The Cost of

Nontariff Barriers to Trade in Shipping

Constantino Stylianos Halkias

Substantial Research Paper

Prof. Lee

Spring 2000

Table of Contents

I. Introduction i-iii

II.A Seaborne Trade 1-8

Seaborne Trade- A synopsis

The Shipping Market Demand Function

The Shipping Market Supply Function

III.B The Ship’s Cargo & Market 9-19

Bulk Cargo

The Bulk Shipping Industry

The Ships & Its Characteristics

The Charter Market

Freight Rate Determination

IV.C Grain as a Commodity 20-28

Grain-The Basics

The Seaborne Grain Trade

The Grain Trade Model

Grain-World Trade

Bulk Vessel Trades

V.D Voyage Estimates 29-35

Voyage Estimating In Perspective

Vessel Costs

Voyage Estimates

VI.E Nontariff Barriers to Trade 36-42

Nontariff Barriers & The World Trade Organization

Defining & Identifying NTB’s

Agricultural Trade Barriers

VII.F Restrictive Shipping Policies 43-57

Restrictive Shipping Policies- An Overview

Cargo Sharing Agreement Between Brazil & Argentina

Argentina’s Freight Tax

Port State Control in Rotterdam

The ITF’s Minimum Wage Demand

The River Plate’s Draft Limitation

The Ukraine’s Bias Against FOC

VIII.G Conclusion 58-63

IX. Appendix

B-1: Parcel Size Distribution

B-2: Bulk Carrier Cross Section & Cross Section of a Hold

C-1: World Seaborne Trade of Main Bulk Commodities 1988-1998

C-2: Grain Seaborne Trade 1998

C-3: Oil/Bulk/Ore Vessel Cross Section

C-4: Stowage Factor for the Main Grains

C-5: Maritime Freight Rates For Wheat

F-1: Voyage Estimate #3

F-2: Affidavit

F-3: World Fleet as of December 1996

G-1: Elements in the Bulk Transport System

G-2: List of Daily Running Costs

X. Bibliography

Illustrations

Tables

1. World Seaborne Trade in Million Tons 3

2. World Seaborne Trade in Billion Ton Miles 4

3. World Fleet at Start of Year (Million Deadweight) 6

4. Deliveries of Newbuildings (Million Deadweight) 6

5. Tonnage Broken Up and Lost (Million Deadweight) 7

6. Major Grain Exporters/Importers for 1998 in Seaborne Trade 25

7. NTB’s and their Effect on Voyage Cashflows 61

Graphs

1. Short Run Supply Function 18

2. Short Run Adjustment 19

I-Introduction

Nontariff barriers to trade act as hidden costs that a shipowner may incur when offering his vessel for hire. Understanding seaborne trade will allow for a clear identification of nontariff barriers to trade (NTB’s). Embedded in the economy as a means of protection, NTB’s disrupt flow and increase costs.

Understanding the intricacies of maritime economics is extremely complex. As exposed in his book, Maritime Economics, Martin Stopford's description of supply and demand of the shipping market will serve as the guide. Stopford outlines ten key influences that affect the supply and demand of the shipping market. The five key influences for the 'demand function' of sea transport are: the world economy, seaborne commodity trade, the average haul, transport costs and political events. On the 'supply function' Stopford identified the following five key influences: shipbuilding output, scrapping, fleet performance, and operating environment. The dominant feature of the shipping market supply/demand model is that demand is highly volatile and unpredictable, while supply is lethargic to respond to changes. All these factors will be exposed in the second section of this paper.

The third section of the paper expands on bulk shipping, bulk carrier vessels and the freight market. There are currently four commodities -oil, iron ore, coal and grain-, which account for two-thirds of all seaborne trade. These commodities are generally shipped in bulk, thus they are commonly referred to as 'bulk commodities' and carried in bulk carriers. Bulk shipping has been instrumental in achieving economies of scale. It has reduced transport costs to the extent that it is often cheaper for industries to import raw materials by sea from suppliers thousands of miles away than to get the supplies from land only a couple of miles away. The way the market works is that the shipowner comes to the market with a ship available, free of cargo. The shipowner will contact his broker or agent, middlemen who specialize in ‘fixing’, which is setting up work for the vessel. The middleman then contacts the shipper or charterer who has a particular volume of cargo to transport from one location to another. The deal is completed when the charter party is drawn up. The procedure of ‘fixing’ is relatively standard, and varies according to the shipment and the type of ship being utilized.

Section four will focus on grain as a commodity and cargo. The world economy is the main driving force behind seaborne trade; however, particular commodity trades may follow a different growth trend than that of the world economy. This is the case with agricultural commodities, which are subject to seasonal variations that coincide with harvests. The trade of grain is a clear example of such a volatile commodity. Since the trade is seasonal and fluctuates with harvest in both the exporting and importing regions, it is virtually impossible to predict changes. This makes planning of grain export facilities difficult, and scheduling efficient large bulk export operations very complex.

In order to quantify the cost of NTB’s in the carriage of grain, voyage estimates will be calculated for a bulk carrier carrying grain from Argentina to the Netherlands and another from the United States to the Ukraine. The voyages will be real calculations and thoroughly analyzed in order identify any possible cost which could be identified as an NTB. Sections six and seven will set out to identify the different nontariff barriers to trade which might be encountered upon while preparing the voyage estimates. An example of a non-tariff barrier to trade for a ship carrying grain is the large costs of dredging that need to be assumed when loading/discharging grain in the River Plate (Argentina). These costs add up for the shipowners account, which in turn is tied to the fact that Argentina is a leading grain exporter. Another such example of a nontariff barrier to trade is when ports issue 'flag restrictions'. By 'flag' it is meant under which country's maritime laws is the ship registered. Countries such as Liberia, Panama and Malta offer lax restrictions and lucrative tax cuts. Consequently shipowners choose these flags over their own national flag. In order to compensate for lost revenue countries impose increased port expenses for vessels that have 'free flags', further adding to the cost of operating a vessel and subsequently reducing income earned in a particular voyage.

The concluding section of the paper will seek to place the cost of NTB’s in perspective with regard to the shipowners cash flow for the above-mentioned voyages. The reason why the shipowners perspective has been chosen is because governments and the cost of NTB’s have been covered. The cost to the individual business man/woman however, has yet to be truly explored, and most importantly exposed. For one of the voyage estimates the total cost of NTB’s is $155,199. This number certainly quantifies nontariff barriers to trade, especially to the shipowner who saw his profit dwindle. This will give the reader a true glimpse into seaborne world trade, and how the terms free trade does not really mean ‘free’.

II-Seaborne Trade

Seaborne Trade- a synopsis:

"Fast and cheap transportation has been one of the main products of the Industrial Revolution. Distances have been shortened at an astonishing pace. Day by day the world seems smaller and smaller and societies that for millennia practically ignored each other are suddenly put in contact or conflict" (Stopford, 2).

Worldwide, the experience has been one of rapid industrial and population growth that has resulted in large, concentrated centers of production and consumption. This has led to an increase in demand for transportation in general, and with world trade rapidly increasing, for seaborne trade in particular. There exist four modes of transportation, railroad, highway, air and water, yet one of them stands out above them all, water. It is only natural that the element, which covers three fourths of the planet, be the number one form of transportation, after all it unites all the corners of the world.

When discussing shipping one inevitably dwells into the core of the world economy. As the interdependence amongst states deepens, the leverage of shipping in the world economy increases. In order to fully understand the economic and political forces that shape seaborne trade, one must be aware of the two-way interaction between the developments in shipping and the developments in the world economy.

In 1999, world seaborne trade increased marginally compared to 1998. In terms of volume, there was a 0.7 percent increase from 5062 mmt (million metric tons[1]) to 5100 mmt. In terms of total miles transported, 1999 showed a marginal decrease from 21492 btm (billion ton miles[2]) in 1998 to 21480 btm in 1999. This is the second consecutive year of negative growth after a fourteen-year period of continuous growth. Seaborne trade relies on the world economy, but does not necessarily depend on it, consequently if the world economy receives a severe shock such as the Asian meltdown in 1997, world seaborne trade is bound to suffer in the long run. (Fearnleys)

The maritime economy is an extremely complex one. In order to get a full picture one must be able to identify its major variables. Martin Stopford, in his book Maritime Economics, identifies ten of the most important variables affecting seaborne trade's supply and demand. In doing so, Stopford set out to understand what makes the variables change, and what effect that change has on the shipping market.

The Shipping Market Demand Function:

The world economy generates the basic demand for seaborne trade. Developments in particular commodities and changes in the distance over which cargo is transported, are key players in modifying the economics of world trade for the shipping market. These, in turn, generate the final demand for shipping services that are measured in ton-miles.

The demand for sea transport originates from the world economy's need to import raw material for the manufacturing industries and the trade of manufactured products. The relationship between sea trade and world industry is not linear however. There are several factors that affect world trade which in turn reflect in the shipping market. The first such factor is the depletion of raw materials, which leads to imports having to increase faster than industrial production. This occurred in Europe, for example, when in the 1960's iron ore had to be imported in order to support its steel industry.

A second factor, which affects seaborne trade, is industrial development. As a country's economy matures, its economic activity tends to become less resource intensive, which in turn leads to a decrease in imports of raw material. However, when the mix of countries experiencing development changes, the decline of one importer may be offset by the boon in industrial output from another country. The third and most unpredictable impact of the world economy on seaborne trade is the occurrence of 'economic shocks'. Unlike 'business cycles', which seem to have somewhat regular ups and downs, 'economic shocks' are precipitated by particular events and are generally unforeseen. Their impact on seaborne trade is dramatic. The last 'shock' was the demise of south east Asian countries economies in the mid 1990's.

Seaborne commodity trade is another major variable in the demand function for the shipping market. Commodity trading may follow a different growth trend from the world economy as a whole because of changes in demand for a particular commodity, a change in the production technology, a change in the source of the commodity, or the relocation of a processing plant. Individual commodity trades fall into short-term and long-term components. The principal short-term components are seasonal effects and stock building, both of which may have a significant impact on the demand for shipping services during a short period. One such example is the trade of grain. In the US Gulf (of Mexico), the principal exporter of grain, port activity reaches a low during the summer only to see it grow by as much as 50 percent between September and the end of the year when grains are harvested. The volume of seaborne trade for the major bulk cargoes can be seen in table 1, which shows their volume for the past three years.

Table 1

World Seaborne Trade in Million Tons

	Crude Oil	Oil Products	Iron Ore	Coal	Grain	Other	Total
1997	1519	410	430	460	203	2070	5092
1998	1524	402	417	473	196	2050	5062
1999	1480	410	410	480	210	2110	5100

Source: Fearnleys, World Bulk Trades 1999

The average haul is another key variable in the demand for sea transport, because the demand for sea transport depends upon the distance over which the cargo is shipped. The basic principle is that the farther away the load port is from the discharge port, the more beneficial it is for the shipping market. If the US were unable to import oil from the North Sea or Mexico, for example, it would have to do so from the Middle East which is 11,000 miles away, having to pay more for the oil and receiving it in smaller quantities and at a lower pace. In most trades we find that the average haul has remained constant over the last few years. Table 2 shows the average haul of crude oil, oil products, iron ore, coal, grain and other commodities during the period 1997-99.

Table 2

World Seaborne Trade in Billion Ton Miles

	Crude Oil	Oil Products	Iron Ore	Coal	Grain	Other	Total
1997	7930	2050	2444	2332	1169	6000	21825
1998	7793	1970	2306	2419	1064	5940	21492
1999	7500	2010	2220	2430	1170	6150	21480

Source: Fearnleys, World Bulk Trades 1999

International trade has been able to expand rapidly thanks to the development of a transportation network. One must keep in mind that when transporting goods the importer incurs on costs, which are reflected in the sale price of the product. Improved efficiency, bigger ships and a more effective and comprehensive organization of the shipping operation have led to a steady reduction in transport costs and a higher quality of service. That is why transport costs are considered to be an important variable in the demand for sea transport.

Political events have the peculiarity of producing sudden and unexpected change in the demand for sea transport. Political uncertainties themselves do not affect the demand for sea transport, but their repercussions do. A political crisis may have an immediate effect on the average haul. This was the case in 1956 when the Suez Canal was nationalized by the Egyptian government. Thus, forced oil tankers to divert around the Cape, consequently increasing the average haul, which led to an increase in ship demand.

The Shipping Market Supply Function:

The most important variable in the supply function of the shipping market is the merchant fleet. The merchant fleet is the stock of ships readily available in the market to transport goods. Scrapping of old vessels and new deliveries determine the growth rate of the merchant fleet. One of the main characteristics of the merchant fleet is the extended period of time a vessel is capable of operating. The average working life of a vessel is twenty years, so the adjustment of the merchant fleet is inevitably measured in decades, which makes it difficult to predict future trends.

The experience of the oil tanker fleet is a clear example of how difficult it is to speculate in the shipping market. Between 1962 and 1973 oil trade quadrupled and came to a screeching halt with the first oil crisis. The first oil crisis struck deep into the industry as new vessels were being delivered to a fleet which saw its cargo dwindle by as much as sixty percent during the next decade. On the other hand, the bulk carrier fleet grew from 17 million deadweight[3] (mdwt) in 1963 to 268.4 mdwt in 2000. This progression in ship size was largely due to the fact that economies of scale were being reached in industries that were previously small in size and production. Such was the case in the coal and iron ore commodity trades. The larger and more efficient ships, which predominated the market in the postwar era, pushed their way into the market as economies of scale and specialization of vessels became the predominant aspect of the merchant fleet. Table 3 shows the total deadweight for the world's merchant fleet for the past three years.

