Shipping Australia notes that there is now backing by both of the major parties for support to, and expansion of, a national commercial ocean-going freight fleet.
Details of the policies by either main party are pretty scant at this point so it is difficult to provide detailed comment. However, Shipping Australia cautions against government support for national fleets.
Similar nationalist policies have been tried in the past – both here and in the United States – and they have been profound failures. Policy proponents and politicians tend to claim that their protectionist maritime policies will bring a variety of benefits. But they generally don’t.
US Jones Act: the many failures
The U.S. Jones Act requires ships carrying goods between two US ports to be US-built, owned, crewed, and flagged.
But the US Jones Act artificially raises the cost of freight and hurts the economy. It thereby increases the cost of living and hurts the poor.
As US Congress Representative, Alexandria Ocasio-Cortez has stated, “We must lift the Jones Act, which has exploited Puerto Rican consumers and strangled the economy”.
The Jones Act is supposed to boost maritime training and the mariner workforce, but it doesn’t. The US Jones Act is supposed to boost US naval security, but, at best, it is irrelevant. During the first Gulf War in the 1990s, the US Navy mostly chartered vessels from the international civilian commercial market to meet their needs for cargo shipping.
The Jones Act has been proven to hinder disaster relief and the flow of aid to the most desperately afflicted during times of national emergency and tragedy – whenever there is a major disaster, such as a hurricane, it is necessary to have a Jones Act waiver issued so that international shipping can deliver aid and relief supplies. What is particularly awful is that there have been examples of Jones Act vested interests who have actually lobbied against the granting of waivers during times of emergency and disaster. Such lobbying would, if successful, prevent hinder the flow of aid to people who are in desperate need during times of national emergency and tragedy.
Australian policy proponents and politicians are looking to have some form of Jones Act-style policy enacted here. This is bad policy with bad outcomes. It ought not to be supported.
Sibling policies: national fleets and national cabotage
Before anyone writes to us complaining that “national fleet” policies and “coastal shipping” policies are two different sets of policies, we like to point out that (a) we know, and (b) despite that, national fleets and national cabotage policies are similar policies in justification and effect. They’re sibling policies.
Both the national fleet policy, and the national cabotage policy, are typically justified in that they will deliver some benefits in the areas of national security; protection of national trade; providing opportunities for maritime training / skilling / workforce development; job creation; creating national maritime clusters, attracting capital investment; boosting the national flag (i.e. the number of ships registered under that nation’s ship registry); boosting general economic development, and so on.
A national fleet can, in theory, be brought into existence in a variety of ways. A government can buy a fleet, or greatly subsidise private operators, or alter policy settings. A national cabotage policy can come into existence pretty much the same way.
Although the details may differ, a national fleet policy and a national cabotage policy will have very similar justifications and goals.
Australia’s own Jones Act: the many and expensive failures of the Coastal Trading (Revitalising Australian Shipping) Act 2012
We already have our own version of the Jones Act. It’s the Commonwealth’s Coastal Shipping (Revitalising Australian Shipping) Act 2012.
The Coastal Shipping Act was set up to “revitalise” Australian shipping. But, really, the Coastal Shipping Act damaged local shipping.
The Act created a contrived and protected market that was meant to provide protectionist advantages to a domestic shipping fleet, to increase the the volumes of coastal cargo, to increase the numbers of ships flying the Australian flag and to increase the numbers of Australian seafarers.
So what’s happened in the ten years since the introduction of the Coastal Shipping Act 2012?
The existing coastal regime was promoted as being sure to spark a shipping Renaissance. But it didn’t.
It was said that the coastal regime (and associated tax benefits) would provide Australian companies with an exciting opportunity to invest in new tonnage and to expand existing operations. But it never.
It was said on the “great day” of the legislative passage of the coastal shipping and tax regime that shipowners were ready to invest, that they were committed to their investment decisions, and that they were looking forward into expanding into new trades. But they weren’t. And they didn’t.
Shippers (the owners of cargo) did find that freight rates massively increased. Tasmanians were put at a severe disadvantage with freight rates rising by up to 63% in some cases. Ships fled the domestic Australian flag (the domestic registry for shipping companies with a locally-trading presence). Hundreds of Australian seafarers lost their jobs when these ships left the domestic registry.
The Australian international flag (the Australian registry for internationally trading ships (i.e. ships that trade internationally and which choose to fly the Australian flag)) was primarily set up to lure international ship operators. But it has never attracted a single ship from an international ship owner in its ten years of existence.
It gets worse. The Coastal Shipping Act 2012 forced at least one manufacturer to shut down with about 100 job losses. It forced widespread “import substitution” – that’s when goods are imported from overseas instead of being manufactured in Australia and shipping around Australia. Bricks, for instance, are imported into Sydney from Spain rather than being made in Perth and shipped around the coast. The average volume of coastally carried cargo has fallen by a few million tonnes since the introduction of the Coastal Shipping Act.
