The Future of the Maritime Industry under a Trump Administration — Part I

Jonathan K. Waldron, Matthew J. Thomas, and Joan M. Bondareff

Those engaged in the maritime industry are extremely interested in what the Trump administration will mean for our industry. Although a challenging task, here is what we see in some key areas as we look into our “crystal ball,” just as the new administration gets started.

Transportation Secretary Elaine Chao has Maritime Experience
As an initial point, we think it is very good news for the maritime industry that Elaine Chao was appointed to lead the Department of Transportation where she served as deputy secretary in the first Bush administration. The incoming secretary not only has extensive government management experience as the former secretary of labor, but she also served as the deputy maritime administrator and former chairman of the Federal Maritime Commission. Ms. Chao is married to the Majority Leader of the Senate, Mitch McConnell (R-KY), and enjoys close working relationships with many in Congress, making her an especially effective advocate for the Trump administration’s transportation priorities. In addition, Ms. Chao is the daughter of a merchant mariner turned prominent ship owner, giving her a unique lifelong exposure to international shipping. And it is worth noting in this regard that her sister is deputy chairman of the Foremost Group, an international shipping and transportation company based in New York.

Infrastructure Proposal and Port Wish List
Secretary Chao has spoken of her support for the Trump infrastructure proposal while stressing the need to “expedite the process of making repairs” and “decreasing regulatory burdens” (as reported by CNN reporter J. Diamond on December 21, 2016). President Trump has announced, at various times, that he wants to spend one trillion dollars on fixing America’s infrastructure. Since the American Society of Civil Engineers rated America’s infrastructure as a D+ in its most recent report card, we agree that this should be a Trump administration priority. Ports and states can certainly benefit from a targeted infrastructure package. The American Association of Port Authorities has already published its wish list for a port infrastructure proposal to include more money for the Port Security Grant Program and the Diesel Emissions Reduction Act Program, increasing FAST Act investments, and making full use of the Harbor Maintenance Tax. It remains to be seen how such a package will be funded, however; President Trump’s proposal is to reportedly fund it with repatriated foreign taxes. Thus, the Congressional Budget Office will have to “score” this effort to account for its effect on the overall U.S. budget. And it will be up to House Republicans to decide whether to support a stimulus package that they did not support when President Obama proposed it. Importantly, the maritime industry will need to make a forceful case to secure a fair share of any infrastructure package for improvement of ports, waterways, intermodal connections, and other shipping projects. The lure of generous federal spending on “infrastructure” has numerous industry sectors—not just roadbuilders and transit, but also rail, pipeline, telecoms, and utilities—already jockeying for position with the new Congress and administration. Unfortunately, ports and the maritime sector are often shortchanged in competing with these other sectors.

FY 2017 Budget Woes
The U.S. government is currently operating under a Continuing Resolution (“CR”) that runs out on April 28, 2017. This means that agencies have no leeway to initiate new programs. The theory of the extended CR is that the new administration will have time to submit its budget for the rest of FY 2017 as well as for FY 2018. This remains to be seen. Currently, we anticipate a continuing CR for the rest of FY 2017 while the FY 2018 budget is being considered.

Key Maritime Programs
Below are the key maritime programs administered by the Maritime Administration (“MARAD”), U.S. Coast Guard, U.S. Customs and Border Protection (“CBP”), and Bureau of Ocean Energy Management (“BOEM”) that will be affected by the new Trump administration, and our preliminary prognosis on their future.

The Maritime Security Program (“MSP”) – currently funded at $300M to cover 60 vessels in the MSP fleet. Although the MSP is a subsidy program to help keep a limited number of ship and other intermodal assets under the U.S. flag for national defense purposes, we anticipate that this program will continue to be supported in the budget because of its relation to national security and defense.