Table 3

World Fleet at Start of Year (Million Deadweight)

	Oil Tankers	Combined Carriers	Bulk Carriers	Others	Total
1998	267.1	17.9	266.6	170.6	722.2
1999	272.7	16.3	266.1	177.3	732.4
2000	276.7	14.9	268.4	181.6	741.6

Source: Fearnleys, World Bulk Trades 1999

Shipbuilding output, the second variable identified by Stopford to affect the supply function, is important because peaks and troughs in the deliveries of vessels have an impact on the development of the market into which they are being delivered. Shipowners order new buildings when the market is riding high. Unfortunately, in most cases, by the time delivery takes place the market has decreased so overproduction and chronic surplus are the norm further depressing the market. In recent years there have been major changes in the product range of ships built by the merchant shipbuilding industry. These are illustrated graphically in table 4.

Table 4

Deliveries of Newbuildings (Million Deadweight)

	Oil Tankers	Combined Carriers	Bulk Carriers	Others	Total
1997	7.49	0.33	18.85	10.17	36.84
1998	12.63	0	11.58	11.08	35.29
1999	19.08	0.44	12.61	8.4	40.53

Source: Fearnleys, World Bulk Trades 1999

Scrapping and losses are the manner in which the merchant fleet's rate of growth is determined. From the existing merchant fleet one must add the new deliveries and subtract ships scrapped or lost at sea. Whilst new orders are readily traced to an increase in the market, scrapping has a more complex and unpredictable way of occurring, causing considerable difficulties in judging the development of the shipping capacity. The scrapping of vessels depends on a number of factors, which interact in many different ways. The most influential factors are the ships age, technical obsolescence, scrap prices, current earnings and market expectations. The tendency to scrap ships is only visible when the industry has encountered a severe and long standing depression that depletes both cash and the owner’s optimism. Table 5 is the total amount of vessels scrapped or lost at sea for the past three years.

Table 5

Tonnage Broken Up and Lost (Million Deadweight)

	Oil Tankers	Combined Carriers	Bulk Carriers	Others	Total
1997	3.6	0.4	7.6	3.8	15.4
1998	5.7	1.4	12.3	4.4	23.8
1999	14.6	1.1	10.5	4.1	30.3

Source: Fearnleys, World Bulk Trades 1999

When contrasting table 5 to table 4, the chronic oversupply of ships, which has led to depressed freight rates for the past couple of years, is evidenced by the fact that newbuildings have outpaced scrapping for the past three years by an average 14.38 mdwt per year.

Changes in the physical capacity of the fleet, and changes in its actual operating performance in response to market conditions, affect fleet performance and productivity, the fourth variable affecting the supply of sea transport. As vessels age their performance is hampered, especially their operating speed, which according to the author is the merchants fleet most important physical characteristic. This affects the fleet’s productivity as more time is needed to transport the goods. Owners may also intentionally reduce speed when freight rates are unfavorable in order to reduce costs. Fleet productivity is just as important in determining the balance of supply and demand, as is the tonnage of cargo to be transported, according to Stopford.

The last variable affecting supply in seaborne trade is the operating environment. In this variable several factors come into play, each affecting the transport capability of the fleet. For example port congestion reduces the supply of ships available for trading because vessels are forced to wait extended periods of time to load or discharge. Safety and environmental standards could also affect the supply of vessels as new standards could leave a large number of vessels incapacitated to trade. The introduction of new laws may eliminate tonnage available to haul the cargo by imposing age and port of registry restrictions. This particular form of action would be categorized as a non-tariff barrier to trade, which this paper is interested in identifying.

The exposition of the ten most important variables affecting supply and demand of the merchant fleet exposes the fact that they do not enjoy a harmonious balance. Demand tends to be volatile and unpredictable whilst supply is ponderous and lethargic to change. Such a market has created some of the most spectacular reversals of fortunes, leaving only a select few daredevils to operate in it. The prospect for growth is hand in hand with the development of world trade for most shipping markets, unfortunately the vagaries are wide and many creating more threats than promises for the market that delivers the most goods.

III- The Ship’s Cargo & Market

Bulk Cargo:

Bulk cargo is generally defined as "any cargo that is transported by sea in large consignments in order to reduce the unit cost" (Stopford, 214). The introduction and advent of bulk cargo shipments has been instrumental in the achievement of economies of scale. The shipment of cargoes in bulk has reduced transport costs to the extent that it is often cheaper for industries to import their raw material by sea from thousands of miles away than by land from suppliers only a few hundred miles away.

Using the grain trade as an example, one notices the increasing trend of using larger vessels in transporting the commodity. In the 1960's most of the grain shipped was done so in vessels under 25,000 dwt, twenty years later vessels ranging from 60,000 to 80,000 are the norm for carrying grain. The table in appendix B-1[4], shows the parcel size distribution of the major dry bulk commodities and their percentage as a total of the amount shipped.

Not all cargoes are suitable for bulk shipment. There are certain characteristics and requirements that must be met for the cargo to be considered suitable for bulk shipment. First "there must be sufficient volume of cargo to justify a tailored shipping operation" (214). Since bulk cargo relies on the principle of economies of scale, as the volume of the cargo increases the probability of it being shipped as bulk increases accordingly. If the shipment is not large enough to justify a separate bulk shipping operation, it is shipped as general cargo[5] in the liner sector[6].

The second consideration for a cargo to be considered as bulk is that the "cargo must be physically suitable for bulk handling" (215). As such the cargo must be able to withstand the loading and unloading characteristics of bulk cargoes which, in the case of grain, can occur at the rate of 5,000 tons an hour and 2,000 tons an hour respectively. The stowage characteristic of the cargo is also important in this case. The ease with which it can be stowed within the hull, its susceptibility to damage and special requirements, such as temperature limits, determine whether or not a cargo can be shipped in bulk or not.

The third characteristic a cargo must have in order to be classified as bulk is that the "bulk shipping operation must be adapted to the overall transport system" (216). This means that the cargo be handled as little as possible from port of origin to port of destination and that the shipping of the cargo be done in a form that allows the use of economical transportation in each leg in order to reduce costs.

The last consideration for a cargo to be classified as bulk is that "the size of the cargo parcel be compatible with the stocks held by the producer and the consumer" (216). The parcel size in which a commodity is shipped depends on the size of stocks held at either end of the transport chain. For high-value cargoes, which incur high inventory costs, the parcels may be limited to smaller amounts to avoid inventory pile up, in doing so the smaller parcel consignments may not justify it being shipped as bulk. In minor bulk trades there exists a similar problem, as the physical characteristics of the product may be adequate for bulk shipment but its inventory costs override the benefits brought forth by bulk shipment.

The physical and economic factors of a commodity must be paired in order for a commodity to be shipped in parcels large enough to be considered bulk. The transport of grain is one such commodity in which its physical and economic characteristics allow it to be shipped in parcels large enough to be considered 'bulk'.

The Bulk Shipping Industry:

Ocean transportation, because of its low cost, and its ability to change with trading patterns, is essential to the bulk commodity export business. Seaborne carriage offers the least costly means of transportation between two points seperated by water, and is particularly well suited for long distance movements of bulk commodities.

The principle for the bulk shipping industry is 'one ship, one cargo', though it does not hold true in all cases it is definitely the ruling modus operandi. As the name of the industry indicates, it provides transport for cargoes that appear on the market in shiploads. If there exists bulk cargo which needs to be transported, the shipper can approach the task in several different ways. The manner in which the shipper dispatches his cargo depends on the cargo itself and on the type of commercial operation he is willing to use to ship his cargo. The shipper’s choices range anywhere from owning his own vessels, to handing over the whole operation to a specialist bulk shipper. (Kendall)

If the shipper is a large multinational company which ships a substantial amount of cargo, they often own their own shipping fleets to handle a proportion of their transport requirements. The major oil companies are this type of company. It is estimated that 40 percent of oil tankers operating in the market are owned by major oil companies. Losses which caused large ecological disasters, such as the Exxon Valdez and the Erika more recently, have prompted oil companies to charter the vessels in order to reduce liability. (Kendall; Stopford)

On the other hand, if the shipper has a long term requirement for bulk transport, but does not want to become a shipowner due to the high capital investment, he may charter tonnage on a long-term basis from a shipowner. The charters agreed upon in such cases range anywhere from ten to fifteen years in order to provide a base load of shipping capacity to cover long-term material supply contracts. Charters of such high duration are generally agreed upon before the vessel is actually built. Short-term time charters, any where from twelve to five years, would be obtained on the charter market. (Kendall)

Many shippers, have only a single consignment of cargo to transport. Agricultural trades such as grain and sugar, which are subject to vagaries such as the weather and a volatile market, are cargoes which fall under this category. Their characteristics make it difficult to plan shipping requirements in advance. In such cases, bulk cargo is chartered for a single voyage via a market such as the Baltic Exchange, in which the shipper can hire a vessel for a negotiated freight rate. (Kendall)

The final alternative available to a shipper is that he enter into a long-term arrangement with a shipowner who specializes in a particular kind of bulk shipping supported by his shipping fleet. The service offered in such cases requires close cooperation between the shipper and the shipowner since it involves adherence to precise timetables, using ships with high cargo capacity and fast cargo handling. (Kendall)

The above scenarios are based on the assumption that they are a C.I.F offer or a F.O.B basis. In a 'cost, insurance and freight' (C.I.F) offer the succesful seller/exporter arranges the freight. In contrast, with a 'free on board' (F.O.B) basis, the buyer/importer arranges the freight. Whenever a grain house, such as Cargill, comes in with an 'order', it usually means they have made a C.I.F sale, and require a vessel to lift the cargo (ASBA, 108).

Many different ship types are used for bulk transport. Since this paper focuses on dry bulk cargo and grain carriage it will focus on the vessels that carry such a cargo: Tween Deckers[7], Bulk Carriers, Ore/Bulk/Oil[8] (OBO), Tankers[9], and Barges[10] (ASBA, 80).

The Ship & its Characteristics:

For the purpose of this paper I will focus on the bulk carrier, the most common ship used for the major bulk cargoes and the great majority of minor bulk cargoes. The bulk carrier fleet falls into four main categories generally refered to as Handy bulk carriers (10-29,999 dwt), Handymax bulk carriers (30-49,999 dwt), Panamax (50-79,999 dwt) and Capesize (over 80,000 dwt). These are all single deck vessels with a double bottom, which are essentially free of obstructions within their holds. The cargo accesses the holds vertically through its hatches in the weatherdeck. Their speed ranges between 12 to 16 knots, and their stowing capacity[11] ranges from 45 to 55 cubic feet per ton. Grain has a stowage factor of 45-50 (Cu. ft/ton) (ASBA, 93).

Bulk carriers are generally designed for cheapness and simplicity. Key design features are cubic capacity, access to holds, and cargo handling gear. Hold design is important because cargoes such as grain shift easily and if unchecked can capsize a ship. To prevent this, bulk carriers generally have self-trimming holds "in which the topside wing tanks are slopped in such a way that granular types of cargo can be loaded by gravity without having to trim the cargo into the wings of the hold" (ASBA, 93). The bulk carrier's cargo handling gear may be cranes or derricks, which will enable it to be self sustaining in ports with inadequate cargo handling facilities. In general, only the smaller bulk carriers are 'geared'. Larger bulk carriers are usually used in trades in which purpose-built cargo handling facilities exist (ASBA, 94).

In appendix B-2[12] there is a cross section of a 66,000 dwt Panamax bulk carrier, the same type which will be considered when preparing the voyage estimates in section V. Included is a cross section of a bulk carrier hull, which depicts a self-trimming hold, similar to that of the vessel which will be used in the voyage estimates prepared for this paper.

The Charter Market:

The charter market is central to the functioning of the shipping industry, it is here that ships and cargoes get 'paired'. The effort to combine cargo with a particular ship seems like an easy task to accomplish, but the cargoes vary as much as the ships do. In order to simplify the shipowners and shippers experience, the broker plays as the intermediary 'match maker'.

The shipowner places his vessel in the market, free of cargo. The vessel offered for cargo has a particular speed, cargo capacity, dimensions and cargo handling gear. The vessel being offered for hire will probably be completing an existing 'fixture', this in turn will determine the date and location at which it will become available. A typical announcement for a vessel for hire would then read something like this:

M/V 'MAGIC SKY' Liberian Flag, built 1983

single deck bulk carrier

37,554 MT DWT on 35' 3.75'' SSW

LOA 615' 11'' EXT BREADTH 93' 3.5"

1,618,800 cuft grain/1,560,900 cuft bale

5 holds/hatches 4 @ 24 MT cranes

14 Kts on 30 MT (1500') plus 2.5 MT blended F.O.

AVAILABLE 2/2 BALTIMORE

The shipper or charterer, who has a particular volume of cargo to transport from one location to another, will enter his cargo in the market in order to have it shipped. The quantity, timing and physical characteristic of the cargo will determine the type of shipping contract he requires. The charterer's cargo description would be phrased somewhat along these lines:

REQUIRE VESSEL OF ABT. FORTY THOUSAND TONS DWT.

FOR SINGLE VOYAGE FROM NY. TO NAPLES CARRYING

FULL CARGO HEAVY GRAIN. DELIVERY IN NY. FOR LOADING

FIRST HALF FEBRUARY.