So that’s a lot of business that the Australian economy is losing. Some observers commented in 2013 that the introduction of the Coastal Shipping Act caused an ongoing loss in excess of AUD$100 million each year.
It’s not just us saying that the Coastal Shipping Act 2012 has not been beneficial to Australia. Prior to its introduction, there was widespread maritime-industry and trade-community opposition to the Act. Since then, the Coastal Shipping Act has been reviewed independently and separately by about eight independent expert reviewers (including the Productivity Commission, which as reviewed it several times) and, each time, it has been recommended that the Coastal Shipping Act ought to be scrapped or fundamentally re-written.
It’s good advice. If only someone in political office would listen to this advice and act upon it.
Still not convinced? Current Australian tax incentives haven’t worked
At the same time that the Coastal Shipping Act was passed, there were a series of tax incentives established to primarily lure ship owners into registering ships in the Australian registry. Those tax incentives are still available now to any operator that wants to operate under the Australian flag.
It’s really important to realise that, today, there is no serious legal or policy barrier to any international ship owner / operator from establishing a local fleet in Australia. In fact, the system is actually set up to lure international ship owners and operators to Australia by providing them with tax incentives. The shipping policy playing field is level now and it was in fact levelled in 2012.
So what are the tax policies?
The Shipping Exempt Income Tax provides that income generated from shipping activities is exempt. In theory, the ship owner would pay lower taxes which would make the Australian flag more attractive.
The Accelerated Depreciation and Roll-Over Relief allows ship owners to claim greater deductions in the earlier part of a vessel’s life. In theory, this would make the Australian flag more attractive. It also encourages owners of older ships to invest in newer ships.
The Seafarer Tax Offset makes Australian companies eligible for a refundable tax offset for salary, wages and allowances paid to Australian resident seafarers. The offset is supposed to stimulate opportunities for Australian seafarers to be employed on overseas voyages.
The Royalty With-holding Tax Exemption makes payments made to non-residents by Australia companies exempt from certain taxes. The aim was to reduce the costs of Australian shipping companies when hiring foreign ships.
Did these tax incentives increase the numbers of ships on either of the Australian registers? No. The numbers of ships on the domestic register fell. The number of ships on the international register is now, and always has been, zero.
Did these tax incentives encourage any international ship owners / operators to set up shop in Australia? No. They did not. There are no ships on the Australian international register. Plus several shipping companies that were present in 2012, and which where offering freight carrying shipping services in Australia, exited the local market.
Did the at-sea opportunities for Australian seafarers increase? No. Because the numbers of ships fell, the opportunities to do sea-time training reduced.
Did the numbers of Australians employed as seafarers increase? No. Because the numbers of Australian flagged ships fell, hundreds of Australian seafarers lost their jobs.
Did the tax incentives meet any of their policy objectives? We think you know the answer to that already. It’s “no”.
Still not convinced? Australia’s cruise industry flourished… with an exemption to the Coastal Shipping Act
Cruise shipping in 2011-2012 resulted in expenditure by the industry of about AUD$1.77 billion. Passenger spending took the total to AUD$2.4 billion. There was an increase of hundreds of cruise ship visits in Australian ports to 736 visits, according to industry body the Australian Cruising Association.
We’ll jump forward now to 2018-2019 (because cruise ships were banned from 2020 to 2022 because of COVID). The Association was reporting “another” successful year. Economic impact analysis shows that expenditure had risen to a total of AUD$4.8 billion. Wage growth was huge. Total employment impacts rose to over 17,000 full time equivalent jobs.
What a success for the Coastal Shipping Act, eh? Right? Eh? Right?
Pretty early on in the life of the Coastal Shipping Act, cruise ships over 5,000 gross tonnes that could carry over 100 passengers were given an exemption from the Coastal Shipping Act under section 11. The last Ministerial exemption for the cruise sector was issued on 13 September 2018 and it runs until the end of 2023.
Given that the cruise sector succeeded economically while it was subject to an exemption to the Coastal Shipping Act, and, given that there were many adverse effects for non-cruise shipping sectors, then it seems reasonable to infer that the success of the cruise sector was due in part to the fact that it had an exemption to the Coastal Shipping Act.
Still not convinced? Western Australia was aided by international ships… when an exemption was given to the Coastal Shipping Act
Outback rains and flooding in late January 2022 damaged vital cross-country road and rail links. That disrupted the landside transport of goods, which caused a shortage of supplies in the western parts of Australia.
