October 27, 2021
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The Economics of Maritime Labor

By Gola Traub

Maritime transport runs as the lifeblood of global trade, but the penchant for globalization to erase national barriers and create competitive labor markets of all sorts - and the desire of some ship owners for a more lax and cheaper operating regime has brought a huge and growing sector of the ocean transport business into direct conflict with Western traditional maritime powers. 

This article attempts to present the seaborne trade as the most globalized industry, one where capital and labor are highly mobile. With this intention, the essay aims to demonstrate that the traditional maritime states’ ability to influence their own national labor and capital markets is weaning, for as these states seek to levy (higher) taxes on corporations, their money managers are moving their capital elsewhere where taxes, labor costs, and operational overhead costs are lower. 

It can be said that international shipping is the touchstone of how globalization has made it difficult for states to regulate their labor and capital flows, for the opportunities that globalization offers makes it easy to deploy capital globally – and to utilize the huge pools of cheap labor in developing countries. The free movement of capital worldwide in search of cheap (and nonunionized) labor has essentially changed the balance of power between the state on one side, and labor and capital on the other. Labor is viewed as a commodity. Hence, the buyer goes where it is cheapest.  This is particularly notable in the manufacturing and shipping industries.

It can also be said that flagging out is the inescapable consequence of the workings of market forces, forces that tend to set difficult and virtually unattainable tasks for the state.  For example, because of the fluidity of the maritime labor market, traditional maritime powers are finding it increasingly hard, if not impossible, to convince their international ship owners to invest in their own countries and to employ their own compatriots rather than employing foreign merchant marines. 

This prolonged and never-ending power struggle between the state and its private money managers is perhaps most pronounced in sectors whose core functions can be easily outsourced or automated. And, as implied, shipping companies flag-out largely because of economic reasons. A British shipping company, for instance, is likely to be more profitable operating its ships under a Liberian flag than operating them under the Union Jack, given that the Liberian Registry charges ONLY registration and tonnage fees. 

This situation demonstrates the extent to which globalization has affected the state’s capacity to regulate economic activities within its own borders – and there is no paucity of evidence for this.

Generally, globalization is spurred by the realization that resources, goods and services are not always aligned with the end users that need them most. For example, until the mid-1950s, crude oil was refined near the source of production and shipped worldwide in small tankers. But the harsh realities of economies of scale soon impelled oil companies to ship larger amounts of crude from far-flung oil wells around the world to refineries near final users. This recognition gave rise to the advent of larger oil tankers; thereby, sharply reducing the freight costs of intercontinental oil and gas transportation.

Similarly, globalization identified cheaper labor markets outside of Europe and the United States and dictated ship owners to recruit seafarers from developing countries, where labor cost is minimal. This has been the case since the early 1920s, but traditional maritime states have found it impossible to reverse or meaningfully shape this development.

Given this pungent situation, it can scarcely be a surprise that there is a growing number of economic pundits that think that the state has been pushed back from the front-line of economic management and social provision to the point that the market has gained a free hand to organize and develop production resources. The decline in the number of European seafarers, for example, presents an excellent illustration of traditional maritime states’ retreat in the face of global economic forces.

European states, after all, were viewed as the kingpins of maritime shipping for centuries. But, seemingly, they have now become vulnerable and unable to keep their merchants and financiers from investing in shipping registries in remote corners of the world. Clearly, this inability undercuts the West’s behemoth historical dominance in international shipping. Now, indications are this loss of preeminence has left these states insecure and unsure about what to do. 

 For centuries ship registration was a reasonably simple process – everything was national. But things began changing in 1919 when Panama opened the first open registry (followed by Honduras in 1943, and Liberia in 1948). 

Today, this important global commerce is sub-divided into three main categories, namely, closed/traditional/national registry, open registry, and second/international registry, with each of these segments having different, well-defined - but sometimes overlapping - commercial and regulatory regimes – and all blocs being governed by international agreements and conventions. 

