CABOTAGE: I N THE INTEREST OF N A T I O N A L DEFENSE A ND COMMERCE

By Joseph Farrell, President American Waterways Operators

The cabotage laws of the United S t a t e s . . . e s s e n t i a l l y the Jones Act...are rooted in national security considerations. Even though they inescapably have economic consequences, those consequences follow the primary purpose of the Jones Act, which is to form a part of the U.S. defense in a time of a limited (non-nuclear) war. This is best illustrated by quoting from the first section of the Merchant Marine Act of 1920, which embodies the Jones Act, entitled "purpose and Policy of the United States," which states, "It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine of the best equipped and most suitable type of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency, ultimately to be owned and operated privately by citizens of the United States." Therefore, the Jones Act should be viewed by us as American citizens first, then from the narrower perspective of barge and towing industry executives whose vision is understandably distorted by seeing the Jones Act through commercial spectacles.

AWO has a venerable policy to oppose any attempt to retreat from the Jones Act. There is some irony here because AWO's policy is no doubt rooted in the economic or commercial interests of AWO's members. However these interests are divided. No wonder there is con- fusion: people whose bottom line depends in some measure on the Jones Act strongly defend a statute which was enacted principally for national defense.

With respect to national defense, it is sometimes argued that the barge and towing industry's vessels are not material to the Jones Act because they aren't fit to travel across oceans and perform a service in combat. This argument usually refers to inland river barges. But, it ignores a policy decision of the United States fundamental to its security...embedded in its cabotage laws...that supplying the war effort within the United States (coal to electric generating stations, coking coal, feedstocks for plastics and munitions, jet fuel, and so on) must not depend upon alien vessels, alien crews, and the like. Such services are surely more in demand during a conventional crisis, whether that is global or in a region like the Middle East. Thus, in this larger context, we understand why the Jones Act has no geographic boundaries. It does not apply any more or less to coastal equipment than it does to inland river equipment. All marine assets are deemed necessary to the effort, and are included under the Jones Act.

Those facts framed AWO's work on the Jones Act issues in 1988, and point to the challenges in 1989 and beyond.

In September of 1986, AWO first began efforts to close a loophole in the Jones Act which allowed the city of New York to construct four barges in Singapore for the disposal of sewage sludge 106 miles off the coast of New Jersey. Because this material has no value, and the disposal site was considered a point in the United States, this movement, according to the U.S. Customs Service, which has enforcement authority for the Jones Act, did not come under the jurisdiction of the cabotage statute. Legislation introduced late that year to correct the situation was not acted upon, but was reintroduced in the next Congress in early 1987. The road to enactment of this legislation was long and tumultuous, but finally was cleared by both the House and the Senate and signed by the President on June 7, 1988.

On other Jones Act issues, AWO, despite considerable pressure, rei- terated its vehement opposition to proposals which would allow foreign- flag vessels to transport commodities such as timber and coal.

Without question, the greatest threat to the Jones Act which emerged in 1988 was the purchase by Japanese entities of an American corporation with an inland barge line subsidiary. This purchase has caused an explosion of litigation, and regulatory and legislative activities.

If this precedent is allowed to stand, it would blow a huge hole in the Jones Act. Stating a complex case in simple terms, the Japanese owners of the inland barge line propose to operate that barge line as a full U.S. citizen, permitted complete freedom to compete with U.S.- owned companies for commercial cargoes. Their reasoning is based upon their magical interpretation of an amendment to the Jones Act (the so-called Bowater Amendment) which permits narrow exceptions to the U.S. cabotage law, far more restrictive than the Japanese propose.

As of now, this issue is unresolved, and is being contested in five forums: the courts, the Congress, the Coast Guard, the Customs Service and the Maritime Administration.

AWO is active in all five, as an amicus curiae in the court case, and as a leader in the other four. AWO's goal is to see to it that the law is upheld with the foreign-owned inland barge line limited in its operation to proprietary carriage, as was Congress's intent in enacting the Bowater Amendment, and to dissolve any ambiguity in the statute which might exist in order to keep the Jones Act impervious to these magical assaults.

As long as the United States "Jones Act Trade" remains seductive to foreign interests, we can expect all forms of imaginative attempts to breach it. AWO must and will counter these foreign forays with determination, skill and energy, and with an objective eye to the changing world within which we exist For Congress to suddenly require off-highway users of diesel fuel to pay taxes they do not owe is attributable to the federal deficit. By having this tax collected upfront from all users of diesel fuel, the federal government was able to claim this windfall as income and count it toward deficit reduction. It was an unfair and inequitable way to force waterway operators and others to float an interest-free loan to the government.

AWO worked hard to get the 1987 law changed. In January 1988, AWO immediately began contacting its friends on Capitol Hill seeking repeal.

As other industries became aware that they too were required to pay this tax—farmers, the construction industry, drilling contractors, coal miners, quarry operators—a strong coalition began to form.

AWO was one of the coalition's most active participants.

In February 1988, AWO initiated the first in a series of carefully targeted education efforts aimed at bringing the situation to the attention of (1) members of the tax writing Ways and Means and Finance Committees with waterway constituents; and (2) members of Congress not on these committees but representing waterway districts or states.