The cargo seems to be ideal for the described vessel, and most importantly time and location seem to coincide. This is when the broker and agent come into play as 'match makers', since they specialize in setting up the deals. If the shipowner and shipper agree on the terms and conditions a charter party[13] is drawn up and the ship is 'fixed'. (Kendall; Stopford)

Several different types of charters exist. The main differences between them is the degree of owner involvement in the operation, the division of the costs and the extent to which the cargo to be transported is specified in the contract. For the purpose of this paper, which is to establish the cost of non-tariff barriers to trade in the shipment of grain, a voyage charter will be used in order to calculate the voyage estimates. When agreeing upon a voyage charter the shipowner incurs all of the costs involved in the operation such as port charges and canal dues. These costs subtract from the owners earnings in a more visible manner, thus any cost construed as a non-tariff barrier to trade will be readily identified. The owner capitalizes in such a charter by earning freight per ton of cargo transported. (Abrahamsson)

In contrast, with a time charter, the charterer assumes all the voyage expenses, and the shipowner pays for the operating costs of the vessel such as crew, maintenance and repair. In this particular type of charter the shipowner capitalizes on his vessel by hiring it out for a specified period of time for a daily, monthly or annual fee. (Abrahamsson)

Once the ship has been fixed, a fixture report is issued in which the details of the charterer are summarized. For the voyage charter described above, the fixture report would read:

US East Coast to Italy- Magic Sky, 36,000 t, heavy grains/sorghum/soya beans,

$12.50, 4 days/1,000 t, Feb. 6-10. (Andreas)

In layman’s terms, the vessel Magic Sky has been chartered to load grain in the US East Coast and transport it to Italy. The cargo consists of 36,000 tons of heavy grains, sorghum and soybeans at a freight rate of $12.50 per ton. Four days are allowed for loading and 1,000 tons per day rate allowed for discharging. The vessel must present itself ready to load between February 6 and February 10. The charterers are Messrs. Andreas. (Kendall)

Freight Rate Determination:

All markets are governed by the relationship between supply and demand, and the freight market is no different in that sense. What sets the freight market apart from other markets however, is the contrasting speed in which supply and demand adjust. While demand is mercurial due to its relationship to the world economy, supply is lethargic mainly due to the fact that ships take anywhere from one to two years to be built and delivered to their owners. Therefore, time is a major factor in reaching equilibrium in the freight market. Short run equilibrium occurs when there is time to adjust supply by short-term measures such as layup, reactivation, or operating ships at a faster speed; while long run equilibrium occurs when shipowners have time to take delivery of new ships and shippers have time to rearrange their supply sources.

For the purpose of this paper we are interested in the short run equilibrium, as the freight rates which will be considered for the voyage estimates will come from the charter market, which in turn is governed by the peaks and troughs the short run has to offer.

On the supply side function of sea transport, whenever there is a shortage of transport capacity, freight rates rise. This has a two fold effect. First, the older and less efficient ships become profitable to operate and are brought out of layup until the whole existing stock of tonnage is either actively trading or seeking employment. The second effect this has on the world fleet is that in order to earn the maximum possible revenue, shipowners operate at increased speeds, fuller space utilization, and perform fewer and shorter trips in ballast. A greater utilization of operational capacity occurs. (Stopford)

The following graph illustrates the short run supply function:

Graph #1

Source: Martin Stopford, Martime Economics 2^nd Ed.

The opposite occurs when there is an oversupply of ships. Freight rates fall and the least efficient ships in the fleet are unable to cover their operating costs and move into lay-up. Gradually the operational fleet falls towards the level of demand and laid up tonnage grows. The operational capacity of the fleet decreases as shipowners reduce their operating speeds to conserve fuel, and are willing to perform extensive ballast trips to ensure cargo. (Stopford)

By bringing the short run demand curve into the picture we can explain how freight rates are determined. Demand for sea transport comes from world trade, so in the short run, one should not expect it to be significantly influenced by the level of freight rates. A major increase in demand only pushes freight rates up slightly because vessels in lay-up immediately enter the market to meet the increasing demand. An additional increase in demand is what triggers the highest hike in freight rates, as the market rate is being set by older vessels which require higher freight rates in order to be profitable. The market's sensitivity to the balance between supply and demand explains why freight rates tend to follow a long trough periods which are sporadically reverted by short periods of very high rates. (Stopford)

Graph number 2 is the short run supply curve coupled with the short run demand curve, which together create short run adjustment:

Graph #2:

Source: Martin Stopford, Martime Economics 2^nd Ed.

The volatility of the charter market has been known to turn shipowners hair white overnight. Operating costs are relatively fixed in the shipping industry, consequently layup may save some money but not enough to withstand an extended trough in freight rate levels. That is why only the adept owner survives the long droughts and flourishes in the short grace periods the market has to offer.

IV-Grain as a Commodity

Grain- The Basics:

The importance of grains in the human diet is primordial. From the earliest times its functions have been two-fold: human food and for feeding livestock. Many different forms of grain exist which are differentiated by their climactic and soil requirements, as well as their nutritional value. From the time when grains were first utilized to their modern day counterparts which are genetically enhanced, there has been no clear cut definition as to which grains are consumed by humans and which are fed to animals. Johnson's Dictionary defined oats in the eighteenth century as a ‘grain which in England is generally given to horses, but in Scotland it supports people' (Atkins M., 123).

Wheat and rice are generally identified as the most important food grains, whilst maize[14], sorghum, and barley are categorized as the most important feed grains. The three latter grains are occasionally grouped with rye and millet, and known as coarse grains. The rule of thumb is that grains fed to animals are those which have the lowest protein content; however, wheat of a lower quality is fed to animals in Europe and the ex-soviet socialist republics, and corn and millet are staple food in many regions of the world. (Atkins M.)

It does not matter which grain is used, as they are all crucial in the human diet, consequently governments intervene heavily in the grain markets. The purpose behind such heavy government intervention is to stabilize or raise the incomes of grain farmers, and to ensure that consumer food prices are reasonably low and stable. To accomplish this governments must maintain a difficult balance, thus their response varies according to the relative strength of the political forces backing the producer or consumer groups. In most cases it’s the producers who pay the price when their product is valued at lower rates than expected. Such agricultural policies are most commonly practiced in the United States and Western Europe. In Europe agricultural subsidies under the Common Agricultural Policy, have been the cause of severe debates and an obstacle in the development of the European Union (EU). (Atkins W.)

The governments intervention in the grains market distorts prices hence a large proportion of the world's grain is produced and consumed at prices set by governments bearing a tenuous relationship to the price of freely traded grains. However, the sheer magnitude of the freely traded grains in the world market allows it to continue to play an extremely important role to many of the world's farmers and consumers of grains.

Seaborne Grain Trade:

Grain is considered one of the major dry bulk cargoes together with coal, iron ore, bauxite & alumina, and phosphate. Of these major bulk trades, grain is different in both economic and shipping terms. Whereas, iron ore and coal are part of a carefully structured industrial operation, grain is an agricultural commodity[15], seasonal and subject to vagaries which make its trade in both volume and route irregular. In appendix C-1[16] one can find a table which indicates the amount of trade the five major bulk trades have followed for the past ten years. What is clearly noticeable is the inconsistency of the grain trade. In 1992 there was an all time high of 208 mt, falling to 184 million tons in 1994, and raising again above two hundred million tons in 1997 to 203 mt (Fearnleys, 5). The inconsistency of the grain trade makes for the optimization of the trade extremely difficult, as planning is almost impossible. Consequently the grain trade depends heavily on general-purpose tonnage drawn from the charter market.

In 1998, grain trade was 196 mt and in 1999 it rose to 210 mt. As pointed out earlier, grain is used for both human food and as animal feedstuff in the production of meat. Wheat, arguably the most important food grain, accounted for about half of the grain trade during the last decade, mostly destined for human consumption; the other half consisted of maize, barley, and oilseeds, mainly for use as animal feedstuff. By commodity, in 1998 the seaborne grain trade was wheat 81 mt, and coarse grains accounted for 115 mt. Thus the grain trade is more closely linked to meat production than to direct human food. (Fearnleys; Stopford 2nd ed.)

Though inconsistent in its quantity, seaborne grain trade has been on an upward trend for the last couple of decades. The rising trend is largely due to greater meat consumption fueled by higher income levels. A considerable amount of the grain trade is destined to meet harvest shortfalls and relieve famines, but the real volume is intended for feeding animals in industrial and industrializing countries, "where each unit of meat produced requires anything from five to fifteen units of animal feed" (Stopford, 323-2nd ed.).

The advent of economic success in developing countries, particularly the Asian Tigers and Eastern Europe, has generated a new pattern in the demand for grain imports. This is evidenced by the fall in the share of total imports from Europe and Japan. While both accounted for two-thirds of total grain imports in the 1960's, by 1995 their trade share had fallen to only 4 percent and 13 percent respectively. On the other hand, Asia (29 percent), South America (17 percent) and Africa (16 percent), have all become much more important (Stopford, 324-2nd ed.). (Atkin, M.)

The Grain Trade Model:

The grain trade depends on the typical supply/demand model. Food demand depends on income, population, prices, daily calorie intake and consumer tastes, while supply depends on land, yields, policies, prices and feed conversion efficiency (Stopford, 324-2nd ed.). Traditionally the focus of the grain markets is on supply disruptions, as these cause the largest movements in price, quantity shipped, and final destination. Demand side developments, however, should not be ignored.

The importance of demand in the food/feed relationship of the grain trade model has increased as developing countries surge forward economically. In the wheat market, developing countries account for a large and growing share of world consumption. The growth rate of this consumption is influenced by the health of their economies, partly through their ability to finance imports, and by having higher consumer incomes, which in turn leads to higher demand. In the feed grain market, rising consumer incomes influence demand as they lead to a higher demand for meat which in turn requires an even larger amount of grains (Atkins, M., 136).

The supply side of the food trade model is primarily concerned with output. Crop production depends upon crop yield, with regard to cultivation and the availability of arable land. In the past most of the world's increase in crop production came from either an increase in the amount of land used or from an increase in the amount of labor used. During the twentieth century these trends have been reversed. Agricultural yields have increased steadily, while the amount of arable land has remained fairly constant. Such an improvement in production was largely due to greater fertilizer application, improved seed varieties, mechanization, pesticides and better farming techniques. World output has consequently increased dramatically. Between 1980 and 1990 world food output increased by about 26 percent. (Atkins, M.; Stopford- 2nd ed.)

Prices, political policies and stock changes are also important variables that affect supply. Of these, government policies are the main culprit in distorting grain output and prices. Seaborne grain trade is directly affected by government intervention in the production of grains. The final amount available to trade depends on how much supply is 'toyed' with. When a major grain exporting country interferes in its agricultural output, the amount of grain available for trade is manipulated. This affects the price of grains adversely as they are held at artificially low levels. This holds true in the case of the United States and the European Union, who have engaged in subsidy wars which have only exacerbated the weakness of grain prices.

Depressed wheat prices might put a dent in developed countries balance of payments, but for developing countries such a situation can bring a country's economy to a screeching halt and further complicate them. Developing countries reliance upon agricultural products for economic survival has led to their intensification of non-tariff barriers to trade to further protect themselves from a playing field in which they have no say.

Grain-World Trade:

For the purpose of this paper, the term 'grain' includes wheat, maize, barley, oats, rye, soybeans, and sorghums. World production of these commodities in 1998 reached a total of 1594 mt, down 3.3 percent with regard to 1997 which saw a total amount of 1605 mt. The individual figures for the various grain commodities in 1998 were as follows: wheat 585 mt, maize 603 mt, barley 138 mt, soybeans 158 mt, sorghum 63 mt, oats 26 mt, and rye 21 mt (Fearnleys, 29).

International seaborne grain trade in 1998 amounted to 196 mt, 12 percent of the world’s total production. As stated earlier, the volume of seaborne grain trade for natural reasons fluctuates more than for other commodities. Grain is the third largest dry bulk commodity at less than half of the coal and iron ore volumes. In 1998, the breakdown by commodity and quantity shipped by sea was: wheat 81 mt, maize 60 mt, soybeans 36 mt, sorghum 7 mt, and barley/oats/rye together 12 mt (29).

The following table shows the major exporters of grain by country in 1998 and the major importing regions (Japan is included separately due to the large volume of trade which is directed to it alone).

Table 6

Major Grain Exporters/Importers for 1998 in Seaborne Trade

Exporting Countries	Importing Regions
United States- 59 mt	Americas- 38705 mt
Argentina- 22.6 mt	Japan- 30759 mt
Canada- 15.3 mt	Africa- 30719 mt
Australia- 15.3 mt	UK/Continent exclu. Med.-13109 mt
European Union to 3rd Country- 14.9	Indian Ocean- 20777 mt

Source: Fearnleys, World Bulk Trades 1999

The above graph highlights the growing importance of developing countries in their share of grain imports. Countries that also have have considerable grain exports are: China (4.6 mt), Turkey (2.6 mt), and France (2.3 mt). On the importing side, regions which have a considerable amount but were excluded are: Other Far East countries (41,102 mt) and Mediterranean (10,583 mt). The major grain exporting ports are shown in appendix C-2[17] in relation to the grain-producing areas from which they draw their supplies.

Seaborne grain trade, measured in ton-miles, decreased from 1169 btm in 1997 to 1064 btm in 1998. The average sailing distance decreased from 5760 to 5430 miles (31). The average haul is a key variable in the demand for sea transport because the demand for sea transport depends upon the distance over which the cargo is shipped. The basic principle is that the farther away the load port is from the discharge port, the more beneficial it is for the shipping market.

Bulk Vessel Trades:

In terms of shipment, grain is essentially an opportunist cargo, consequently the trade tends to use the ports and ships that are available in the charter market. The reason for such a volatile market is that grain trade is seasonal and fluctuates with the harvest in both the exporting and importing regions. The United States for example, exported 118 million tones of grain in 1984, only to drop to 78 million in 1986, returning to little over 100 million in 1992 (ASBA, 102). These fluctuations are virtually impossible to predict which makes planning for grain export facilities very difficult, and scheduling efficient large bulk export operations extremely complex. For example, loading cargoes of more than 70,000 tons involves careful scheduling of input barges or box cars from a host of different sources, often at the height of the season. Discharging can be equally complicated and hazardous since there are all the problems of ensuring the prompt arrival of a multitude of barges and coasters. Penalties for faulty consignments and demurrage[18] charges grow more rapidly with large consignments as well. (Stopford-2nd ed.)

Vessels of all sizes carry grain, but in main trading routes like USA-Far East or South America-Europe, Panamax or larger vessels are predominantly used. The share of grain shipments by bulk vessels over 50,000 dwt in 1998 was 48 percent. If the pattern of growing bulk trades continues, and grain shipments are more carefully coordinated, this figure is bound to increase. In terms of shipment volume which was transported in vessels over 50,000 dwt, it totaled 94 mt in 1998, down from 112 mt in 1997. Measured in ton-miles, bulk vessels of over 50,000 dwt completed 628 btm, for an average transport distance of 6710 miles in 1998.