There is even a two-tier labor market for seafarers – one (almost certainly) unionized and more expensive, the other commonly nonunionized and far cheaper.  One is domestic, while the other is international.

 Correspondingly, it can be concluded that these days a qualified mariner can decide between working with his domestic fleet (his country’s nationally owned-and-operated flagged ship) and working on a ship that is internationally owned, scantly unionized, if at all, and operated by a mixed international crew.

Interestingly, recent data received by the author from LISCR, the management company that runs the Liberian Registry, indicates that most seafarers work on vessels that are registered in nations other than their nationality. Quite recently, on the 4th of April, to be precise, the “seafarer nationality book” of LISCR showed that the company had 157 different nationalities working on Liberian flagged vessels. 

 One can only imagine how daunting it is to maintain a crossed-section of a professionally skilled and motivated labor force of seafarers across ranks and nationalities working on one vessel in arduous working conditions – a working situation that does not necessarily guarantee work-life balance or job security.

In the context of an open registry, a hiring manager’s primary concern is hiring a team of seamen that would gel - with particular attention being paid to manning cost, the ability and experience of his sailors, and the level of tonnage tax he would have to pay. 

Given that under an open registry regime, a company does not have to pay corporate tax or contribute to the general welfare of its international employees, one can safely infer that a ship owner’s gain amounts to an economic disadvantage (a loss of revenue) to his state, at least as far as taxes are concerned. 

The opposite is true under closed (national) registry arrangements, wherein a shipping company is incorporated (registered) within its owner’s country. Incorporation here means that the company is headquartered in the owner’s country – and its shipping taxes are based on its earnings, and its crew is 100 percent local.

In other words, a company operating in a national registry regime must pay corporate taxes, along with payroll taxes, medical insurance, and social security contribution for each seaman. Moreover, the mariners themselves have to pay income taxes and welfare contributions (i.e., toward health and pension). 

The third type of shipping registry is called a second registry (often referred to as a hybrid or international registry).  A second registry can be seen as a creation of traditional shipping nations – a creation that is aimed at offsetting the strength and the exponential growth of the open registry model, a model that is solely owned by developing countries. These relatively new shipping registries are owned by former colonial powers. They are located mainly in former and current European dependencies. Indeed, it can be suggested that these establishments are a direct response to the power and attractiveness of well-established open registries. 

 To date, the most prominent ones are the British Isle of Man (offshore, opened 1984, used primarily by the UK), the Netherlands Antilles (offshore, opened 1987, used primarily by the Netherlands), the Norwegian International Shipping Register (domestic, started 1987, used mainly by Norway), the Kerguelen Islands of France (offshore, 1989, used primarily by France), Luxembourg for Belgium (offshore, started 1989, used mainly by Belgium), Denmark International Register (domestic, started 1989, used primarily by Denmark), and the Marshall Islands (offshore, started 1992, used mainly by the United States), the Germany International Register (domestic, began 1989, used mainly by Germany), and the Italian International Register (domestic, started 1998, used primarily by Italy).  

Undeniably, secondary registries are designed to lure Western ship owners into sailing under their own national emblems. That is why they offer advantages and conveniences that are similar to those on offer in open registries. 

It must be stressed that for both economic and regulatory reasons, a shipping company has to choose one or more of the above modes (traditional, open, or second registry). Equally, to engage in commercial activities, it must register under a flag-state - and by that it acquires the nationality of the said state, enabling it to enjoy the privileges and protection of the flag state. This so-called nationality is not proof of ownership, but it merely permits a vessel to sail internationally (Article 91 of the United Nations Convention on the Law of the Sea, UNCLOS). For example, a Canadian might be the real owner of a ship that is operated under a Mongolian flag.  

UNCLOS does not in any way suggest that a vessel has to acquire its owner’s nationality. This means, for example, a Russian owner can register his ship under the Liberian emblem. This notion is a relatively new phenomenon, for until the early 20th century, nearly all oceangoing vessels operated under the national colors of their owners. However, latter decades occasioned a near paradigm shift, with commercial registers around the world dispensing vessel registrations and jurisdictions to vessel owners from all corners of the globe for a fee. 

