SIC 4412
DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT



This category includes companies primarily engaged in operating vessels for the transportation of freight on the deep seas between the United States and foreign ports. Establishments operating vessels for the transportation of freight which travel to foreign ports and also to noncontiguous territories are classified in this industry. A related industry group is SIC 4424: Deep Sea Domestic Transportation of Freight.

NAICS Code(s)

483111 (Deep Sea Freight Transportation)

Industry Snapshot

Deep sea foreign transportation of freight is greatly affected by the global economy and international competition. U.S. companies in this industry compete with each other and with foreign carriers. Competition in the industry is heightened in part because U.S. regulations have tended to make costs for U.S. ship owners higher than for ships bearing the flags of other nations. Many American-owned ships carry flags of nations with lower levels of expenses in order to stay competitive in the cargo transport business. By operating under the authority of other countries, U.S. shipping operations estimated they could cut labor costs by as much as 80 percent.

In the early 2000s, U.S. merchant ships engaging in the deep sea foreign transportation of freight carried more than 1 billion tons of cargo, according to The Transportation Institute. The United States remained the world's largest trading nation, with export and import trade equaling one-fourth, or more than $500 billion of total world merchandise trade. By far, the majority of this trade cargo was transported by water. Nonetheless, in 2000 the U.S. ranked eighteenth in number of oceangoing vessels, and the U.S. flag merchant fleet ranked twelfth on a dead-weight tonnage basis. The U.S. fleet's share of ocean-borne commercial foreign trade, by weight, was less than 5 percent.

Although tonnage of foreign merchandise trade increased over previous years, rising costs and price competition still meant declining profits for U.S. ship owners. Some shipping firms received subsidies from the U.S. government to compensate for high U.S. flag operating costs. These subsidies fell under the Maritime Security Program, in which steamships were made available to the U.S. Defense Department should the need arise.

By 2000, there were 454 active, privately owned U.S. vessels of 1,000 gross tons or more engaged in oceangoing transportation of freight, according to the U.S. Bureau of Transportation Statistics. The U.S. flag merchant marine's active oceangoing fleet consisted of 142 tankers, 136 general cargo ships, 90 container ships, 60 roll-on/roll-off vessels, 15 dry bulk ships, and 11 combination passenger/cargo ships.

The outlook for the U.S. flag fleet was predicated on several factors: foreign competitors; costs of labor, fuel, insurance, and other operating expenses; and volume of trade in relation to available cargo space. Overcapacity has been a problem for U.S. and foreign merchant fleets for many years, resulting in lower freight rates.

In recent years, the top foreign-trade water gateways for freight cargo (ranked in descending order, based upon trade dollars) were: the Port of Long Beach, California; the Port of Detroit, Michigan; the Port of Los Angeles, California; the Port of New York, New York; and the Port of Buffalo-Niagara Falls, New York.

Organization and Structure

The U.S. merchant deep sea fleet is made up of three categories of service: liner, non-liner (or tramp), and tanker.

Liner service includes regular, scheduled stops at ports along a route. Vessels operating as liners may be owned or chartered by an operator. Operators must accept any legal cargo they are equipped to carry, unless it does not meet the minimum freight requirements of the operator. Liner service usually carries manufactured goods. Often, two or more carriers along a route form "conferences" in order to regulate rates and competition. All conference members must charge the same freight rates, although rates may fluctuate according to supply and demand for cargo space. Liner service vessels are designed to handle the cargo most often shipped along their routes. Trip frequency depends upon the demands for shipping along that route.

Non-liner, or tramp, shipping is scheduled individually by a customer who charters the ship to carry its cargo. Tramps usually carry only one type of bulk cargo, such as coal, ores, grain, lumber, or sugar. On occasion, two shippers of the same commodity may charter the ship jointly. Freight rates vary depending on the negotiations of the ship owner and shipper and the supply of and demand for cargo space. The tramp freight market peaked in 1995 and continued to decline except for a few peak rate periods.

Tanker service carries liquid cargoes, especially crude oil and petroleum products. Tankers may be operated by privately owned companies for charter or by the oil company or other company as part of its entire industrial organization. Oil companies also charter extra ships as needed. However, they are not the only ones to employ ships exclusively for their own trade. Other companies may have specialized ships for transport of their goods. For instance, produce growing and distributing concerns operate fleets of refrigerated vessels for transportation purposes.