Even though most major grain cargoes move in bulk carriers, sometimes 'clean'[19] OBOs (combined carriers) are used instead. Combined carrier shipments of grain totaled 0.9 mt, a very small volume when compared to that of Panamax vessels. Combined carriers peaked in 1979 when the total fleet amounted to 49 mdwt, in 1998 the fleet of OBO vessels was reduced to 16.6 mdtw. The reason for this decrease is that they have become less efficient, despite their 'multi-tasking', due to longer repair time and idleness for the aging fleet. In addition, structural changes in trading patterns have influencd the volume of individual commodities shipped by combined carriers (42). For better reference, appendix C-3[20] contains a diagram of an OBO vessel.

For calculations in connection with chartering the usual stowage factor for 'HSS' (heavy grains, soybeans and sorghums- an acronym given to some commonly shipped grains) is about 49 Cu. ft./ton. This figure is carefully considered because certain crops vary in stowage depending on their country of origin, and for some from season to season. In appendix C-4[21] one can find a table which serves as a guide to determine cargo capacity, to the extent that it is limited by its cubic considerations. (ASBA)

For the purpose of estimating a real voyage, this paper will make its calculations based on a Panamax bulk carrier of 63,500 dwt. Such a vessel has been chosen for this paper's case study because of its capabilities of trading in the River Plate, and the fact that it is the vessel used most often in the carriage of grain.

In order for the reader to better grasp seaborne trade, maritime economics, the vessel, and the commodity itself, grain, were all given careful consideration. The following section is a real case study of two voyage estimates. Both voyages transport grain. The first one from the River Plate to the Continent with a cargo of grain, and the second from the US Gulf to Odessa, Ukraine. The supply and demand functions of maritime economics, as well as the vessel and cargo characteristics all influence the freight rate at which the cargo will be shipped. Appendix C-5[22] outlines the maritime freight rates for wheat and how they have dropped or increased from the major export ports to the major import ports in the past few decades. The uncertainty involved in the export of grain and the vagaries of the shipping market make selecting a representative freight rate difficult and perhaps even misleading.

The fact that from Argentina to the Netherlands the freight rate has dropped from $28.44 in 1981/82 to $17.62 in 1997/98 exemplifies the vagaries of the market. The purpose of this paper is to identify non-tariff barriers to trade. Freight rates and their variations affect both shippers and shipowners, but are of no immediate relevance to this paper. The freight rate and all other variable costs such as bunkering[23], port charges, and tolls, will be the current prices available in the market and not averages of past figures.

V-Voyage Estimates

Voyage Estimating In Perspective:

When performing a voyage estimate one should keep in mind two things: first, that voyage estimates do not determine the freight market, and second, that voyage estimates are an effort to be as accurate as possible and are not 'written in stone'.

The freight rate that is paid at any given moment will depend on the supply and demand ratio, i.e. the amount of cargo available, and the number of suitable ships available and willing to carry it. The shipping market, as all free markets, is subject to the basic laws governing supply and demand. If the number of cargoes available is higher than the number of ships available, freight rates will be high. This is also known as an 'owners' market'. Conversely, if there are few cargoes and a surplus of ships, rates will be low, becoming what is known as a 'charterers' market'. In either case, the shipowner will try to fix a voyage which gives him the highest margin of profit. The voyage estimate gives the owner the ability to compare voyages; if the going market rates do not produce the desired level of profit the owner has the choice whether or not to offer his vessel(s) for hire (ASBA, 170).

Accuracy in preparing the estimate is important, but perfect accuracy is impossible since there are too many imponderables which can affect the outcome of the voyage. Only after the voyage is finished and all bills and disbursement accounts have been received and checked, and demurrage and despatch[24] accounts settled, can the end result of the voyage be calculated to the last cent. The usefulness of estimating voyages is the comparison of rates, one with another, so that one may select the voyage with the largest opportunity for profit, or sometimes, when the market is severely depressed, the least likelihood for loss. Results of a voyage estimate will only be comparable if the estimates are prepared in a consistent manner. (ASBA)

Vessel Costs:

From the standpoint of an owner, vessel costs can be divided into three categories: capital costs, operating costs, and voyage costs.

Capital costs include interest on the money used to purchase the ship and the amortization thereof. Capital costs, although they may affect an owner's attitude towards long term employment of his vessel, have very little or no bearing on the spot market and are usually disregarded by estimators. (Stopford, 2nd ed.)

Operating costs, or running costs "are the ongoing expenses connected with the day-to-day running of the vessel (excluding fuel, which is included in voyage costs), together with an allowance for day-to-day repairs and maintenance (but not major dry dockings which are dealt with separately)" (161-2nd ed.). The vast majority of the operating costs are cash costs which can only be avoided by laying up[25] the vessel. However, because there are also costs associated with laying up, only a part of the daily operating cost can be avoided. Many owners, when preparing voyage estimates, will include operating costs. Operating costs are given consideration when deciding a freight rate only if the market level is close to layup, therefore, they will not be taken into account when preparing the voyage estimates for this paper (ASBA, 171).

Voyage costs are those variable costs directly attributed to the voyage in question. These include the cost of fuel to perform the voyage, port charges, cargo handling expenses, canal tolls, hold cleaning, and other miscellaneous costs such as telegrams expenses and representation costs at the ports of call. (Stopford-2nd ed.)

Fuel is the single most important item in voyage costs, accounting in average for 47 percent of the total. In the voyage estimates calculated for the purpose of this paper, fuel costs account for 44% of first estimate and 53% of the second estimate. Little attention was paid to fuel costs in ship design prior to the 1970's Oil Crisis. In the period ranging from 1970-85 fuel prices had a nominal increase of 950 percent, consequently fuel went from accounting only 13 percent of costs to 34 percent of costs. As a result, resources were poured into designing more fuel-efficient ships and operating practices were adjusted so that bunker consumption by the shipping industry fell sharply. The design of the main engine, the most important influence on fuel consumption, the use of auxiliary engines to improve fuel efficiency, and the hull’s condition are the main variables affecting a ship’s fuel consumption. When taken into consideration as a whole these variable can affect fuel consumption in vessels of a similar size and speed by as much as 20-30 percent (Stopford, 170-2nd ed.).

Port-related charges represent a major component of voyage costs and include various fees levied against the vessel and/or its cargo for the use of the facilities and services provided by the port. In the examples prepared for this paper the ports costs amount to $180,000 and $125,000 respectively. These figures account for 36% and 30% of total voyage costs. This clearly exemplifies the varying charging practices from one area to the other, but broadly speaking they fall into two major components-port dues and service charges. Port dues are levied on the vessel for the general use of the facility while charges range anywhere from the volume and weight of cargo, to the gross/net registered tonnage of the vessel. Under a voyage charter, the type used in estimating this paper's voyage estimates, all port dues and charges accrued by the vessel are charged to the shipowner. The charterers, except for cargo handling charges, which are generally agreed under the charter terms, generally pay for all charges on the cargo in such contracts. (Stopford, 2nd ed.)

Canal dues and cargo handling costs are the other two major components of a voyage estimate. In the examples used in this paper only the second voyage includes the usage of a canal, the Bosporous Canal. In total the costs of crossing the canal amount to $17,550 including the canal toll and use of a pilot[26] through the canal. Cargo handling costs are not for the owners account in either example as the terms used in this case are Free In and Out Trimmed (FIOT). As such, the charterer or shipper/receiver pays for the loading and discharging of the cargo. The term 'trimmed'-to level the cargo either by machinery or hand- is applicable in this case as grain, the cargo used in both examples requires trimming, and this cost is included in this case. If this were omitted from a charter, then any 'trimming' would be for the owner's account and could be an expensive oversight. (Stopford, 2nd ed.; ASBA)

Voyage Estimates:

The voyage estimates are based on a Panamax built in 1976 and registered in Panama. The deadweight of the vessel used in the example is 63,500 tons, with seven holds and hatches, and a draft[27] of 44 feet. The cubic capacity of the vessel used in these examples is 2,820,000; in each case the cargo's stowage factor was taken into consideration in order to determine the maximum amount of cargo which could be loaded. The speed at which the vessel operates, as well as the fuel consumption, are based on the actual figures of the above-mentioned vessel.

The loading and discharging rates were determined by the total amount of cargo divided by the ports actual ability to load/discharge cargo. In the first example both ports, San Lorenzo in Argentina and Rotterdam in the Netherlands are assumed to load/discharge at a rate of 8,000 tons per day. In the second example the load/discharge rate is considered to be 10,000 tons a day for New Orleans, USA and Odessa, Ukraine. Approximately two days grace was added in loading/discharging due to any possible variance in the weather. The term WWSHEX, stands for Weather Working (Days) Sundays and Holidays Excepted. Work is conducted in loading/discharging cargo as long as the weather does not interfere. Disturbances in the weather which do not allow for work to be conducted do not count against laytime, Sundays and Holidays are excluded from laytime as well. (ASBA)

When comparing several different voyages, shipowners and/or their brokers may estimate the time charter equivalent of the voyage they are calculating. This is achieved by dividing the net revenue by the total amount of days the vessel is on hire. This allows the owners to get a perspective as to what they could expect if they wish to charter their vessel on a time charter voyage.

The freight rates and the cost of bunkers are representative of actual market figures at the time when the estimates were calculated. As explained earlier, freight rates vary dramatically and can rise or fall in a matter of weeks. This paper focuses in identifying the costs of the different trade barriers involved in the carriage of grain. Freight rates and bunkers will play a determinant factor in the variance of profitability of the voyages, but hidden costs and trade barriers will always be extra costs, whether the market is strong or weak.

M/V "EXAMPLE"

DRY CARGO

VOYAGE ESTIMATE COST

DATE: Prepared/Basis 4/00

S/S: 63,500 CARGO: HSS @ 49

SPEED: 12 MILES PER DAY: 288 FROM:Argentina TO:Holland

DAILY CONSUMPTION AT SEA: 32.5 T IFO

2.5 T Diesel

IN PORT: 2.5 T Diesel LOAD/DISCH: 14 WWSHEX

----------------------------------------------------------------------------------------------------------------------------

ITENERARY: Rotterdam/River Plate-Rio Grande Do Sul/Rotterdam

----------------------------------------------------------------------------------------------------------------------------

TOTAL MILES: 12,720 VESSELS CUBIC: 2,820,000 % 49SF= 57,500

SEA PORT

STEAMING: 45 DWT: 63,500

LOADING[28]: 7 FUEL: 21 dys x 30 T= 630 (ballast)

DISCHARGING: 7 24 dys x 32.5= 780 (laden)

TOTAL VOYAGE DAYS: 59

--------------------------------------------------------------------------------------------------------

CARGO @ San Lorenzo:…40,000 MT @ 23………………………..$920,000

CARGO @ Rio Grande:…10,000 MT @ 18…………………....……$180,000

GROSS REVENUE CARGO:……………………………………………..…$1,100,000

VARIABLE COSTS:

FUEL…………………………………………………………..$221,325*

*Averaged Rott/Riv Plat-Rio Grande/Rott

(b) 21 dys @ 630 x $135= $85,050

(s) & (p) 45 + 14= 59 dys x 2.5T x $210= $30,975

(s) 24 dys @ 780 x $135= $105,300

PORT CHARGES:…………………………………………….$180,000

San Lorenzo, Argentina: $75,000

Rio Grande, Brazil: $40,000

Rotterdam, Netherlands: $65,000

ARGENTINA FREIGHT TAX @ 3%………………………..$33,000

LOADING/DISCHARGING………………………………….F.I.O.T

COMMISSION @ 6 1/4%…………………………………….$68,750

TOTAL VARIABLE COSTS…………………………………………………….$503,075

NET REVENUE…………………………………………………………………..$596,925

DAILY T/C EQUIVALENT………………………$10,117

M/V "EXAMPLE II"

DRY CARGO

VOYAGE ESTIMATE COST

DATE: Prepared/Basis 4/00

S/S: 63,500 CARGO: WHEAT @ 49

SPEED: 12 MILES PER DAY: 288 FROM:US Gulf TO: Black Sea

DAILY CONSUMPTION AT SEA: 32.5 T IFO

2.5 T Diesel

IN PORT: 2.5 T Diesel LOAD/DISCH: 14 WWSHEX

--------------------------------------------------------------------------------------------------------------------------

ITENERARY: New Orleans/Odessa/New Orleans

--------------------------------------------------------------------------------------------------------------------------

TOTAL MILES: 13,464 VESSELS CUBIC: 2,820,000 % 49SF= 57,500

SEA PORT

STEAMING: 46 DWT: 63,500

LOADING: 7 FUEL: 23 dys x 30 T= 690 T (ballast)

DISCHARGING: 7 23 dys x 32.5 T= 747.5 T (laden)

TOTAL VOYAGE DAYS: 60

-------------------------------------------------------------------------------------------------------------------------

GROSS REVENUE CARGO:…57,500 MT @ 16.50…………………………$948,750

VARIABLE COSTS:

FUEL…………………………………………………………..$228,563*

*Averaged NoLa/Odessa/NoLa

(s) 23 dys @ 690 x $135= $93,150

(s) & (p) 46 + 14= 60 dys x 2.5T x $230= $34,500

(b) 23 dys @ 747.5 x $135= $100,913

PORT CHARGES:…………………………………………….$125,000

New Orleans, USA: $65,000

Odessa, Ukraine: $60,000

LOADING/DISCHARGING………………………………….F.I.O.T

COMMISSION @ 6 1/4%…………………………………….$59,297

CANAL COSTS @ Bosporous NET………………………….$8,500

PILOT @ Bosporous NET…………………………………….$9,050

TOTAL VARIABLE COSTS……………………………………………………$430,410

NET REVENUE…………………………………………………………………..$518,340

DAILY T/C EQUIVALENT………………………$8,639

VI-Nontariff Barriers to Trade

Nontariff barriers to Trade & the World Trade Organization:

The world economy's functionality relies on trade, as countries and individual citizens seek to purchase what they cannot or do not produce, while trying to sell the product that they do produce. The sheer size of the world and the millions of different goods and services offered have made the exchanging of products extremely complex, and in some cases prohibitive.