The Deputy Prime Minister and Minister for Infrastructure, Transport and Regional Development, Barnaby Joyce, signed a section 11 exemption from the Coastal Trading (Revitalising Australian Shipping) Act 2012, which allowed international ships to carry cargo between Australian ports on voyages between eastern states and territories and Western Australia.
Shipping Australia understands that international shipping companies experienced a surge in bookings for east-to-west coastal cargo after the coastal shipping exemption was granted.
Let us put that another way. When Australian shippers were given the choice of using international shipping companies to carry their cargo on Australian coastal voyages, they leapt at the chance. This post-exemption surge proves that there is demand by Australians to access coastal shipping services that could be offered international ships.
Still not convinced? Australia’s previous national fleet repeatedly went bankrupt
Australia once owned its own national shipping line. It went bankrupt and was re-capitalised several times because it just couldn’t compete and it was subject to political interference.
Australian Labor Party Federal Transport Minister Laurie Brereton was given the thankless task of selling the company. He found it really hard going and famously remarked that “you couldn’t give it away”.
Still not convinced? StateShips failed with huge financial losses
Consider the fate of StateShips. This was a Western Australian government owned-shipping line set up to serve the people of Western Australia. It was abolished by the Liberal Richard Court government in the mid-90s. It was racking up huge debts and was costing a fortune to operate – it was losing about AUD$19m a year in 1995, that’s about AUD$35m a year today.
Still not convinced? Pricey subsidised coastal shipping failure
After the abolition of StateShips, the WA government tried subsidising a private coastal shipping operator to run a service around the WA coast. That too had to be abandoned. It couldn’t win enough business and it repeatedly ran at a loss. The shipping company operating the route needed more money to break even and, when this wasn’t supplied by the WA government, it had to give up the service.
Still not convinced? Costly failure of the International Shipping (Australian-resident Seafarers) Grants Act 1995
The International Shipping (Australian-resident Seafarers) Grants Act 1995 was set up to provide payments to Australian shipowners to make employing Australia seafarers more competitive. It was meant to close the gap between the international fleet and the Australian fleet. It was a plan to boost the numbers of Australian mariners. It was also supposed to calm down industrial relations tensions and produce industrial peace via a compact with the unions that would, ultimately, save $15 million a year based on $200,000 per ship per year.
What do you think actually happened? Spoiler: none of these things!
The Act was repealed the following year. The unions did not deliver industrial peace, the savings did not materialise (repeal of the Seafarers Grants Act, in fact, saved AUD$52m over four years or about AUD$13m a year) and the sale of the government owned-shipping line was delayed (a further drain on the Australian taxpayer).
“The evidence is there for all to see. The international shipping grants package has not delivered… it has simply provided a windfall gain of $19 million to existing operators”, Transport Minister John Sharp told Parliament during the passage of the repeal bill through Parliament.
Still not convinced? Expensive failure of the Ships (Capital Grants) Act 1987
The Ships (Capital Grants) Act 1987 was set up to help Australian ship operators to buy modern, technologically advanced, ships that could be operated with smaller crews. There were also various subsidies and financial assistance along with early retirement and voluntary redundancy packages for union members. There were also accelerated depreciation tax measures. The total value of these various measures weas estimated to be in excess of about AUD$320 million in 1996. That’s about AUD$574 million today.
So, what do you think happened? In 1996, the average crewing factor (crew per ships) was higher for Australian ships than it was for international ships, which meant Australian ships cost more. There was a pooled employment system which “gives employers no right to select the most suitable, appropriately trained [crew] for their shipping operations,” Minister Sharp told Parliament.
Australian crew wages remained higher than international wages and, as Minister Sharp concluded, “Australian shipping is no nearer to being internationally competitive than it was nine years ago”.
History repeats itself, first as tragedy, then as farce
There are numerous documented attempts above (most in Australia, one overseas) to produce benefits through implementing protectionist maritime policies:
- Government ownership and operation of ships: expensive failure
- Tax benefits for ships, ship operators, and employment of seafarers: expensive failure
- Grants and subsidies for ships and services: expensive failure
- Creation of a protected and contrived domestic market: expensive failure
The only sensible conclusion is that national fleet and protected coastal shipping policies simply do not work.
Worse, they can hurt Australians. They cause Australians to lose their jobs. They cause Australian businesses to shut down. They cause Australians to lose economic opportunities as goods are imported from overseas instead of being made here and transported around the coast. They drain money from the Australian taxpayer. They cause freight rates to increase unnecessarily.
Ultimately, these policies burden everyday Australian families as they put upwards pressure on cost of living.
We should learn from this sad history. We should learn from the eight or so economic reviews that say such policies don’t work – the most recent of which was in 2021 (the Productivity Commission Vulnerable Supply Chains study).
Karl Marx wrote that “history repeats itself, first as tragedy, then as farce”.