Does the Harbor Maintenance Tax (HMT) on U.S. imports encourage the diversion of cargo through Canada and Mexico?
That question—the subject of an ongoing Federal Maritime Commission (FMC) inquiry—may sound like an obscure exercise in policy analysis. But the inquiry has evolved into a debate over much broader issues, including whether government policies are putting U.S. seaports at a competitive disadvantage and are thereby restricting the country's economic growth.
Depending on how the government chooses to respond to the FMC's findings, there could be several potential outcomes: Congress could change the way the HMT is assessed and its funds allocated, the United States could end up in a dispute with Canada and the World Trade Organization (WTO), and costs could rise for many importers and exporters.
Currently, U.S. importers pay a Harbor Maintenance Tax (HMT) of 0.125 percent on the declared value of imported merchandise. Established in the 1980s, the tax and its associated Harbor Maintenance Trust Fund are designed to help fund the U.S. Army Corps of Engineers' harbor maintenance projects, including dredging. The fund has built up a multibillion-dollar surplus, which critics say is being used to help reduce the federal budget deficit instead of paying for needed waterways improvements.
The tax generates an average fee of between $84 and $137 per 40-foot container, according to estimates. For high-value cargo such as auto parts, that figure can be as high as $300. For commodities like lumber and refrigerated produce, it can be less than $20.
However, containers that enter the United States by truck or rail via Canadian and Mexican seaports are not subject to the HMT. As the volume of such shipments has grown—notably at the ports of Prince Rupert in Canada and Lázaro Cárdenas in Mexico—lawmakers in California and Washington state have voiced concern that the HMT is at least partly to blame for their neighbors' rising fortunes.
The FMC's inquiry was sparked by an Aug. 29 letter to FMC Chairman Richard A. Lidinsky Jr. from Sens. Patty Murray and Maria Cantwell of Washington. In the letter, the senators asked the FMC to examine the extent to which the HMT and other factors influence diversion of cargo from U.S. West Coast ports to Canadian and Mexican competitors. The exemption for overland shipments, they wrote, has given Mexican and Canadian ports a competitive advantage over U.S. seaports, causing an increase in cargo diversion, a reduction in revenue for the Harbor Maintenance Trust Fund, and the loss of U.S. jobs. They also asked the agency to offer "recommendations for legislative and regulatory responses" to those concerns.
The FMC agreed to take up the matter and in its November 2011 notice of inquiry (Docket 11-19) asked for comments on the HMT's influence on cargo routing as well as suggestions for actions the U.S. government could take to improve the competitiveness of U.S. ports. That request drew dozens of responses from private industry and government organizations across North America, as well as from the governments of Canada and Mexico.
Sparks fly in Puget Sound
The primary battleground of the dispute is the Pacific Northwest, where the Puget Sound ports of Seattle and Tacoma on the U.S. side of the border, and British Columbia's Prince Rupert and Vancouver on the Canadian side, have long battled it out for market share.
In recent years, Seattle and Tacoma have been on the short end of the stick. According to data compiled from various port sources, the two ports accounted for nearly 16 percent of containerized traffic on the West Coast of North America in 2010, down from about 18 percent in 2005. During that same period, the market share for British Columbia ports rose to 12 percent from about 8 percent.
Washington state interests insist that the HMT is, at least in part, to blame for the shift in market share. In their comments, the Seattle Metropolitan Chamber of Commerce, the Washington Public Ports Association, and the Port of Seattle asserted that the HMT's "land-border loophole" provides incentives for shippers to avoid U.S. ports. They have requested that the federal government change the law to eliminate any such incentives.
Few others, though, believe the HMT is a significant factor in routing decisions. "When the FMC completes its investigation, what [it] will find out is that the reasons for using [Canadian West Coast] ports have nothing to do with avoiding the 0.125 percent fee on the value of the cargo," says Peter Friedmann, Washington counsel for the Coalition of New England Companies for Trade (CONECT) and the Agriculture Transportation Coalition.
The main reason, he says, is that Prince Rupert is a day and a half closer to Asia, and rail service from Prince Rupert and Vancouver to the U.S. Midwest is faster and more affordable than service from U.S. West Coast ports.