The Jones Act – we expect that provisions restricting domestic shipping to U.S.-owned, flagged, and built vessels will continue largely unchanged, in line with the Trump administration’s focus on protecting U.S. industries. The recent emphasis on Jones Act enforcement, through the creation of a new Jones Act Division of Enforcement (“JADE”) in CBP, likely will continue and could be enhanced under a Trump regime.

Cargo Preference – these programs provide critical support for U.S. shipping companies, but they also fall under the rubric of support programs for industry that we expect President Trump may not support. U.S.-flag ships depend on shipping U.S.- impelled cargo, including military and agricultural products, for their livelihood. It remains to be seen whether MARAD will exercise the strong oversight and enforcement for these programs that Congress granted it in 2014.

Title XI Loan Guarantees and Shipbuilding – President Trump has touted rebuilding our military assets and building up the Navy fleet to 350 ships from its current roster of 272. This will mean an increase in the Navy’s budget of more than eight billion dollars over present budgeting. The shipyards are anxious for this work. (See Shipbuilders Council of America comments at http://shipbuilders.org.) An increase in the Navy’s budget to support more ship construction will mean an increase in the deficit, unless offsets are found in civilian programs. It is unclear how the Trump administration will handle subsidies. We would expect the new administration to look at this on an industry sector-by-sector basis. In this regard, it is unclear how funding for title XI loan guarantees for civilian shipbuilding will be handled, taking into account that there is some support in Congress for this loan guarantee program, but it has certainly had its vocal critics, too.

Time for New Icebreakers?
The United States lags severely behind Russia when it comes to a fleet of polar icebreakers. In fact, the United States barely has one operating polar icebreaker now. This compares to the Russian fleet of over 24 icebreakers, including those built for Arctic defense. Building new icebreakers in U.S. yards will create many high-tech jobs, and we hope that the Trump administration will support the U.S. Coast Guard’s request for funding the development and construction of at least two polar icebreakers. Indeed, the Coast Guard issued a request for quotes on December 22, 2016, for industry studies to identify solutions for the heavy polar icebreaker that minimize cost, schedule, production, and technology risk, which indicates that the Coast Guard expects to award multiple industry study contracts in early 2017. This will be followed by a request for a proposal for the detailed design and construction of heavy polar icebreakers in 2018.

More Maritime Programs
Small Shipyard Grants – although this is also a subsidy program of sorts, members of Congress from shipbuilding districts have been very supportive of this program and we anticipate that Congress will continue to fund it because, for a modest investment, the program benefits a number of small yards and their constituents across the nation. It also provides high-skilled jobs and manufacturing for shipyard improvements, such as cranes and floating dry docks.

Marine Highway Program Grants – MARAD has tried for a number of years without much success to get this program, also called Short Sea Shipping, off the ground. The first grants for establishing a marine highway were awarded in October 2016. (See www.marad.dot.gov for more information.) Unless small ports and communities along the sea routes, and their members of Congress, can make a better case for continuing this program, we do not anticipate that it will continue to be funded.

Marine Environmental Grants – Congress has recently appropriated approximately three million dollars a year for MARAD to issue small grants for environmental projects, including studies on hydrogen fuel cells, batteries, and ballast water technology, among other studies. We doubt that this program will survive President Trump’s budget cuts. It will be up to the new Congress to decide whether it’s worth funding.

Federal Maritime Commission – the Federal Maritime Commission (“FMC”), an independent agency that oversees competition rules for international liner shipping companies, forwarders, and terminals in the United States, has been in the headlines recently. Prolonged overcapacity led to accelerating consolidation in the container shipping industry last year, and the remaining major carriers have reordered into three main alliance groupings. While the FMC’s statutory powers are relatively limited, its current role of overseeing these changes in the competitive landscape and trying to ease disruptions for concerned shippers is expected to continue. In addition, a new Trump-appointed chair could dust off the FMC’s trade law powers to retaliate against foreign government policies that are “unfavorable to shipping,” unfairly disadvantaging U.S. maritime companies or U.S.-foreign waterborne trade.