In all of this, the crux of the matter is that the seafarer labor market is split into two distinct segments operating under different labor laws, crew costs and different conditions for efficiency and tax liabilities. It is universally accepted that operating under an open registry reduces the overall labor costs per seafarer because a shipping manager does not have to pay for major maritime education, payroll tax, social security contributions, pension payments, compulsory national retirement fund, health care and other employee-welfare schemes. 

As intimated earlier, before the 20th century, a vessel generally registered only in the country of her owner’s nationality. But the dynamic and erosive forces of globalization have, for the most part, pushed aside or greatly minimized that traditional shipping norm, making it exceedingly difficult for the old maritime states to educate, employ, manage and retain their own mariners. 

Today, most commercial vessels, both in tramp trading and in liner services, operate under a flag that differs from the flag of ownership. It is needless to point out that the four key shipping registries, Panama, which has the world’s largest bulk carrier fleet, Liberia, which is the flag state of the world's largest container ship fleet, the Marshall Islands, which now has the largest oil and gas tanker fleet, and the Bahamas, the owner of the largest cruise ship registry - are not major ship owners themselves (UNCTAD, 2018).

In sum, it is mainly the open registry shipping business model that openly challenges and undermines the power and position of the old maritime states, given that an open registry ship owner can move his investments from one ship registry to another with little or no regard to the nationality of the registry, his crew’s nationality or his own nationality.

Indeed, he is at liberty to shop in the global seafarer labor market, particularly in Asian and East European labor markets, for the ablest and cheapest mariners. And, given that labor cost tends to be the most significant operating cost in running a commercial vessel, it is safe to assume that it is a major consideration in the decision of a ship owner when he is deciding whether to sail under his national flag or operate in an open registry. All of this, it must be added, makes shipping a fascinating business.

The Influence of Open Registries on the Global Employment Policies for Seamen

As alluded to in the preceding paragraphs, the inexorable growth of the open registry business in the oceangoing industry has led to the gradual erosion of Western countries’ ability to educate, employ and maintain their seafarers. This reality is essentially a result of European shipping companies turning to developing countries (mainly Asian countries) for labor. The erosion began in the 1920s, at the very inception of what was then known as the flag of convenience shipping – and has continued to date. Prior to this development, Western nations had well-oiled, well-structured, well-run, and well-respected regimes of maritime education that met their labor needs. 

These days, however, most seafarer schools are now located in low-income states like the Philippines, China, and India, with huge implications for employment levels, earnings, taxes and remittances worldwide. In fact, most traditional maritime states have warily curtailed or stopped training seafarers, thereby diminishing their maritime preeminence even further. 

The gradual erosion of developed countries’ ability to educate, employ and maintain their seamen was sped up during the 1980s recession – after the 1970s OPEC (Organization of Petroleum Exporting Countries) oil embargo, an embargo geared at harming the economies of countries that supported Israel in its conflict with the Arab world. This situation brought a sudden end to what can rightly be described as the best decades in international shipping.

The embargo spiked shipping freight costs, but they were short-lived, however. Oil production had gone up by the beginning of the 1980s, far exceeding pre-embargo days, and everything seemed very promising. Hence, oilmen began buying new ships and ordering many more. Undeniably, capital markets became buoyant; truly, they became irrationally exuberant. In no time, there was an excessive amount of oil on the market, and freight rates sank considerably, almost overnight. Subsequently, in a great dash to cut costs, ship owners substituted European seafarers with mariners from the developing world, and they rushed to register their ships under what was then called FOC (Flags of Convenience countries). From then onwards, things have never been the same.

Surely, the ready supply of cheap labor in poor developing countries has just about quelled the seafarer market in the rich world. Western seamen, for the most part, are now just too expensive to employ and deploy, when one considers all the taxes, fees and social contributions a company must pay for hiring a mariner from the West. This, needless to stress, increases the unemployment rates in traditional maritime states and hurts their competitiveness.