Shipper groups agree. "Shippers, including retailers, who are using ports such as Prince Rupert are choosing these ports because of their operational efficiencies, and it is our view that any change in U.S. tax policy will have no impact on shippers' routing decisions," the National Retail Federation (NRF) said in its comments.
Washington state port executives have a different view. "It's difficult to believe ... that any factor that can increase the cost of moving a container by $150 plays no role," said Sean Eagan, director of governmental affairs for the Port of Tacoma, in an interview.
Ironically, the haggling is not over torrents of U.S.-bound cargo pouring into Canada. According to the Canadian Embassy, just 2.5 percent of U.S. containerized imports moved through Canadian ports in 2010. By contrast, about 6 percent of Canada's containerized imports passed through U.S. ports, according to data from the embassy.
What if ...
Puget Sound groups argue the tax should be structured in a way that does not put U.S. gateways at a competitive disadvantage to Mexican and Canadian ports. In its comments to the FMC, the Port of Seattle said, "User fees must be applied universally and equitably to all U.S.-bound cargo." The Seattle Metropolitan Chamber of Commerce and the Washington Public Ports Association want the U.S. government to close the "land-border loophole" by imposing the HMT or an equivalent fee on international cargo passing from Canada by land across the U.S. border. However, such a move could invite retaliation from Ottawa, leading to a potentially costly trade war between two closely aligned trading partners, according to Friedmann.
"Canada has already stated that if the United States considers imposing a tax on containers arriving from Canada, it will consider imposing a similar one on cargo that comes through the United States and moves up to Canada," he says. "That would impose additional fees on U.S. exporters, while having no impact whatsoever on the choice of ports for those who import."
Friedmann and others note that expanding the scope of the HMT may violate certain provisions of the World Trade Organization's General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA). The United States, therefore, could find itself on the receiving end of two sets of penalties and sanctions.
Furthermore, the tax would conflict with other U.S. trade policies, such as the new "Beyond the Border" agreement with Canada, which is designed to reduce barriers to cross-border trade.
For all the discussion about Canada and Mexico, the HMT uproar may be as much about U.S. domestic tax and infrastructure policies as anything else.
The HMT is assessed on imports at all U.S. ports, but not all of them require dredging or other harbor maintenance work. Consequently, HMT revenues are redistributed from big import gateways with naturally deep channels—such as Los Angeles, Seattle, and Tacoma—to ports with smaller import volumes that require dredging to maintain channel depths and widths. According to a January 2011 report by the Congressional Research Service, these and similarly positioned ports typically receive just one penny's worth of benefit for every dollar of HMT revenues their imports contribute to the Harbor Maintenance Tax Fund.
That disparity—along with the unspent billions of dollars in the fund—is as big a concern for U.S. ports as cargo diversion. Numerous filers asserted that the HMT system is broken and must be fixed now.
The Port of Seattle's filing summed up a widely supported prescription: Fees assessed against freight movement should be spent on improvements to the freight system; fees collected from one gateway or trade corridor should benefit the users of that gateway and corridor; and user fees must be applied universally and equitably to all U.S.-bound cargo, without putting U.S. gateways at a competitive disadvantage to Mexican and Canadian ports.
Ultimately, some filers said, the HMT is just one symptom of a larger problem: the failure of the U.S. government to develop and implement a national freight transportation strategic plan with sufficient, dedicated funding for infrastructure projects.
In an ironic twist, a number of U.S. ports suggested that the solution to some of the problems covered by the FMC's inquiry would be for the United States to be more like Canada. Canadian ports pay for harbor maintenance out of their own revenues. Much of that money comes from fees collected from the carriers serving the nation's ports. As a result, the funds that are collected from port users directly benefit those users.
Furthermore, Canada has made the development of transportation infrastructure and trade corridors a national priority, and is funding large-scale freight projects that will improve the country's competitiveness, several U.S. ports said.
The nearly 70 comments filed with the FMC represent many different points of view, but it can be argued that one theme underlies them all: If the United States is going to help its ports become more competitive, perhaps it should stop wasting energy on blaming its neighbors, and focus instead on implementing a national freight transportation strategy that benefits not just ports but the nation as a whole.