Offshore Renewable Energy Up in the Air
Offshore Wind and Other Renewable Energy Projects – the Obama administration gave strong support to the development of Offshore Wind (“OSW”) and succeeded in awarding a total of 12 commercial leases in the Atlantic Outer Continental Shelf (“OCS”), including last month’s sizeable award off the end of Long Island to Statoil for a significant amount of money. In addition, the first commercial OSW project in state waters went operational in December 2016—the Deepwater Wind project off Block Island, Rhode Island. European developers have flocked to areas of the OCS adjacent to states that support OSW in other offshore areas on the Atlantic coast of the United States. However, these projects have also been supported by the Production Tax Credit (“PTC”), which was enacted last year and continues the PTC for five years, albeit at a reduced rate. We do not think that congressional tax reformers will extinguish this popular tax credit, but this is uncertain under a Trump administration. The incoming secretaries of the interior and energy will have to decide how much support to continue to give to offshore renewable energy projects. It is perhaps a good sign that incoming Energy Secretary Rick Perry is from a state that has extensive (onshore) wind projects.

Offshore Oil and Gas – we fully expect the Trump administration to be friendlier to offshore oil and gas development than the Obama administration. In the more near-term, President Trump could take policy action to help offshore drillers turn a profit at a time when prices remain low. Subsequent action could include opening up more offshore areas.

U.S. Coast Guard and Environmental Protection Agency Enforcement
Environmental – we expect the Trump administration to generally cut-back on environmental regulation of industry. However, because most of the environmental regulation of shipping is driven by international treaties and agreements, we do not expect any significant changes with regard to our industry. With regard to federal and state environmental regulations such as ballast water and attempts to enact the Vessel Incidental Discharge Act to preempt state laws, it will remain difficult to enact such legislation in view of continued strong state interests in Congress.

Trade Sanctions
Trade Sanctions – the Obama administration rolled back longstanding maritime restrictions on Cuba trade, issuing general licenses for passenger vessels, allowing cargo ships to move broader ranges of approved goods from U.S. ports to Cuba, and significantly easing the so-called “180-day rule” that blocked international vessels from the United States after trading to Cuba. With regard to Iran, the sanctions-easing nuclear deal last year led to a resurgence in global bulk and liner operators serving Iran’s ports (and some breathing space for insurers and other service providers that play a role in those operations). The new administration and Congress are expected to take a more hardline sanctions stance, however (especially with regard to Iran). As a result, compliance issues related to serving Cuba and Iran will need to be watched closely in the months ahead. On the other hand, the administration’s apparent intention to forge closer relations with Russia could lead to an easing of sanctions that have sharply curtailed U.S. companies’ dealings with Russia’s offshore energy sector, as well as mariners and maritime companies based in the now-embargoed Crimea region. This may set up a conflict with congressional Republicans who favor increased sanctions on Russia following its hacking of the Democratic Campaign Committee computers.

Broader Trade Policies – of broader concern to much of the shipping sector is the question of what the new president’s tough rhetoric on trade will mean for the growth of waterborne trade in the years ahead. President Trump has assembled a trade team who share his skepticism for free trade agreements like the North America Free Trade Agreement (“NAFTA”), and his critical and confrontational trade views towards China, in particular. Ship owners, investors, and lenders will be watching closely to see whether a U.S. retreat from free-trade principles (e.g., the expected jettisoning of the Trans Pacific Partnership and Transatlantic Trade and Investment Partnership, and adoption of import tariffs and restrictions aimed at Chinese-made goods) will dampen trade growth and prolong the painful cycle of overcapacity affecting the container, dry bulk, and other shipping sectors.

Monitoring Developments
In conclusion, we are hopeful that the Trump administration and 115th Congress will continue to support and enhance useful maritime programs, but maritime issues usually receive lower priority in a new administration. Thus, it will likely take an extended amount of time to determine the direction of the Trump administration and Congress with regard to the issues discussed above. We will continue to monitor developments and provide updates as appropriate.

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