The US needs to reform harbor fees to encourage more equitable trading

The Harbor Maintenance Fee, which serves as one of the primary revenue mechanisms for federal dredging projects at ports, harbors, and federal navigation projects, has faced significant scrutiny from scholars and legal challenges from U.S. trade partners based on the U.S. signatory status of the General Agreement on Tariffs and Trade. 

The Harbor Maintenance Fee (HMF), in its current form, is an ad valorem tax on the value of commodities transferred, but because of the Export Clause of the Constitution, it is not rendered on exports at all. Policymakers ought to evaluate different options for reform both to comply with the General Agreement on Tariffs and Trade (GATT) and to better fund port and harbor development in the country.

GATT, initially established in 1947, aimed to promote international trade among U.S. allies during the Cold War by reducing tariffs and other trade barriers. It was modernized in 1994 as part of the Uruguay Round of negotiations, which also created the World Trade Organization (WTO) as the successor to the original GATT regime.

Article III, Section 2 of GATT mandates that imports should not be subject to internal taxes or charges exceeding those applied to domestic products. This principle ensures that imported goods are not unfairly taxed compared to domestic goods. 

The Harbor Maintenance Fee was initially applied to imports and exports, but it was significantly altered following the 1998 Supreme Court ruling in United States v. United States Shoe Corp. The Supreme Court found that the HMF, as it was then structured, violated the Export Clause of the U.S. Constitution because it was not a true user fee but rather a tax on exports. Consequently, the HMF could no longer be applied to exports, leading to funding inequities and compliance issues with GATT.

More specifically, Article VIII, Section 1(a) of GATT allows for fees and charges related to importation or exportation, provided they are limited to the approximate cost of services rendered and do not serve as indirect protection for domestic products or as a fiscal measure. 

This inequity and disregard for the general agreement did not go unnoticed by U.S. trade partners. In 1998, the European Union (EU) argued that the Harbor Maintenance Fee violated Articles I, II, III, VIII, and X of GATT and sought consultation through the U.S. trade representative and the WTO. Following the change to the HMF to exempt exports from paying the fee, the EU gave the United States a deadline of Jan. 1, 2000, to address GATT compliance issues, but the U.S. never made any changes. Although no formal panel has been established by the WTO to address these concerns yet, the EU’s action remains pending.

Throughout the HMF’s history, several reforms have been proposed and evaluated by policy scholars seeking to address this issue (among others).  In 1999, the Clinton administration proposed replacing the ad valorem HMF with a user fee based on the tonnage of vessels. The proposal was never considered by Congress.

This approach aims to comply with both the U.S. Constitution and GATT by ensuring the fee correlates with the cost of services rendered at ports rather than the value of cargo moved through seaports. A tonnage-based fee would be more equitable and could be applied to both imports and exports, thus addressing the current funding inequities.

Another proposal is to abolish the Harbor Maintenance Fee entirely and fund port maintenance through appropriations from the general fund. This approach would eliminate the compliance issues with GATT and the Constitution’s Export Clause but would decouple revenue from the use of the ports, potentially leading to inconsistent and inappropriate funding levels.

A third proposal suggests increasing the federal diesel fuel tax to fund port maintenance. While this approach would spread the funding burden more broadly and avoid direct charges on imports and exports, it may not be as directly tied to the use of port services and could face political resistance. Additionally, as modes of transportation move to different means of propulsion (be that hydrogen-powered vessels or fully electrified fleets), this revenue stream will become less viable over time.

Reforming the HMF to ensure compliance with GATT and the Constitution’s Export Clause is crucial for equitable funding of U.S. ports. Positive reform could spread the cost burden more equitably among beneficiaries instead of exempting exports from paying into the system. GATT-compliant reform would promote fairer competition among trading partners, and reform would additionally help the U.S. avoid diplomatic disputes and WTO arbitration. 

A user fee based on tonnage appears to be the most promising solution, as it aligns with the principles of GATT by correlating fees with the cost of services rendered and can be applied to both imports and exports, but it comes with other considerations, including political feasibility. A solution, no matter how good in principle, is only effective if it can be implemented. Regardless, any reform will require careful consideration of the legal, economic, and political implications to achieve a balanced and effective funding mechanism.

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