Domestic and foreign market imperfections, infant industries, employment, contribution to the domestic economic activity, stability in the balance of payment, inability to compete with low-wage countries, and national defense issues, are all reasons for a country to hamper free trade by introducing nontariff barriers to trade (NTB's). Such actions restrain trade, especially international trade. This is where the World Trade Organization plays an important role, as the largest governing body regarding trade issues. The goal of the WTO is to implement a trading system which does not discriminate, is freer, predictable, more competitive, and more beneficial for less developed countries. (White; WTO-TBT's)

The above-mentioned principles constitute the WTO's basic framework for the international trading system. Trade without discrimination implies that under WTO agreements, countries should not discriminate amongst their trading partners. If a country were to grant another special conditions on trade, such as lower tariffs on a particular product, it should extend such a benefit to all other WTO members. Such a principle is known as most-favored nation (MFN) treatment. The MFN principle means that "every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners" (WTO-TBT's). Another principle which follows along these lines is that all imported and locally-produced goods should be treated equally, at least after the foreign goods have entered the market.

While tariffs have been steadily reduced, the relative importance and cost of NTB's has increased. The major concern toward NTB's is their changing nature which allows them to 'evolve' from clear-cut tariffs to other unclear and not easily quantifiable discriminatory arrangements. The major consequence is that the MFN principle, the cornerstone of the WTO's 'free' trading system, "has been eroded by an increasing reliance on nontariff barriers directed at specific countries or country groups" (Laird & Yeats, 1).

Defining and Identifying NTB's:

Nontariff barriers, unlike tariffs, compromise the order of the international trading system since they normally involve lack of transparency and de facto discrimination amongst trading partners.

It is estimated by the United Nations Conference on Trade and Development (UNCTAD) that approximately 20 per cent of world trade now encounters nontariff barriers, and that they continue to proliferate. Discriminatory barriers are introduced at a general level between members of different trading blocks, particularly the European Union (EU), and selectively against individual countries and industries. As nontariff barriers keep evolving in different forms, transparency has been reduced, making monitoring, surveillance, and assessment of these trade barriers' effects more difficult. (Laird & Yeats)

The difficulty in identifying NTB's is their lack of transparency in their usage and most importantly their economic effects. In order to clearly identify NTB's for the purpose of this paper, Ingo Walter's definition will be used. Walter's identifies NTB's as "[barriers which] encompass all private and government policies and practices that distort the volume, commodity-composition or direction of trade in goods and services" ( Laird & Yeats, 15). Such a definition proposes that the intent of different measures be a factor used for identification of NTB's. Since there exist several measures whose intent is not clearly identifiable the UNCTAD made a distinction between NTB's and nontariff measures (NTM). Nontariff measures is a wider definition in that in encompasses "all trade instruments which may be used as barriers, although their restrictive effects, if any, may vary between countries, or even at different points in time in a specific country" (16).

Nontariff barriers appear in several different forms such as quotas, variable import levies, 'voluntary' export restraints, and government procurement regulations. An import quota is a government-imposed quantitative restriction on imports. The country wishing to limit imports of a particular good, determines the amount to be admitted during a certain period of time, and then prohibits additional trade. "The forced scarcity raises the domestic price of the good by the amount necessary to reduce demand. This implies that somewhere along the line from the foreign producer to the domestic consumer, a premium was added to the restricted good's price" (40). The beneficiary of the premium depends on how the quota is administered. Under such a system the government annually auctions licenses to import the quantity set out by the quota in a competitive bidding.

Variable import levies are "designed to achieve domestic price stability by imposing a charge on imports which varies to hold the landed prices of foreign goods constant" (37). In cases where the domestic prices are higher than foreign prices, the levies reverse their function and become a subsidy on exports. Variable import levies are most heavily implemented on agricultural products, most predominantly in the European Union, and slightly present in the United States, particularly on sugar imports. Voluntary export restraints (VER) is "an agreement by an exporting-country government to restrict exports of a good to a specific importing country" (41). Such an action serves as an import quota, without it really being implemented by the importing country. Normally such 'agreements' are achieved through actual or implied economic pressure on foreign suppliers.

Government procurement regulations require government purchasers to favor domestically produced goods. Such regulations generally impose a maximum percentage over which domestic goods can cost over foreign goods before the foreign goods are preferred over domestically produced goods. With regards to shipping, such regulations appear in the sort of minimum requirements. In the United States for instance Public Law 480 requires that 75 percent of agricultural aid shipments be shipped by US flag ships. The Jones Act is yet another such regulation taken to the extreme, as all domestic coastal shipping routes must be performed by US-flag operators. (Laird & Yeats; White)

Nontariff barriers to trade have circumvented the WTO's most-favored nation principle, to the extent that they severely hamper international trade at a high cost. Nontariff barriers significantly reduce both developed and developing countries' export earnings, the ultimate losers being developing countries. In a study conducted by Laird and Yeats (1987a), it is estimated that NTB liberalization would allow heavily indebted third world countries to increase imports earnings by an amount equal to one-half of these countries' debt ( Laird & Yeats, 8) . This form of protectionism clearly distorts the World Trade Organization's intent of encouraging development and economic reform in developing countries. Nontariff barriers frustrate commodity producing countries' efforts to shift from primary commodities to semi-finished or processed goods. Further more, they often discriminate against products in which developing countries have a comparative advantage. Finally NTB's harm consumers in protected markets by limiting access to lower-priced foreign goods, further defeating the WTO's efforts of introducing a trading system which benefits both the trading countries and their individual consumers. ( Laird & Yeats)

Agricultural Trade Barriers:

The World Trade Organization has been instrumental in achieving major breakthroughs in the agricultural sector in an effort to make policies more market-oriented. An Agricultural Agreement, which is still being deliberated, seeks to allow the agricultural market to develop with regards to: market access-various trade restrictions confronting imports; domestic support-subsidies and other programs; and export subsidies as well as other methods used to make exports artificially competitive. (WTO-Agriculture Agreement)

Government agricultural support programs in most countries are directed at the following objectives: preserving rural society; making sure that enough food is produced to meet the country's needs; shielding farmers from the effects of weather vagaries and swings in world prices, and accelerating the development of other sectors which have linkages to agriculture. However, such support programs often involve major costs for society in the form of 'distortion' (Laird & Yeats, 136; WTO-Agriculture Agreement).

The concept of 'distortion' is used in describing the anomalies present in the agricultural trade. Trade is distorted if prices are higher or lower than normal, and if the quantities produced, bought and sold are also higher vis a vis the levels that would exist in a competitive market. Examples of such distortions were quantified by a study conducted by Geoffrey Miller (1986). In his study Miller found that "the budgetary cost of US farm programs in 1986 was nearly $700 for each non-farm family while [in the then European Economic Community's, now the European Union,] was more than $900" ( Laird & Yeats, 136). The study noted further anomalies such as in the case of the Japan in which consumers paid in 1986 about 60 percent more than they would "if internal food prices reflected the fall in world prices and the appreciation of the Yen since 1980" (136). The most outstanding 'distortion' identified in this study was the fact that "the quarter of the EEC and US farmers with the largest output received three-quarters of the farm support" (136).

When some countries subsidize and others do not, the result is that subsidizing countries produce considerably more than they normally would. Such policies have often been expensive, and have encouraged gluts leading to subsidy wars. Countries with less money for subsidies have consequently suffered, and it comes as no surprise that such countries are always developing nations who depend on agriculture for their economic stability and growth.

The WTO's Agriculture Agreement is instrumental in leading the way to a fairer market. It has imposed a new rule for market access in agricultural products in an effort known as 'tariffs only'. Under this program, quotas and other types of non-tariff measures are converted to tariffs, in a process known as "tariffication". A system of 'tariff-quotas' was introduced as well, in which lower tariffs rates were applicable for a specified quantity and higher rates for quantities that exceed the quota. Tariffication is instrumental in identifying the sometimes extremely dubious NTB's, more importantly it allows for a gradual decrease of such ex-NTB's. By the end of the Uruguay Round developed countries pledged to reduce 'tariff-quotas' by 36 percent in a six year span, while developing countries would make 24 percent cuts in a ten year time span (WTO-Agriculture Agreement).

The main complaint about policies which support domestic prices or subsidize production in some other way, is that they encourage over-production. This in turn squeezes out imports or leads to export subsidies and low-priced dumping on world markets. Sam Laird and Alexander Yeats, in their book Quantitative Methods for Trade Barrier Analysis, list several simulation studies on agricultural trade liberalization. The results of such studies may be outdated with regard to current world trade figures and advancement in the elimination of NTB's, but they clearly shed light on how far world trade is from being truly 'free'.

In the study conducted by Sarris and Freebairn in 1983 they assumed a full liberalization of wheat trade by the EEC alone, and concluded that such a policy would raise world wheat prices by 9 percent while price variability would be reduced by 20 percent. In a similar study Sampson and Snape (1980) assumed the elimination of variable levies within the EEC, and had that been implemented they believed that world wheat, barley and maize prices would rise anywhere between 3 and 11 percent. Anderson and Tyers (1983) took it a step further and assumed full agricultural liberalization by all developed market economy countries. Their results indicated that world wheat prices would rise by 20 percent, coarse grains by 16 per cent and price variability would be reduced considerably (Laird & Yeats, 80).

Market intervention by governments in the agricultural market has prevented world free trade of grains from occurring, affecting not only the price paid by the consumers, but also incurring a high cost to the implementing governments. The World Trade Organization's efforts to liberalize trade have not been futile, unfortunately the implementation of NTB's is more rampant and creative than the WTO will ever be.

VII-Restrictive Shipping Policies

Restrictive Shipping Policies- An Overview:

Many restrictive shipping policies are closely related to a country's shipping and trade policy, and are generally introduced as complementary elements that further protect local industry. Some of these restrictive policies have a direct effect on cargo access, such as preferential cargo allocation, discriminatory measures favoring national carriers, abusive tariffs for services, which are often not rendered or are provided poorly, or a freight tax. Other policies such as shipping subsidies and restrictive financing and regulation indirectly affect cargo access.

One of the major restrictive shipping policies is cargo sharing. In recent years cargo reservation, limited bilateral cargo access, and other methods limiting access to cargo in ocean trading have been introduced or proposed in many parts of the world. The reasons behind such development is the increasing worldwide nationalism in shipping, the preoccupation of many developing and developed countries to participate in international shipping, and the integration of shipping with other national transport modes and national commerce. These factors manifest themselves in the form of restrictive policies, which are designed by governments to strengthen the development of their national merchant fleet. (Frankel)

Cargo reservation and cargo allocation are two of the main forms of cargo sharing. Cargo reservation is usually applied to particular commodities or to government-controlled shipments. In such cases, the carriage of the specified goods is reserved for particular carriers, usually of the national flag fleet. For instance, in 1997 approximately 0.8% of American bulk and general cargoes were carried on US-flag vessels under US cargo preference/reservation laws. In contrast, the People's Republic of China, which imposes certain restriction on purchases to f.o.b. and exports to c.i.f., allowed Chinese registered vessels to transport 19 percent of exports and 27.5 percent of its imports. Cargo allocation, on the other hand, is the assignment of cargo to specific operators (Frankel, 53; APEC).

Few, if any, operator negotiated cargo sharing agreements exist in tramp[29]/bulk shipping, largely due to the fact that they are not organized in conferences or other groupings. The trade served by tramp/bulk shipping (reefer, dry bulk, oil, gas, chemical, etc.) depends on a competitive free market system. Since bulk commodities are usually traded in worldwide markets that are subject to multiple sources of supply, the vagaries of demand and the economies of the world commodity trades, it makes these trades more vulnerable to free market forces. This makes the particular assignation of a place and time almost impossible. Exceptions to this are volume contracts, long-term charters, and similar service contracts. However, some governments have over the years imposed unilateral policies regarding bulk cargo reservation and a few bilateral bulk cargo sharing agreements have been negotiated.

Such restrictive policy measures by governments are generally imposed by developing countries, although developed countries, such as the United States, have imposed cabotage restrictions applied to domestic trade (Jones Act). Developing countries impose anywhere from 40 to 100 percent cargo reservation, or when entering bilateral agreements do so in a 50-50 manner. Still, in most cases, the countries lack the capacity to actually carry the reserved share. Consequently many of these countries issue temporary exemptions, permits or licenses to foreign shipping companies, or encourage national shipping companies to charter or lease the necessary tonnage. In a study conducted by Ernst Frankel in his book titled, The World Shipping Industry, he determined that an extra 231.1 million dwt tonnage (105.7 dwt of tankers and 12.9 dwt of bulk carriers) would be needed by developing countries to carry their share of reserved cargo (98).

The effectiveness of cargo sharing is reduced because of two basic facts that are often overlooked. First, once a ship is scheduled to undertake a voyage, 70 to 85 percent of the voyage costs are fixed costs. Therefore the marginal costs of a voyage, with regard to the carriage of cargo, are only 15 to 30 percent. Second, increases in freight rates or shipping costs must actually be absorbed by increased domestic prices, therefore the increased freight costs are generally borne by the importer (Frankel, 50).

Cargo sharing affects the operation of free market forces in shipping by regulating the quantity and terms of shipment. As such, it has a detrimental impact on rates, shipper choices, quality and quantity of service, technological change, investment, and fleet expansion and contraction. (Frankel)

Restrictive shipping polices are also present as operational controls on shipping. Such restrictions generally take the form of port access restrictions, freight tax, port berth assignment restrictions, and discrimination in the clearance of export/import cargo (Frankel, 39). All such actions impact ship routing, scheduling and operating cost in general. The United States, for example prohibits seven[30] countries from entering American ports, including its territorial waters. Freight taxes on foreign flag vessels loading/discharging in any Panamanian port are a measure used by Panama to increase national shipping participation in its trade.