Some companies chartered ships on a long-term basis. Doing so provided many of the same advantages of owning a fleet without the enormous investment. By owning a fleet or contracting for long-term charter, the shipper was able to maintain complete control over shipping schedules. It could divert its ships to ports where demand for the product was high, and it could engage for service a fleet of ships with crews that had experience in handling a particular commodity.

Ships became increasingly more specialized during the twentieth century, and specialized ships were built to carry such diverse products as bulk cement, liquid chemicals, coal, iron ore, liquefied natural gas, newsprint and other paper products, petroleum and petroleum products, wood chips and wood pulp, refrigerated foods, and heavy equipment such as railroad locomotives or electric generator parts. Because many specialized ships were so expensive to build, a ship owner could agree to have a ship built for a company with the stipulation that the company agreed to lease the ship for most of its active life.

There were several federal agencies that administered laws and policies concerning the U.S. merchant fleet. The main agency was the Maritime Administration (MARAD), which was charged with coordinating the requirements of ship owners, shipbuilders, shippers, and labor unions for both domestic and foreign trade. In the late twentieth century, MARAD initiated and administered construction and operating subsidies, capital construction funds, and market development and maritime training.

Background and Development

Since the earliest days in the United States, the federal government has considered the maintenance of a viable merchant fleet to be a priority for national security and the health of its foreign trade. During wars and other emergencies, the U.S. military chartered private ships to transport supplies.

Congressional legislation throughout U.S. history has helped to protect and promote the U.S. merchant fleet. Legislation in 1845 required the USPO to transport mail abroad on U.S. merchant ships. Mail contracts were offered as incentives to shipping companies to establish shipping lines with Cuba, Panama, and major European ports. The law also stipulated that merchant ships could be converted to warships if necessary. The Military Transportation Act, passed in 1904, directed the U.S. Army and Navy to give preference to U.S. flagships for the transportation of supplies for direct support of military operations abroad.

The Merchant Marine Act of 1928 offered incentives to the shipbuilding industry to build new ships so that U.S. fleets could compete more effectively in the world market. This legislation, however, failed to spur the construction of many new ships and U.S. foreign shipping continued to decline as it had for many years.

The Merchant Marine Act of 1936 has been called the Magna Charta for U.S. shipping. It called for the first direct aid to merchant fleets for construction and operation. It also authorized the government to build ships and charter them to private companies for operation on foreign routes if private citizens did not provide that service. It required subsidized fleets to set up special funds to replace aging ships, provided loans and mortgage insurance, and authorized a training program for American crew members. That landmark piece of legislation was followed in 1954 by the "Fifty-Fifty Law," which required that at least half of the country's foreign aid or humanitarian aid cargoes be carried abroad by U.S. merchant ships.

A weak merchant marine was regarded as unacceptable to the U.S. Department of Defense, as the military has historically relied on private ships to carry military cargo during emergencies. Although all U.S. presidents since George Washington have recognized the importance of a strong merchant marine for the nation's security, the industry has not always received the support it needed to remain viable and to compete successfully with foreign ship operators. Presidents George Bush and Bill Clinton promised reform in order to maintain the shrinking U.S. merchant fleet, which carried only about 15 percent of U.S. exports in the early 1990s, according to The Wall Street Journal. The National Performance Review headed by former vice president Al Gore made several reform recommendations regarding the maritime industry, including striking down legislation that forced U.S. flag ships to carry military and aid cargoes; curtailing subsidies; repealing antitrust protection for carrier conferences established under the 1984 Shipping Act; and extending the U.S. flag to carrier lines that had foreign investors.

The Merchant Marine Act of 1970 was an attempt to counter several growing problems in the shipping industry. The U.S. fleet at that time carried only a small portion of the nation's foreign trade and a large portion of its ships were due to be scrapped because of age within the next few years. The 1970 legislation called for the construction of 300 merchant ships, deferred taxes for U.S. shipping companies if the money was put into funds to replace aging vessels, and operating and construction subsidies.