Industry response to this initiative was unprecedented. As Congressional constituents sent letters by the hundreds, optimism grew. Members of the Senate Finance Committee became more outspoken in their opposition to the provision they had passed several months before. Senator Lloyd Bentsen (D-TX), Finance Committee Chairman, in March reported out legislation intended to allow all off-highway users to purchase diesel fuel tax free.

However, without action by Ways and Means Committee Chairman Dan Rostenkowski (D-IL), the Senate Finance Committee bill was stalled.

To complement its legislative activities, AWO mounted a public affairs program both in Washington and at the grassroots level. As a result, many articles and editorials appeared in newspapers throughout the country, calling on Congress to change this unfair law. AWO took action to assure that members of Congress were aware of the media attention this issue was generating.

Finally, in mid-summer, the House moved a bill making technical changes to certain tax laws. Included in the bill was the relief we were seeking: off-highway users of diesel fuel would be allowed to purchase that fuel tax free.

The senate Finance Committee once again endorsed the diesel fuel tax fix several weeks later, and it was soon approved by the full Senate.

A great deal of work still remained to secure the fix. Other provisions of the House and Senate bills were contentious, and members of the House and Senate assigned to develop a compromise bill seemed unable to resolve these differences.

Negotiations frequently broke down and agreement on a final package came down to the final hours of the 100th Congress. But the hard work paid off, and President Reagan on December 13, 1988, signed into law legislation to allow tax-free purchase of diesel fuel beginning January 1, 1989.

On another tax front, one of the more publicized "reforms" of the 1986 Tax Reform Act was elimination of 100 percent deductibility for business meals and entertainment— the so-called "three martini lunch." However, Congress drafted this provision so broadly that it inadvertently applied to meals provided to crew members on vessels.

The House technical corrections measure mentioned above included language to restore full deductibility for crew meals as a result of AWO's work. However, there was no companion provision in the Senate.

AWO and a maritime industry coalition concentrated efforts on members of the House and Senate who would be negotiating a compromise bill. Despite the strenuous objections of the Treasury Department, the final bill allows 100 percent deductibility of meals provided to crew members on vessels.

AWO was also involved in many legislative areas other than tax issues, of course. The whole issue of cabotage, and the industry's work in the environmental arena played a major role as well. These two key areas are covered in-depth elsewhere in this special Maritime Reporter AWO Annual edition.

A brief review of some of the other legislative matters which commanded the attention of both AWO's members and staff might be useful. At least one mark of a good trade association is its ability to juggle a considerable number of matters of interest to its members.

As part of its war on drugs, the Reagan Administration instituted a new policy called "zero tolerance." This policy allowed immediate seizure of a commercial vessel or recreational boat if any amount of drugs are discovered on board, regardless of whether or not the vessel owner or operator is aware of the drugs. While AWO member companies strictly prohitit drug use, immediate vessel forfeiture, with no defense, places tug and barge operators at great risk.

AWO worked closely with the House Merchant Marine and Fisheries Committee to amend this flawed policy to protect the rights of the innocent owner while not frustrating the legitimate efforts of law enforcement agencies. The language ultimately adopted by Congress as part of the omnibus drug bill provide limited protection for a vessel owner/operator who is "innocent" of knowledge that drugs are present.

While it does not permit seizure of a vessel, it does provide expedited procedures for securing return of the vessel. Election year politics and the fear of appearing "soft on drugs" caused many members of Congress to shy alway from supporting a more reasonable approach to zero tolerance.

In another area, the 100th Congress returned to a two-year cycle of authorizing water resources projects by passing and sending to the President S.2100, signed into law in November.

In comparison to the 16- year stalemate over water project construction and funding which culminated in the 1986 enactment of landmark legislation, P.L. 99-662, development of the 1988 bill was a much smoother process. The Administration worked closely with Congress on this new bill to assure adherence to the principles of P.L.

99-662: non-federal cost sharing and specific eligibility criteria for projects.

This legislation, now P.L. 100- 676, authorizes construction of the Olmsted project, which will replace Locks 52 and 53 on the lower Ohio River. The Olmsted project is considered a priority by the Inland Waterway Users Board, an advisory group of waterway carriers and shippers established under P.L. 99- 662 at the urging of AWO. The Users Board is empowered to advise Congress and the Administration on inland waterway funding priorities.

In the area of international trade, AWO is monitoring the ongoing negotiations aimed at reaching a new i n t e r n a t i o n a l GATT (General Agreement on Tariffs and Trade) agreement. AWO members have reason to be concerned about the impact of these trade negotiations on its future. In the summer of 1987, the U.S. trade officials attempted to bargain away domestic cabotage laws in negotiations on a U.S.-Canada Free Trade Agreement (FTA).

Despite the outrage by a united maritime industry and by Congress, trade officials refused to remove maritime services from the scope of their negotiations. Ultimately, the industry prevailed. But once again, U.S. negotiators refuse to remove the industry from the GATT agenda.

Industry and Congress are gearing up for what could be a major confrontation.

Maritime Reporter Magazine, page 46,  Mar 1989 New Jersey

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