The bottom line of restrictive shipping policies is that they affect transport costs. The influence they have on transport costs may influence the economic viability of shipping firms or induce changes in the transport costs of a country's trade. "Depending on the elasticity of export supply and import demand, these costs may be passed on to the consumer or be absorbed by the producer of the traded good" (Frankel, 42).

"[Barriers which] encompass all private and government policies and practices that distort the volume, commodity-composition or direction of trade in goods and services, " is the definition used in this paper to identify nontariff barriers to trade (Laird & Yeats, 15). Bearing such a definition in mind, what follows are the different NTB’s that were encountered while preparing the voyage estimates available in section V.

Cargo Sharing Agreement Between Brazil & Argentina:

Argentina and Brazil have a bilateral cargo reservation arrangement, which covers the wheat and iron ore trade between both countries. Such a cargo reservation agreement adversely affects voyage estimate number one by not allowing the vessel to load iron ore in Brazil for discharge in Argentina, consequently reducing the cost of ballasting from Rotterdam to the River Plate.

If the cargo of iron ore were not limited to Argentine and Brazilian shipping companies, the vessel could stop in Tubarao, Brazil on its way to the River Plate to load iron ore and earn a freight which would reduce the cost of ballasting all the way. The limitations faced both by the Argentine and Brazilian merchant marines make such an option possible due to the fact that neither country has the capability to provide the tonnage necessary to carry all the reserved cargo. As such an 'exemption' is granted, and third party vessels are allowed to carry a certain percentage of the otherwise reserved cargo. A third voyage estimate was prepared, in which the vessel does have the opportunity to load iron ore in Brazil for discharge in Argentina (Appendix F-1[31]).

The difference in revenue between example number one, in which the cargo reservation is fully implemented, and example number three, in which an exemption is granted on the cargo reservation, is $156,599. The difference in the daily time charter rate payable in both cases is of $1,130 extra per day for voyage estimate number three. This is a considerable increase in revenue considering this is a single voyage, whose revenue maximizing was reduced by an NTB imposed bilaterally by Argentina and Brazil. The shipowners operating costs are constant, so the extra revenue would surely benefit his balance of payments, especially if the going market rates were low, by helping reduce losses.

One should also bear in mind that the freight rate of $7 per ton is considerably less than what would have been paid if either an Argentine or Brazilian vessel had transported the cargo. It is generally the case that the country which charters the third party vessel pays a freight rate which is reduced. The chartering party has most probably already been paid a higher rate; say $10 per ton, to carry the cargo. Consequently not only does the third party get a lower freight rate, the industry suffers as transport costs are considerably higher than they would be had the freight been determined by the market, most probably at a lower level than that paid for in the agreement. In a commodity such as iron ore "shipping costs are often 30 to 40 percent of the landed value of the commodity," if the trade of iron ore were unrestricted it would allow for lower costs and make the industry as a whole more efficient (Frankel, 42).

Argentina's Freight Tax:

Argentine income tax law 20,628 states that "the companies not constituted in the country which deal in the transport business between the Argentine Republic and foreign countries obtain for such activity, net profits from Argentine source equal to [3%] of the gross receipts for passage money and cargo freights corresponding to such transport" (Agencia Maritima Intercontinental SRL).

This entitles the Argentine government to collect a freight tax equivalent to 3 percent of the gross revenue cargo from voyage estimates number one and three. In both cases the amount to be paid is $33,000, as only the cargo leaving Argentina is taxed, in this case the grains going to Holland. Such a restrictive shipping policy constitutes an extra cost for the shipowner. In the first voyage estimate it accounts for 7 percent of the voyages variable costs, while in the third voyage estimate, in which the vessel earns extra freight from carrying iron ore, it constitutes only 5 percent of the total variable costs.

In terms of the amount of money to be paid to the Argentine government, it pales in comparison to the fuel and port charges. What categorizes this as an NTB is that not all countries have to pay such a tax. Thirty-five countries have signed a reciprocal agreement, which exempts them from paying the income tax. The list of countries exempt from the tax can be found in appendix F-2[32], which is a copy of the affidavit given to all companies doing trade with Argentina. Exempting certain countries from a tax, as done in this particular case, constitutes a violation of the World Trade Organization's Most Favored Nation principle. Under the MFN principle all countries should be treated equally, and in this case they are not.

Port State Control in Rotterdam and New Orleans:

As far as safety is concerned, the main vehicle is port state control. "The 'port state control' principle is the right recognized to the state of the harbor where the ship calls to arrest and detain substandard ships for safety reasons" (WTO- Maritime Transport Services). Any vessel calling at a port is subject to inspection so as to ensure that it meets international standards for construction, maintenance and safety equipment. However, Article 21 of the Law of the Sea, the same article which endorses the coastal states right to enforce international regulations in its territorial waters, states that the coastal states regulations "shall not apply to the design, construction, manning or equipment of foreign ships, unless they are giving effect to generally accepted international rules and standards" (Stopford, 452-2nd ed.).

Such a provision allows for the aversion of a 'nightmare scenario' in which ships are subject to different standards in different territorial waters. This is not the case however. Open registry[33] vessels are generally subject to intense port state control inspections, while national flag[34] vessels often escape scrutiny. David Hughes in his article titled Ship manager defends standard of ships on open registries, gives an example on how this occurs. In the example a ship flying the flag of a large Asian maritime state, which traded regularly into a country with a reputation for tough port state control measures, was never inspected. The ship had blatant violations, including crewmembers using propane gas cookers in cabins and working on deck in open sandals, both of which are violations of international safety standards. Hughes then emphasizes how a ship registered in an international open registry would not have gotten away with such violations.

Rotterdam and the Port of New Orleans are both characterized by their strict port state control, and had this voyage truly occurred, the vessel, an overage and open flag bulk carrier, would have been meticulously inspected. There is nothing wrong in doing so, the problem lies in the fact that the vessel would be targeted because of the flag it was flying. International open registries differ in the way they enforce safety standards for the ships on their register. Some enforce high standards, while others leave safety entirely to the shipowner; this inconsistency in open registries of imposing international standards has tarnished their reputation with regards to safety implementation. This does not imply however, that all open registry vessels are substandard.

The International Transport Workers' Federation (ITF) is vehemently opposed to open registries, labeling them as flags of convenience (FOC). The ITF releases statistics that show the number of detained ships and the percentage of detention with regards to inspection for each year. The highest level of detention rate for 1998 was 17 percent of all vessels inspected. These figures correspond to vessels registered in Turkey, which is not categorized as a FOC. St. Vincent & Grenadines was the FOC state with the highest detention rate percentage with 172 vessels being arrested or detained, accounting for 14 percent of the total amount registered. Liberia and Panama, two of the worlds largest open registries, had 3 and 5 percent detention rates respectively, below the world average for percentage detention/inspection of 6 percent (ITF-FOC).

Targeting vessels because of the flag they fly is a violation of the MFN principle put forth by the World Trade Organization. Substandard vessels should be arrested whether they are registered in a maritime powerhouse or an open registry.

The ITF's Minimum Wage Demand:

The ITF is a global organization for transport workers unions. The ITF's efforts in the maritime industry are spearheaded against the transfer of ships to flags of convenience to evade national laws and unions. ITF unions have been battling against the FOC system for half a century, seeking to establish a 'genuine link' between the nationality of a ship and its owner, and minimum standards on wages and conditions of employment on flagged-out ships. (ITF-FOC)

The ITF has identified twenty-seven countries, which it categorizes as FOC because they offer low or non-existent taxes, lax standards for safety and training, and no restriction on the nationality of the crew. They believe such registries are unsafe because they register substandard ships and the crews employed in such vessels are unprotected-with regards to physical safety and no union coverage-, undervalued and sometimes even unpaid. There exists a harsh reality in the shipping world, which includes cases of crews having gone unpaid for years while having to tolerate the worst possible working conditions. It is cases such as these that the ITF wishes to prevent.

The argument of 'genuine link' between the owner and nationality of the vessel is what the ITF wishes to impose in order to avert what they believe are substandard vessels and working conditions in open registries. Such an argument is extremely vague and the source of many discussions about the nationality of the vessel. The International Court of Justice made the final decision on the subject matter in 1960, when it ruled that the 'genuine link' argument was unenforceable, and as a result, international open registries were legitimized in international laws. (Cafruny)

There are four main reasons why shipowners choose open registries over national registries. In descending order of importance, they are: lower labor costs, tax reduction, ability to evade safety and environmental regulations, and business 'friendly' company laws. As stated earlier open registries vary amongst themselves with respect to the standards they enforce, thus the possibility of evading international regulations in some of them. Shipowners do not necessarily wish to avoid safety standards and environmental regulations, but do benefit from their freedom to recruit their crew internationally. There is no requirement to employ high-wage nationals as either officers or crew. However, regulations regarding crew standards may be enforced, depending once again on the policy of the register. (Cafruny; Stopford)

All major shipping nations make use of open registries, though the practice varies considerably. In appendix F-3[35] one can find a table, which documents what percentage of the national fleet, has 'flagged out' from the major maritime countries as of 1997. The United States for instance had 72.65 percent of its vessels registered under a different flag. Greece, with 17.63 percent of the world’s total tonnage, had 65.53 percent of its ships registered in a foreign country. Belgium had the highest percentage with 97.46 percent of its ships registered in another country by 1997. (WTO-Maritime Transport Services)

As noted earlier the principal reason for 'flagging out' is the possibility of reducing crewing costs by employing foreigners. This greater freedom in the crewing arrangements has had the ITF opposing the system ever since its inception almost fifty years ago. To combat such a system the ITF produces a recommended wage scale and issues a 'blue card' to the master of ships employing crews paid on this scale. If the master fails to produce the 'blue card', the unions may attempt to 'black the ship'. This has been relatively successful in persuading the owners of open registry flag vessels to observe pay scales.

Article 21 of the Law of the Sea clearly states that the coastal states regulations "shall not apply to the design, construction, manning or equipment of foreign ships, unless they are giving effect to generally accepted international rules and standards". Since "each state under international law may determine for itself the conditions on which it will grant its nationality to a merchant marine ship, thereby accepting responsibility for it and acquiring authority over it," the black listing and picketing conducted by the ITF against FOC vessels holds no legal weight and acts similar to a NTB by discriminating against a particular set of countries (Stopford, 452-2nd ed.; Cafruny, 101).

While it is undeniably true that certain FOC vessels have deplorable working conditions, and relatively low wages, it is important to keep matters in perspective. There must be a relationship between wages paid to seafarers and rates of pay for shoreside jobs in labor supply countries such as the Philippines and India. For example, ITF rates for an Indian chief engineer range anywhere from $3,500 to $6,050 a month, and for an ordinary seaman, they are approximately $1,200 a month. When compared with shore jobs salaries in Bombay, one sees the seafarer's earnings being three and six times greater respectively. (Hughes)

From the shipowners perspective hiring a crew with the ITF recommended wage scale would cost approximately an extra $500 per day. For the vessel used in the examples the daily running cost was calculated to be $4,200, with crew costs coming to approximately $1,000 per day. If the ITF wage scale is implemented, running costs would increase to $4,700 per day, and the percentage of crew costs from the total daily running costs would rise from 24 percent to 32 percent. The reduction in total running costs of eight percentage points per day, is quantitatively speaking, the single highest reason why shipowners 'flag out'.

The River Plate's Draft Limitation:

Ports are the crucial interface between land and sea; it is here that much of the real activity takes place. As such, ports have several important functions, which are crucial to the efficiency of the ships that trade between them. Their main purpose is to provide a secure location where ships can berth in order to load/discharge their cargo. Cargo handling is one of the main aspects, which characterize a port; therefore shore-based facilities and ensuring that vessels have adequate access are of major importance to a port. As stated earlier ports and terminals earn income by charging ships for the use of their facilities.

Ports on the River Plate have a natural adversary, the river. The draft of the River Plate ranges anywhere from, 32 to 33 1/6 feet, according to the season. This draft limitation is the principle reason why in voyage estimates number one and three, the vessel is obliged to complete the loading of its cargo in Brazil. Due to the vessels draft of 44 feet, it can only load a maximum amount of 40,000 metric tons of grains. It then has to proceed to Brazil where it finishes loading the final 10,000 metric tons.

Port improvement plays a major part in reducing sea transport costs. The River Plate's draft limitation is the main reason for the excessively high port charges, and the increased freight for loading. Port charges in Argentina amount to $75,000 in voyage estimate number one, and $150,000 in voyage estimate number three as the vessel discharges iron ore in San Nicolas and steams to San Lorenzo to load the grains. If the terminal of San Nicolas had the capabilities to handle different cargo, iron ore and grain in this particular case, port costs would have been reduced by $75,000.

The costs would be further reduced, if for example, the vessel need only call in Brazil where barges or small vessels of 20-30,000 dwt would transfer the grain brought from Argentina to the vessel loading in Brazil. If the Argentine and Brazilian port systems were fully integrated, as the example just pointed out, port charges would be reduced by $75,000 as the vessel would not have to go to Argentina to load. The freight would also be reduced as the principle reason why loading grains in Argentina cost $23 versus the $18 in Brazil, is that the dredging and draft limitation have to be taken into consideration when determining the freight. The vessel would also spend less time ballasting, as Tubarao, Brazil is closer to Rotterdam than San Lorenzo, Argentina.

Ports within a region compete with one another in a cutthroat manner to attract the cargo moving to inland destinations or for distribution within the region. Argentine ports on the River Plate, because of natural impediments, stand to loose in such a battle. In 1998, South America exported 35,138 million metric tons of grains, of which 22,630 million metric tons, which accounted for 64 percent of the total, were transported in vessels larger than 50,000 dwt. Argentine ports on the River Plate, because of the draft limitation, would be limited to service vessels whose draft allowed them to navigate the river fully loaded. These would be vessels of less than 50,000 dwt, which in 1998 transported only 36 percent of all grain exports (Fearnleys, 33).