Despite the best intentions and stated policies of the U.S. government, American companies engaged in foreign deep sea transportation have been in trouble for many years. Operation Desert Shield and Operation Desert Storm, the 1990 to 1991 confrontation with Iraq over its invasion of Kuwait, called for a gigantic shipping effort to bring U.S. supplies and equipment to the Middle East. The military enlisted the services of the merchant marine for this task. It also used several dozen chartered transport ships it kept fully loaded and ready. However, even these privately owned ships could not handle the demand of military shipments, and the U.S. was forced to turn to foreign transport to carry equipment and supplies. During the build-up of forces, almost half of the 200 ships carrying equipment to Saudi Arabia were foreign-owned. This dependence on foreign vessels was, in part, a consequence of the U.S. fleet's incompatibility with military needs. The U.S. military needed Ro/Ro (roll on/roll off) ships for ease of transport, but according to a Fortune magazine article, half the U.S. fleet consisted of oil tankers, and the rest were containerships or bulk carriers. Fortune also noted that although ships were much larger than in 1950, the U.S. shipping capacity had slipped by a third during that time.

Like the rest of the world's fleets, U.S. bulk carriers and supertankers were aged and worn. But replacing them was expensive, and the industry was likely to be unable to afford replacements because of its perennially shaky financial standing. After years of debate, the U.S. Congress finally passed the Maritime Security Act in 1996 by an overwhelming margin. This act reformed outdated maritime regulations and ensured that privately owned merchant ships would be available to meet national security sealift requirements. It also established a program to provide participating carriers with $1 billion in operating assistance over 10 years.

Prior to passage of the act, the two largest U.S. shipping companies, American President Companies and CSX Corporation's Sea-Land Service, Inc., considered registering their fleets overseas and flying the flag of another nation unless the United States relaxed its rules and regulations, which ship owners regarded as prohibitively expensive. One of those restrictive rules stated that shipping lines must buy ships built in the United States in order to receive operating subsidies. John Lillie, president of the American President Lines Ltd. (APL), said that ship lines needed to have more freedom to buy vessels overseas because of the lower costs of those products.

Despite threats that even surpassed the passage of the Maritime Security Act, in January 1997, APL chose to remain a U.S. flag carrier, retaining at least a 51 percent U.S. ownership, by enrolling nine of its largest ships in the Maritime Security Program in return for $2.1 million per ship in annual subsidies for a total $18.9 million. Its other 38 vessels were enrolled in December of 1996. Nevertheless, APL Limited announced in April of 1997 that it was merging with Neptune Orient Lines LTD, a Singapore-owned and operated steamship line.

Sea-Land Services, Inc. also applied to the Maritime Security Program. The U.S. government accepted 15 of its ships. For this, Sea-Land received $2.1 million per year for each ship participating in the program.

Legislation to deregulate the ocean shipping industry continued to be debated within the halls of Congress after the National Industrial Transportation League proposed the issue in January 1995. Such reform would enable shippers to operate in a more certain regulatory environment and, according to steamship lines, would improve shipper-carrier relations and the efficiency of American exporters, plus reduce the federal government's involvement in unnecessary regulation.

In March of 1997, legislation to allow confidential contracting between individual ocean common carriers and shippers and other measures such as the making public of tariffs and the reduction of time required to post such a tariff rate increase were proposed to change the Shipping Act of 1984. Called the Ocean Shipping Reform Act, the bill, in essence, would eliminate the Federal Maritime Commission (FMC) and transfer remaining functions to an expanded and renamed Surface Transportation Board. If passed, the regulatory changes would take place in 1998 with the FMC eliminated in 1999.

Tankers and Oil Spill Legislation. Transport of oil in bulk began in the late 1880s. Tankers in the more than 100 years since then have changed dramatically, with ship work handled more by computers, thus cutting back on the size of the crew. The enormous size of the tankers of the modern era has also increased the risk of oil spills and the impact such spills have on the environment. The Alaskan oil spill in Prince William Sound by the Exxon Valdez in 1989,which caused significant ecological damage to the area, thus served as a catalyst in the institution of stricter environmental regulations for tankers and other vessels.