This state of affairs is further worsened by the fact that these days there is the apparent reluctance on the part of young Westerners to choose seafaring as a profession. It now appears that for the everyday European youth, seafaring is no longer as alluring and tantalizing as it once was – little wonder why most European governments have cut back or stopped investing in the education and training of young people as seamen.

Candidly, it seems that the liberty to recruit a multinational labor force and pay them relatively low wages on open registry ships is a major factor in every labor policy decision making. For example, the Chinese Government Seafarer Supply Initiatives (SSI), often scout towns and villages to recruit low or unskilled people to work for open registry companies (WU, B. 2010).

Manning Costs

Manning costs include all direct and overhead costs by the crewing of a ship. The level of crew costs for a particular vessel is a function of two factors, namely; the size of the crew and the employment policies adopted by the company and the relevant registry (i.e., closed or open). It is said that crew costs may account for up to half of the operating costs, depending on the size of the vessel and the level of automation.

The wages of mariners on merchant vessels have always been controversial, with the Transport Worker Federation (ITF) laying down minimum wage levels and paid leave for all ranks. But these are never accepted universally. In fact, wide disparities exist, depending on nationalities, flag states, the number of seafarers needed globally and the number available in the maritime labor market. That is why operating costs on European flagged vessels are always much higher than, say, running a comparable ship under a Liberian or Panamanian flag.

The Significance of Seafarer Remittances in a Nascent Economy

If the amount of remittances sent to the Philippines is, for example, anything to go by, then the amount of money remitted to the fledgling economy of the Philippines by its seafarers is praiseworthy. Over the last decade or so, Filipino mariners have continuously sent cash to their loved ones to the tune of billions of dollars. 

Take this. According to BIMCO (the international maritime statistical magazine), in 2010, out of the $24 billion contributed by foreign-based Filipinos, seafarers alone sent $5.5 billion. As can be expected, the amount has increased since then. For instance, money sent home by Filipino marine workers accounted for about 19% of all remittances of all overseas Filipino workers in 2018 – out of a new record high of $6.14 billion (Daily Tribune 2018, ACTS-OFW Rep. Aniceto ‘John’ Bertiz 2018).

Therefore, the importance of remittances from mariners in a developing economy cannot be overemphasized, for they help to sustain a developing country’s domestic consumption and growth. Moreover, these payments, unlike some other financial assistance, help straightforwardly to alleviate the poverty of the individuals and households to whom they are sent. 

This relatively stable source of income from ocean-workers offers a lifeline to millions in the most vulnerable groups across the developing world. Above and beyond that - and unlike other financial flows to these developing countries, remittances do not stream through government agencies or non-governmental organizations (NGOs) - remittance payments are targeted precisely to the needs and desires of their receivers. It is not aid agencies or governments that decide when, where or how remittance incomes are spent, but the recipients themselves.

Seamen Productivity and Economies of Scale

In sum, economies of scale are the cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods or when, for example, two men ably and readily - and within a reasonable time - do a piece of job that would otherwise be done by ten men. It is accepted that the larger the business, the more the cost saving. 

Specialization of labor and integrated technology are key drivers in all of this. In the ocean industry, seafarers are expected to be rewarded for their marginal productivity, i.e., the incremental amount of service output obtained with an additional unit of labor. It is inferable that manning costs are high on ships with sailors from countries with high standards of living. It also perceptible that seamen from countries with lower standards of living will willingly accept pay and conditions that may be worse than current international standards but much better than what they would get in their own countries.  It is said, as incredible as it may sound, that some mariners from developing countries earn higher incomes than some government ministers in their places of origin.

The Role of Liberian Flagged Vessels in the Maritime Labor Market

Holding on to the old adage that “a picture is better than a thousand words”, it is the author’s fervent hope that the below pie charts and anatomizations would hammer home the vital role that Liberian flagged vessels play in the global labor market for seafarers far better than any text would do. Here, crew data of 2011 from LISCR is juxtaposed with similar data from 2019; then, relevant interpretations are drawn. Both pie charts show the different nationalities on board Liberian ships.