As production increases so will the need for larger vessels in order to capitalize on economies of scale, the principle breakthrough brought forth by bulk carriers. Argentina will need to find alternatives to service larger vessels if it wishes to exploit to its maximum potential the export of grains. Port development could entail further developing its deep-water ports located in the southern part of the province of Buenos Aires. It could also seek to develop the above-mentioned integration with the readily available deep-water ports in Brazil. Argentina will need to modernize its ports to keep them in par with its grain production, otherwise it will loose out in further capitalizing in one of its major comparative advantages: the export of grains.

The definition used to identify NTB's in this paper is "[barriers which] encompass all private and government policies and practices that distort the volume, commodity-composition or direction of trade in goods and services" (Laird & Yeats, 15). Argentina by being one of the largest exporters of grain in the world, and having the draft limitations which the River Plate imposes on the ships that can trade in its waters, is restricting trade and increasing the cost of transporting grains. The high cost of Argentina's port charges is a burden to the shipowner, while the increased freight, which is paid to offset such a cost, is generally passed on to the importer, who in turn reflects it in higher prices, which affect the consumer. The advent of technical innovations allowed for economies of scale to occur in the shipping industry with the introduction of bulk shipment of goods. Individual countries will need to develop new methods in order to fully exploit such advancements, until that happens restrictions such as the one described will act as nontariff barriers to trade.

The Ukraine's Bias Against FOC:

In the Ukraine there exist two different port charges, one for national flag registries and another for open flag registries. If a vessel calling at Odessa, or any other Ukrainian port for that matter, is flying an open registry flag, it gets charged $60,000 worth of port charges. On the other hand, if a vessel with a national registry calls into the Ukraine it gets charged $30,000 in port charges.

This constitutes a direct violation of the WTO's Most Favored Nation principle, as not all states are being granted the same treatment. In terms of cost it affects the shipowners variable costs adversely as it adds an extra $500 dollars per day.

Nontariff barriers affect trade in that they infringe on the international business transaction by increasing the cost. Governments and non-government organizations impose such restrictions in order to protect themselves from the predatory behavior of their trading partners. This in turn leads to a vicious circle as prohibitive protection measures increases in order to counter the other countries imposed sanctions.

Taking into consideration voyage estimate number one and adding the cost of not being able to carry the reserved cargo between Argentina and Brazil, and imposing an ITF wage scale on the crew, and the Argentine freight tax, the cost of NTB’s adds up to $219,099[36]. Nontariff barriers to trade may be difficult to identify due to their rapidly changing façade. Unfortunately ordinary citizens who conduct international trade are regularly exposed to such NTB's, and one can be assured that these NTB's are readily quantifiable by international businessmen.

VIII-Conclusion

World trade in goods and services expanded by over 55 percent between 1990 and 1998, rising from $4,300 billion to $6,700 billion. In this same time period, global trade continued to outpace increases in the world's GDP, reflecting the growing tendency of greater openness in national economies. The ratio of global trade and services to GDP rose from 19 percent to 23 percent in 1998. Developing countries and newly industrialized economies have achieved the fastest expansion of trade in the 1990's, but the share of industrial countries, although declining somewhat, is still predominant. (Peters)

An increase in world trade would not be possible if not for a similar increase in seaborne trade, which accounts for an estimated 95 percent of the world's cargo volume. Between 1980 and 1998, the total annual world seaborne trade increased by almost 37 percent. When a sector of the economy accounts for such a large percentage of trade, and shows such an outstanding level of growth, governments tend to keep a watchful eye in order to benefit from the growth and maintain control. This is precisely what has occurred with international seaborne trade. Governments interfere in order to benefit, but such interference generally involves restrictive policies in the form of nontariff barriers to trade. (Peters)

The World Trade Organization, as the largest entity regulating world trade, has made several efforts to eradicate trade restrictive activities such as NTB's. The WTO has gone as far as giving governments the opportunity to turn NTB's into clearly identifiable tariffs in the process known as 'tariffication'. The reasoning behind such an approach is that as long as NTB's remain as such it will be difficult to identify and quantify as to their true effect on trade. By quantifying NTB’s it is possible to implement measures which allow for their gradual decrease and eventual elimination. Nontariff barriers to trade have circumvented the WTO's Most Favored Nation principle, and have consequently been identified, together with human rights violations and children's and woman's rights, as a major concern and obstacle to a truly 'free' international trading system.

For international trade to occur, the goods being exported or imported- depending on which end one is viewing the chain- must go through some form of transport system. Since each commodity and industry has its own particular transport requirements, there is no single system which is ideal for every situation. There are, however, certain principles which apply to when viewing the transport system for a particular commodity, in this case grain.

Appendix G-1[37] is a diagram created by Martin Stopford in the second edition of his book, Maritime Economics. This diagram depicts the elements involved in the bulk transport system. Sea transport is one stage of the whole depicted transport system, which between the producer and consumer is handled fourteen times. Transport systems designers are keen in reducing the cost of exports/imports, yet government interference hampers such efforts by implementing protective measures which act as hidden costs and increase the total cost of the transport system.

Stopford, in his analysis of the bulk transport system, identified seventeen operations which take place before the importer receives the product. This paper has focused on only one section of the whole system, the sea voyage. A brief summary of the government’s intervention in seaborne trade would entail its efforts to protect its local industry, as well as seeking to strengthen or establish a strong national merchant fleet. Subsidies and other protective measures, granted towards the production of grain were exposed so as to emphasize how the products price has been manipulated from the very first stage, its production.

The voyage estimates prepared in section V were done so with the purpose of identifying the various NTB’s encountered in the carriage of grain from Argentina to the Netherlands, and the United States to the Ukraine. As stated earlier, these estimates were done as accurately as possible taking into consideration the market prices at the time. When doing so, several restrictions were encountered which could be identified as NTB’s. All of the identified NTB’s were given carefull consideration, and when possible, quantified as to their total monetary cost.

The term used to identify NTB’s in this paper was “[barriers which] encompass all private and government policies and practices that distort the volume, commodity-composition or direction of trade in goods and services” (Laird & Yeats, 15). Keeping this definition in mind, cargo sharing and discrimination against foreign carriers, were identified as the most predominant ways of discriminating in the shipping world. The bottom line of restrictive shipping policies is that they affect transport costs. The influence they have on transport costs may in turn influence the economic viability of shipping firms or induce changes in the transport costs of a country's trade. "Depending on the elasticity of export supply and import demand, these costs may be passed on to the consumer or be absorbed by the producer of the traded good" (Frankel, 42). Which ever the case producers or consumers pay the higher price, the ones the government had in mind to protect when implementing these policies.

The government’s role in this paper has been exposed as one which seeks to protect its local industry without any regard to its trading partners or the consequences of spending exorbitant amounts of money on industries which would otherwise not survive in the international market. The reasons behind such measures were identified as being used to protect local industry and employment.

With the purpose of identifying any costs construed as NTB’s, voyage estimates were calculated in order to identify and quantify them. In order to put the cost of NTB’s into perspective, this paper focuses on the shipowner’s cashflow with regards to the final cost of NTB’s. The cost of implementing and being on the receiving end of NTB’s from the governments perspective has been covered by several scholars; however, the perspective of the single international business man has not been studied as often. That is why, in this concluding section of the paper, the focus is on the consequences NTB’s have on a shipowner’s cashflow.

The shipowner incurs day-to-day costs known as running costs. These costs include crew wages, insurance, spares and all other costs which are accrued while actively operating a vessel. Appendix G-2[38] is a list of all the estimated running costs of the vessel used in the voyage estimates, the total amount comes to $4,200 per day. Operating costs are taken into consideration when determining the level of profit once the voyage has been completed. The voyage estimates prepared for this paper did not really occur, but for purposes of establishing the cost of NTB’s, the figures reached will be considered as if the voyage had truly been completed. In order to better compare the voyage cashflow of the three voyage estimates, all the basic figures were compiled in the following table.

Table 7

NTB’s and their Effect on Voyage Cashflows

	Voyage Estimate #1	Voyage Estimate #2	Voyage Estimate #3
Gross Revenue Cargo	$1,100,000	$948,750	$1,415,000
Variable Costs	($503,075)	($430,410)	($661,476)
Net Revenue	$596,925	$518,340	$753,524
Opertating Costs	($247,800)	($252,000)	($281,400)
Profit	$349,125	$266,340	$472,124
NTB’s Cost[39]
Cargo Reservation Arg/Bra.	($122,199)[40]	N/A	Cargo reservation ‘exemption’
Argentine Tax	($33,000)	N/A	($33,000)
Ukraine Extra Portcharge	N/A	($30,000)	N/A
NTB’s Total Cost	($155,199)	($30,000)	($33,000)

N/A: Not Applicable

The figures which appear in the very last row should be seen as what they truly are, the cost of nontariff barriers to trade. When contrasted to the overall figures in the whole shipping operation they do not come across as large sums of money, however, the shipowner is paying extra or receiving less due to laws which hamper trade. The sum of $155,199 is exorbitant from whatever angle one looks at it. The costs of NTB’s will be present whether the market is riding high or low. When the voyage estimates were calculated the market was recuperating from a two year down cycle that saw several major shipping companies fold. The margin for profit is not as large as it seems. It is estimated that approximately eighty percent of all profits must be reinvested into the vessel(s) in order to maintain their seaworthiness. One should also take into consideration debt repayment, any major unforseen repairs and drydocking. All of these factors add financial strain to a competitive market such as the shipping world.

Nontariff barriers to trade not only adversely affect the business man/woman who conducts business across the globe, but also the consumer. The implementation of NTB’s ultimately harms the final consumer, as the price on the product at the stand of the supermarket has been tweaked over and over again in order to protect particular segments of the transport system except the one which keeps it functioning, the consumer.

Seaborne trade will always ride on the ‘wave’ of economic advancement as it stands to benefit from technology and the increase in trade it brings along with it. ‘Globalization’ has been identified as the driving force behind the international growth in trade. To a large extent ‘globalization’ has come to stand for the broad notion that changes in the international economy have fundamentally and significantly altered the way international transactions are conducted and has transformed the way governments implement policies. As businesses take the commanding role of the world economy, individual countries, which in turn are relinquishing control, impose barriers which disrupt the ‘free’ flow of trade. The efforts made by the WTO in trying to establish a level playing field are valiant, unfortunately countries are hesitant in complying with the established set of rules since they infringe on the way the manage and conduct their economy. There is no telling when free trade will be truly free. Until then exporting grain will cost the business man and the consumer the equivalent of what governments are trying to save by imposing nontariff barriers to trade.

X-Bibliography

Agencia Maritima Intercontinental SRL. Affidavit.

Asia-Pacific Economic Cooperation. Transport Working Group. <http://www.apectptwg.org.au/TPT/tpt- main/Publications/TEQ/Contents.htm> (24 April 2000)

Aspinwall, Mark. Moveable Feast. England: Avebury Ashgate Publishing Limited, 1995.

Association of Ship Brokers & Agents (USA), Inc. (ASBA). Basic Principles of Chartering. New York: ASBA, 1990.

Atkin, Michael. Agricultural Commodity Markets. London & New York: Routledge, 1989.

Cafruny, Alan. Ruling the Waves. Berkeley, Los Angeles & London: University of California Press, 1987.

Fearnleys. World Bulk Trades 1999. Oslo: Fearnresearch, 1999.

Food and Agriculture Organization of the United Nations. FAO Yearbook of Commerce Rome, FAO UN, Vol.51, 1997.

Frankel, Ernst. The World of Shipping. London, New York & Sydney: Croom Helm, 1987.

Hughes, David. “Ship manager defends standard of ships on open registers.” Shipping Journal. May 09 2000. <http://www.shippingjournal.com> (15 May 2000)

International Transport Workers Federation. ITF Maritime Department: what are FOCs?. <http://www.itf.org.uk/SECTIONS/Mar/focs.html> (24 April 2000)

Kallard, Thomas. Fortune-Building Commodity Spreads for the '90's. New York: Windsor Books, 1991.

Kendall, Lane. The Business of Shipping. Cambridge & Maryland: Cornell Maritime Press, Inc., 1976.

Peters, Hans. “The World Economy and Seatrade.” Institute for International Research. 11^th Annual Ship Finance Forum. New York, April 11-12, 2000.

Stopford, Martin. Maritime Economics. London: Unwin Hyman, 1988.

Stopford, Martin. Maritime Economics. 2^nd ed. London & New York: Routledge, 2000.

White, Lawrence. International Trade in Ocean Shipping Services. Cambridge: Ballinger Publishing Company, 1988.

World Trade Organization. Agriculture: fairer markets for farmers. <http://www.wto.org/english/thewto_e/whatis_e/tif_e/argm3_e.htm> (24 April 2000)

World Trade Organization. Council for Trade in Services: Maritime Transport Services. November 16 1998. <http://www.wto.org/ddf/ep/c4/c4578e.doc> (24 April 2000)

World Trade Organization. Non-tariff barriers: technicalities, red tape, etc. <http://www.wto.org/english/thewto_e/whatis_e/tif_e/argm8_e.htm#technical> (24 April 2000)

---

[1]A unit of weight of 1,000 kilograms (2,204.6226 Lbs.) (ASBA, 43)

[2]Ton-miles are used as a measure for demand, because changes in the average haul over which cargoes are transported have a significant impact upon the requirement for shipping capacity. One ton mile is defined as the tonnage of cargo shipped, multiplied by the average distance over which it is transported (Stopford, 22).

[3]The number of metric tons (about 2204.6 lbs), which a ship is capable of carrying of cargo, fuel, stores, fresh water, and crew on the ship's summer freeboard (the vertical distance measured on the vessel's side amidship from the water line to the upper side of the main deck) (ASBA, 39).

[4] Appendix B-1 (Parcel Size Distribution):

Source: Martin Stopford, Maritime Economics 2^nd Ed.

[5]General Cargo: Cargo that travels as small individual 'parcels' too small to fill a ship, hold or compartment (Stopford, 177).

[6]Liner services provide transport for cargoes that are too small to fill a single ship and need to be grouped together with others for transportation (Stopford, 28-2nd ed.).