A U.S. law passed in 1990 required all tankers sailing in U.S. waters to be equipped with double hulls to prevent spills if the outer hull was damaged. The shipping industry claimed that another rule included in the act could shut down the shipping industry in U.S. waters. The rule required carriers to provide environmentalliability guarantees in the form of insurance, letters of credit, surety bonds, or Protection and Indemnity (P&I) clubs that insured more than 95 percent of the ships traveling in U.S. waters. However, the liability allowed was open-ended, making it impossible to find guarantors. This rule was not implemented pending resolution of the problem.

Although the number of oceangoing vessels dramatically decreased, fleet productivity, in terms of cargo-carrying capacity, improved by 42 percent since 1972. The last operating differential subsidy (ODS) contract expired in 2001. As of January 1999, three companies still held ODS contracts that covered seven vessels in the bulk trades: Ocean Chemical Carriers, Ocean Chemical Transport, and Liberty Maritime. Under 1996's Maritime Security Program (replacing ODS), 47 U.S. flag vessels remained as participants. Companies that were awarded MSP agreements included: American Roll-On Roll-Off Carrier, American Ship Management, Central Gulf Lines, Farrell Lines, First American Bulk Carriers, and Waterman Steamship Lines.

The annual inflation rate for water transportation as of November 1999 was approximately 6.1 percent, a dramatic increase from 1997's 0.5 percent. Another 4 percent increase was expected for 2000. The biggest hike was for inbound deep-sea foreign transportation of freight.

The economic boom of the mid-1990s caused many ship owners to replace their aging vessels, the new vessels being delivered 18 to 24 months later, just when the market plummeted. The Baltic Freight index dropped and Japanese steel production dropped 13 million tons between 1998 and 1999. Seaborne trade in chemical products dropped 1 percent in 1998, and U.S. petrochemical shipments to the Far East dropped 18 percent. Although domestic business was booming, the Far East crisis left many owners of new vessels "all dressed up with nowhere to go." Consequently, in 1998, demolition of older vessels increased as owners attempted to avoid continued financial losses. The biggest demolition efforts in 1998 were in the Handy size (20/49,999 deadweight) of vessels in the 20 to 25 year age range.

Current Conditions

During the early 2000s, companies engaged in the deep sea foreign transportation of freight contended with a number of different challenges. While reduced levels of consumer and corporate spending, as well as lower production levels, affected shipment volumes, concerns over security and labor issues also plagued the industry. In the wake of a sluggish economic climate, made worse by the terrorist attacks of September 11, 2001, conditions were especially bleak for carriers operating routes in the North Atlantic. In 2001 and 2002, these companies struggled with dangerously low shipping rates that were taking a toll on carriers' financial health, leading to significant losses. According to Country Views Wire , member companies of the Trans Atlantic Conference Agreement saw their market share decrease significantly from 1994 to 2000, falling from 70 percent to 46 percent. The conference membership base also was on the decline, falling from 17 shipping lines in 1997 to a mere seven in 2001. Making matters worse was the fact that trans-Atlantic routes were stagnant in comparison to trans-Pacific routes that benefited from high-growth nations in regions such as Asia.

Shippers on the West Coast also had their share of challenges. In the fall of 2002, dockworkers at 29 coastal ports staged a lockout that lasted 10 days when the International Longshore and Warehouse Union failed to come to terms with the Pacific Maritime Association. The lockout created a number of significant problems. Hundreds of ships were stranded, leading to congestion at area seaports. In addition to losses that some industry observers estimated would cost shipping companies anywhere from $400 to $600 million, the lockout had a more severe impact on the larger U.S. economy. For example, during the lockout JoC Online reported: "Analysts and business leaders have warned the shutdown will cause a noticeable increase in plant closings, job losses, and financial market turmoil. Already, storage facilities at beef, pork and poultry processing facilities across the country are crammed with produce that can't be exported." The publication revealed that the lockout's overall impact on the U.S. economy could range in the billions of dollars.

The terrorist attacks against the United States on September 11, 2001; a terrorist assault on the USS Cole in Aden, Yemen; and the U.S.-led war with Iraq in early 2003 were all factors that led to heightened concerns over security within the industry, as well as higher insurance rates for shipping companies. Faced with these threats, congressional leaders and industry experts were challenged with improving security levels without causing significant shipment delays. While it appeared that at least some standing delays were imminent, the industry was working to improve security by using new technology to insure the integrity of shipments. Among technologies being evaluated by the U.S. Department of Defense and the U.S. Department of Transportation were so-called "Eseals," which according to the September 2002 issue of World Trade were "metal bolts with radio transmission devices embedded. In the event of tampering, a radio frequency signal alert is sent to a central communication center." The publication also reported that global positioning satellite and cellular technologies were being employed in conjunction with Eseals in a program called CargoMate, which sought to monitor truck shipments en route from various ports to their final destinations.