Untitled 3

Source: Liberian International Ship and Corporate Registry

Liberia had over 4,000 ships, as of 2011.

Key numbers:

  • Asia had 60% of all seafarers (40% masters).
  • Europe had 36.4% of seafarers (60 % masters). This reflects largely Eastern European seamen.
  • Africa had only 1.1% of sailors (0 % masters).
  • Liberia had only 57 seafarers on all Liberian flagged ships or only 2.3% of all Africans employed. Liberia had no masters.  

Untitled 4

Source: Liberian International Ship and Corporate Registry

Today, Liberia has well over 4,300 vessels.

Key Numbers

∙   Asia has 69% of all seafarers (47% masters).

∙    Europe has 29% of seafarers (52 % masters). This is largely a reflection of Eastern European seamen.

∙    Africa has only 2% of sailors (1% masters).

∙     Liberia has only 41 seafarers on all Liberian flagged ships or only 1% of all Africans employed.  

So, what are the implications? What does all of this mean? An abridged juxtaposition statistical analysis suggests the following:

∙         Some developed countries rely on developing countries for employing their mariners. This is likely to be the case for the near future, perhaps longer.

∙         Several developing countries, along with middle-income ones, particularly in Asia and Eastern Europe, depend on Liberia for the employment of their sea-going nationals. Indications are this reliance will continue to intensify.

∙         African seamen, particularly Liberian seafarers are disadvantaged under the Liberian registry. African governments must make policies to change this situation.

∙         Remittances from Liberian flagged vessels are a major source of foreign exchange for many developing countries. And if open registries (FOC shipping) were ever stopped, these remittances would stop, causing unemployment in many countries.

∙         Maritime schools in Asia and Africa are likely to expand, turning out well-qualified mariners, thereby diminishing even further the competitive edge of traditional states.

∙         South America has much room for improvement. Seemingly, there is great potential for developing the marine economy of the region.

∙         For a small developing country, Liberia plays a significant role in employing people across nationalities not only as seafarers but as port workers, teachers and others in marine-related clusters.

∙         The traditional maritime nations are left with their maritime history and residues of seafaring skills, regulation and procedure making - but with very few flagged ships and seafarers.

∙         It is safe to assume that developing countries would continue to provide the highest number of seafarers and that they are likely to become the hub of world shipping.

∙         It is also safe to surmise that the formation of trade unions will continue to be discouraged in both in the developed North and the developing South, mainly because of the fluidity of capital. It will continue to be commonplace for capital to flow to markets that are scantly unionized or not unionized at all.

∙         Group bargaining positions will not be commonplace situations aboard many vessels for a long time to come.

∙         The numbers suggest that in the last ten years, Africa, particularly Liberia, has made incremental progress, but it is far too little to induce optimism. Liberia could use this set of circumstances to enhance its Pro-poor Agenda for Prosperity and Development (PAPD).

In summation, merchant ship registries can be broadly divided into three groups, namely: national (traditional), international and open registries. National registries treat shipping companies in the same way they treat all businesses. A few special incentives (i.e., subsidies) may be on offer, but broadly speaking, shipping companies, like all other companies, must respect all financial legislation, including taxes and employment regulations. Given this, national registries are highly noncompetitive, particularly when it comes to the employment of seafarers.

Open registries, on the other hand, offer companies an alternative to operating under their national flags. This model has proven to be very attractive and successful since it started in the 1920s. It allows ship owners to employ internationally. Consequently, seafarers in this model send billions of dollars to their countries of origin, thereby, aiding economic development worldwide. International registries, on the other hand, treat shipping companies, for the most part, just as an open registry, charging a fixed tax on the tonnage of a vessel (tonnage tax), but even though they are akin to open registries in major ways, their efficacy is yet to be seen.

 

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