[7]Typically of 10,000-20,000 dwt and are designed with a tween deck that enables them to carry either a full load of general cargo or bulk cargoes such as grain (Stopford, 400-2nd ed.).

[8]Designed for greater flexibility, OBOs are designed to carry a full cargo of dry bulk, e.g. ore, coal, grain, etc., or a liquid cargo such as crude oil (413).

[9]Clean product tankers are similar too crude oil tankers but generally smaller (30,000-55,000 dwt) with more parcel tanks to allow the carriage of different products (409).

[10]LASH barges load about 400 tons cargo and Seabee about 600 tons. The barges are designed to be floated to the ship and loaded/discharged as a unit (388).

[11]The cargo stowage factor tells the shipper how many cubic feet/meters of hold space will be occupied by a ton of any given cargo. It determines how much cargo can be fitted into the ship (Stopford, 254).

Appendix B-2 (Bulk Carrier Cross Section & Cross Section of a Hold):

[12]

Source: Martin Stopford, Maritime Economics 2^nd ed.

[13]Charter Party: A contract setting out the terms on which the shipper contracts for the transportation of his cargo or the charterer contracts the hire of a ship (Stopford, 22)

[14]Maize is the English term used to identify Corn in the United States. This paper will use the term maize due to the authors predisposition to call it 'maiz' in Spanish.

[15]A commodity is anything that can be bought and sold. Whatever the product, it needs only be transportable and easily divided into standard units (Kallard, 3).

[16] Appendix C-1 (World Seaborne Trade of Main Bulk Commodities 1988-1998):

Source: Fearnelys, World Bulk Trades 1999

[17] Appendix C-2 (Grain Seaborne Trade 1998):

Source: Fearnelys, World Bulk Trades 1999

[18]The money payable to the owner for delay for which the owner is not responsible in loading and/or discharging after laytime has expired. Laytime is the period of time agreed between the parties during which the owner will make and keep the ship for loading/discharging without payment additional to the freight (ASBA, 42).

[19]'Clean ship' refers to tankers which have their cargo tanks free of traces of the dark persistent oils which remain after carrying crudes and heavy fuel oils (ASBA, 34).

[20] Appendix C-3 (Oil/Bulk/Ore Vessel Cross Section):

Source: Martin Stopford, Maritime Economics 1^st Ed.

[21]Appendix C-4 (Stowage Factor for the Main Grains):

Grain Type	Stowage Factor
Heavy Grains Soybeans & Sorghums (HSS)	49
Wheat	42 ½ /46
Maize	49/51
Barley	53/55
Heavy Oats	68/71
Pellets	60/63
Sunflower Seeds	85/100
Rapeseed	54/55
Flax	54/55
Soybean Meal	62/64

Source: ASBA

[22]Appendix C-5 (Maritime Freight Rates):

To UNITED KINGDOM (Tilbury/Seaforth)[22] from:

Year[22]	Argentina (River Plate)	Australia (Eastern states)	Canada (St. Lawrence ports)	United States (Atlantic ports) (Gulf Ports)
1981/82	29.96	30.46	11.00	11.96
1982/83	22.42	25.08	09.56	10.92
1983/84	20.46	26.00	10.42	12.58
1984/85	18.75	27.17	13.02	14.62
1985/86	19.38	22.25	10.21	11.13
1986/87	17.08	18046	11.58	11.75
1987/88	20.92	21.96	14.78	18.08	15.58
1988/89	23.00	26.79	17.02	21.58	19.06
1989/90	23.00	28.92	22.46	23.67	21.92
1990/91	23.08	27.79	25.00	23.67	22.17
1991/92	24.50	26.04	19.33	24.00	18.35
1992/93	23.17	24.58	18.85	23.25	17.60
1993/94	20.17	25.12	20.19	21.00	15.70
1994/95	20.21	27.12	19.71	16.04	16.04
1995/96	-	-	-	-	-
1996/97	19.38	25.67	19.00	-	18.30
1997/98	-	24.00	16.92	-	16.50

To THE NETHERLANDS (Rotterdam) from:

Year	Argentina (River Plate)	Australia (Eastern states)	Canada (St. Lawrence ports)	United States (Atlantic ports) (Gulf Ports)
1981/82	28.44	30.21	11.50	11.52	12.60
1982/83	17.42	23.88	09.04	10.23	10.67
1983/84	14.88	24.58	09.67	13.02	11.75
1984/85	18.50	25.33	10.71	14.62	12.62
1985/86	19.21	19.25	08.88	12.54	10.96
1986/87	14.20	16.46	11.23	11.58	11.56
1987/88	17.25	19.96	12.38	17.25	15.88
1988/89	23.50	24.96	14.88	17.58	17.71
1989/90	21.92	27.58	17.92	20.42	22.19
1990/91	22.33	27.59	17.25	20.42	19.00
1991/92	19.25	24.50	17.25	20.75	16.92
1992/93		23.00	16.92	20.00	18.69
1993/94		23.12	15.79	17.69	17.67
1994/95	24.20	25.08	17.71	17.02	19.15
1995/96	25.91	26.12	19.00	21.00	21.75
1996/97	16.79	23.42	13.67	20.50	18.63
1997/98	17.62	21.15	11.08	16.92	12.35

To JAPAN from:

Year	Argentina (River Plate)	Australia (Eastern states)	Canada (St. Lawrence ports)	United States (Gulf ports)
1981/82		24.67	26.82	27.38
1982/83		16.77	17.48	23.41
1983/84		18.25	18.29	24.42
1984/85		19.08	19.35	26.00
1985/86		17.54	17.56	24.63
1986/87		17.06	17.15	24.42
1987/88		24.06	23.75	31.03
1988/89		26.19	26.17	32.85
1989/90		27.33	27.31	34.06
1990/91		26.16	26.16	33.31
1991/92		27.95	27.99	34.95
1992/93		27.67	27.73	34.69
1993/94	40.00	29.00	29.21	35.90
1994/95	43.17	-	32.79	38.08
1995/96	65.50	-	35.21	37.00
1996/97	65.00	-	28.29	37.00
1997/98	65.50	-	28.08	37.00

Note: Estimated mid-month rates (in US Dollars per metric ton) based on current chartering practices for vessels to load from three to four weeks ahead. Annual averages are based on the rates for dry cargo vessels.

Source: FAO Yearbook 1998

[23]The loading of fuel into a vessel's bunkers for its own use as distinguished from loading fuel as cargo (ASBA, 32).

[24]The money payable by the owner if the ship completes loading or discharging before laytime has expired (ASBA, 36).

[25] Laying up a vessel entails removing the vessel from active trading. This is generally done to reduce costs when the market has a severe downturn.

[26]The use of a local expert who guides the vessel through confined and difficult passages.

[27]The distance a vessel extends below its water-line, measured vertically to the lowest part of the hull, propellers or other projecting points. Contrast this to depth of water, which must of necessity be a greater figure than 'draft' if vessel is to be afloat (ASBA, 37).

[28] Includes loading 40,000 T in Argentina and completing 10,000 T in Brazil

[29]The designation commonly used for vessels with no regular employment whose owners send them wherever they expect to, or can, obtain the most lucrative employment (ASBA, 49).

[30]These countries are: Cambodia, Cuba, Iran, Iraq, Libya, Peoples Republic of Korea and Syria (APEC).

[31] Appendix F-1 (Voyage Estimate #3):

M/V "EXAMPLE III"

DRY CARGO

VOYAGE ESTIMATE COST

DATE: Prepared/Basis 4/00

S/S: 63,500 CARGO: Ore & HSS

SPEED: 12 MILES PER DAY: 288 FROM: Brazil & Argentina

DAILY CONSUMPTION AT SEA: 32.5 T IFO TO: Argentina & Holland

2.5 T Diesel

IN PORT: 2.5 T Diesel LOAD/DISCH:

(1) 5 WWSHEX (2) 14 WWSHEX

----------------------------------------------------------------------------------------------------------------------------

ITENERARY: Rotterdam/Tubarao/River Plate-Rio Grande Do Sul/Rotterdam

----------------------------------------------------------------------------------------------------------------------------

TOTAL MILES: 12,770 VESSELS CUBIC: 2,820,000

SEA PORT ORE HSS

(1) Tubarao/San Nicolas (2) San Lorenzo/Rotterdam

@ 16SF= 176,250 cargo @ 49SF= 57,500 cargo

STEAMING: 48 DWT: 63,500

LOAD/DSCH ‘ORE’: 5 FUEL: 17 dys x 30 T= 510 (ballast)

LOAD/DSCH ‘GRAINS’: 14 31 dys x 32.5= 1007.5 (laden)

TOTAL VOYAGE DAYS: 67

---------------------------------------------------------------------------------------------------------------------------

CARGO @ Tubarao:…45,000 MT @ 7……………………….$315,000

CARGO @ San Lorenzo:…40,000 MT @ 23…………………$920,000

CARGO @ Rio Grande:…10,000 MT @ 18…………………..$180,000

GROSS REVENUE CARGO:………………………………………………..$1,415,000

VARIABLE COSTS:

FUEL…………………………………………………………..$240,038*

*Averaged Rott/Riv Plat/Rio Grande/Rott

(b) 17 dys @ 510 x $135= $68,850

(s) & (p) 48 + 19= 67 dys x 2.5T x $210= $35,175

(s) 23 dys @ 1007.5 x $135= $136,013

PORT CHARGES:…………………………………………….$300,000

Tubarao, Brazil: $45,000

San Nicolas, Argentina: $75,000

San Lorenzo, Argentina: $75,000

Rio Grande, Brazil: $40,000

Rotterdam, Netherlands: $65,000

ARGENTINE FREIGHT TAX @ 3% ‘GRAINS’……………………… .$33,000

LOADING/DISCHARGING……………………………………………...F.I.O.T

COMMISSION @ 6 ¼ % ‘GRAINS’…………………………………….$68,750

COMMISSION @ 6 ¼ % ‘ORE’…………………………………………$19,688

TOTAL VARIABLE COSTS…………………………………………………….$661,476

NET REVENUE…………………………………………………………………..$753,524

DAILY T/C EQUIVALENT………………………$11,247

[32] Appendix F-2 (Affidavit):

Agencia Marítima Intercontinental SRL

Argentine income income tax law 20,628 rate in force is 30 % of 10 % of freight (i.e. 3 % of total freight) as stablished by articles 9 and 98, we hereby transcribe same for your ready reference:

Quote

Article 9:

It is presumed, without admitting evidence to the contrary, that the companies not constitued in the country which deal in the transport business between the argentine republic and foreign countries obtain for such activity, net profits from argentine source equal to 10% of the gross receipts for passage money and cargo freights corresponding to such transport.

The agents or representatives in the republic of such companies shall be jointly responsible with them for the payment of the tax and shall be obliged to present sworn declarations or other information in the manner and during the period established by the internal revenue direction, the presumption established in the first paragraph of this article shall not be applied in the case of companies constitued in countries with which, and in virtue of convenants or international treaties the exemption from payment of the tax has been established or may be established. The profits arising out of transport obtained by companies constitued or domiciled in the country shall be considered as of argenitne source without taking into account the ports between which trade is effected, and shall be determined in the manner prescribed by this law.

Article 98:

When payment is made to partenships or companies constitued abroad or to any other beneficiary abroad, of any net profits of any category it shall be the duty of whoever makes the payment, to retain and pay to the internal revenue direction as a sole and definite payment of such profits.

Unquote

The following countries have signed reciprocal agreements exempting their particulars from paying argentine income tax on freight as established in the article 9 of the law 20,628

Austria / Azerbaijan / Belarus / Belgium / Brazil / Canada / Chile / Peoples Republic of China / Colombia / Cuba / Denmark / Finland / France / Georgia / Germany / Greece / Iran / Israel / Italy / Japan / Kazakhstan / Kyrgyzstan / Netherlands / Norway / Peru / Poland / Portugal / Spain / Sweden / Switzerland / C.I.S. / U.K. / U.S.A. / Uruguay / Yugoslavia

[33]"A country whose laws allow-and indeed make easy for-ships owned by foreign nationals or companies to fly these flags states," "often as a means of earning revenues for the flag state" (Cafruny, 91; Stopford, 434-2nd ed.)

[34]Maritime countries, and many others, where the right to fly the national flag is subject to stringent conditions, such as being a national of the country and "having the shipping company subject to the full range of national legislation covering financial, company and employment regulations" (434).

[35] Appendix F-3 (World Fleet as of December 1997):

Source: World Trade Organization-Maritime Transport Services

[36]$33,000 (Argentine Freight Tax) + $29,500 (ITF wage requirements [$500 extra per day x 59 days-total voyage days]) + $156,599 (Revenue difference between voyage estimate one and three)= $219,099

[37] Appendix G-1 (Elements in the Bulk Transport System):

Source: Martin Stopford, Maritime Economics 2^nd Ed.

[38]Appendix G-2 (List of Estimated Running Costs):

Vessel Type: Bulk Carrier @ 63,500 dwt
CREW	1,000
TRAVELLING/MEDICAL	150
H+M/WAR RISK INSURANCE	190
P+I INSURANCE	180
VICTUALLING	150
STORES DECK ENGINE CABIN	100 250 50
SPARES DECK ENGINE	50 350
LUBRICANTS	250
PAINTS	100
CHEMICALS	150
REPAIRS	300
CLASSIFICATION/ISM	130
SPECIAL SURVEY	250
TONNAGE TAX AND LEGAL FEES	50
OVERHEADS	400
MISCELLANEOUS	100
	$4,200 PER DAY

Source: Meandros Lines S.A.

[39] The cost of implementing an ITF wage scale were excluded as the vessel considered for performing the voyages does not adhere to it. If it did implement it would be an added cost of $29,500 for voy. 1, $30,000 for voy. 2, and $33,500 for voy. 3 respectively.

[40] The difference in profit between voyage estimate number one, where cargo reservation was in effect, and voyage estimate number three, where the cargo reservation was not in effect.