Research and Technology

Foreign shipping benefited from a revolutionary improvement first introduced in domestic transport in 1956—containerization of freight as part of an integrated transportation system. Prior to this new design, cargo was lifted aboard either in separate packing crates or bundled on pallets. However, container shipping involved large containers that fit the chassis of a tractor-trailer and that could be packed and sealed by the manufacturer, transported via truck to the ship terminal, removed from the truck chassis, and placed in the cargo hold of the ship with a large crane that was actually part of the ship. At its destination port, the container was lifted off the ship, placed on the truck chassis, and driven to its ultimate destination. The containers could also be hauled by train if necessary. This innovation eliminated much of the handling that cargo once required. With this integrated system, it was handled once to pack it and once to unpack it, neither time by ship personnel, thus reducing the risk of damage and liability on the part of the ship owners.

Containerization also led the way to Ro/Ro (roll-on/roll-off) ships with their gigantic cargo doors on the sides and stern that allowed large vehicles or other large cargo to be driven or rolled on and off. Conversion to containerships was an expensive investment for ship owners, terminal operators, and port agencies. The adoption of containerships also led to the establishment of new companies that bought containers and leased them to the ship owners, thus removing from the ship owners the complex problem of keeping track of the whereabouts of empty containers.

In recent years, a number of shipping lines have installed sophisticated computers and information technology to provide shippers with access to information about their cargo, keep track of rates, and allow customs officers to screen cargo while the ship is still at sea.

The near future was expected to be marked by the introduction of significantly faster shipping vessels. David L. Giles, an aeronautical engineer, has invented a new craft dubbed FastShip. The new breed of freighter would be 863 feet in length and marry jet-ski technology to a novel hull design 100 feet shorter than the conventional super freighter. FastShip is estimated to cross the North Atlantic at speeds up to 40 knots in 3.5 days as compared to existing ocean service requiring seven to eight days. If the ship is successful, its biggest benefit will be delivering high-value time-sensitive (HVTS) cargo, such as automobiles and automotive parts, pharmaceuticals, apparel, and other consumer goods, on a door-to-door basis in five to seven days as opposed to the current 14 to 35 days that existing services require. Japanese researchers are experimenting with ships driven by super-conducting electromagnets and ships propelled by water jets and powered by gas turbine engines. Further in the future, a Techno-Superliner might be capable of traveling between Japan and the United States in three days.

Further Reading

"Bush Takes First Steps Toward Intervening in Port Dispute." JoC Online, 7 October 2002.

Coates, J. Douglass. "Trends in the Transatlantic: The Squeeze Is On for Carriers." World Trade, February 2003.

Dupin, Chris. "On the Rocks: Fallout from West Coast Lockout May Not Sink Shipping Lines but It's Denting Their Bottom Lines." Traffic World, 18 November 2002.

Logistics Management & Distribution Report, November 1999.

The Transportation Institute. "Industry Profile," 22 March 2003. Available from http://www.trans-inst.org .

"USA Industry: Desperate Times for North Atlantic Ocean Carriers." Country ViewsWire, 21 February 2002.

U.S. Department of Transportation. Bureau of Transportation Statistics. "Table 1-20: Number and Size of the U.S. Flag Merchant Fleet and Its Share of the World Fleet." National Transportation Statistics 2001, 2001. Available from http://www.bts.gov .

Ventham, D. J. "Deep-Sea Shipping: Hope Seen for Long-HaulMarket Stability in 2000." American Metal Market, 23 November 1999.

Young, Ian. "Chemical Ship Owners Grapple With Overcapacity." Chemical Week, 16 June 1999.

Zuckerman, Amy. "Shippers Pay a Price: Insuring Cargo in a War-Torn World is Risky Business." World Trade, May 2002.

——. "Striking a Balance." World Trade, September 2002.



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