Effects of Cargo Preference Requirement for Dry Bulk Exports and Imports

GAO was asked to comment on the effects of requiring that at least 40 percent of the Nation's dry bulk imports and exports be carried in U.S. flag, U.S.-built vessels, particularly with respect to coal. The specific questions addressed were whether such a cargo preference would: (1) inhibit U.S. dry bulk export trade; (2) burden U.S. consumers with increased import costs; (3) increase the costs of U.S. coal and other dry bulk exports so that they would not be competitive on the world market; (4) stimulate investment in domestic maritime trades and shipbuilding; (5) erode the concept of free trade among nations by artificially distorting market prices and by dictating source of transportation; and (6) be practical from a regulatory aspect.

The U.S. merchant marine now carries very little of the Nation's oceanborne dry bulk imports. Without Government subsidies, ship operators have strong incentives not to patronize U.S. shipbuilders and little incentive to register their ships under the U.S. flag. The high cost of shipboard labor accounts for most of the operating cost difference between U.S. and foreign flag vessels. A cargo preference requirement would increase the cost of transporting U.S. bulk exports overseas and would probably exert upward pressure on charter rates, which would result in higher transportation costs for dry bulk exports. In markets where U.S. exporters enjoy a substantial price advantage over foreign competitors, these higher costs can probably be shifted to customers. The larger the share of the market for any commodity that U.S. exports supply, the more likely it is that transportation cost increases can be shifted to customers. The United States is not the world's sole supplier of any export commodity, although it is the dominant supplier of several. Whether the cost of importing dry bulk goods would increase depends upon whether the United States used foreign sources for most of its supplies and the amount of the commodity it consumes. The ability of the United States to expand its share of importing and exporting dry bulk goods is highly limited. Expectations that expanding cargo preference will raise transportation costs enough to decrease exports and imports will reduce investment incentive. The cargo preference provision would impede trade by adding to transportation costs.