitious extension of protectionism can carry the day. History suggests otherwise, but this is a new era, and many things never seen before may be possible.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.