Source: Office of Maritime Administration, US Department of Transportation.
A ship is considered an extension of the sovereignty of a nation to which it is registered. The share of open registry ships operated under a “flag of convenience” grew substantially after WWII. They accounted for 5% of world shipping tonnage in 1950, 25% in 1980, 55% in 1995, and 72% in 2021. The usage of a flag of convenience refers to a beneficial national owner choosing to register one or more vessels in another nation in order to avoid higher regulatory and manning costs. This enables three types of advantages for the shipowners:
- Regulation. Under maritime law, the owner is bound to the rules and regulations of the country of registration, which also involves requisitions in a situation of emergency (war, humanitarian crisis, etc.). Being subject to less stringent regulations commonly confers considerable savings in operating costs.
- Registry costs. The state offering a flag of convenience is compensated according to the ship’s tonnage. Registry costs are, on average, between 30 to 50% lower than those of North America and Western Europe.
- Operating costs. Operating costs for open registry ships are 12 to 27% lower than those of traditional registry fleets. Most of the savings come from lower manning expenses. Flags of convenience have lower standards in terms of salary and benefits.
The countries with the largest registered fleets offer flags of convenience (Panama, Liberia, Marshall Islands, Greece, Malta, Cyprus, and the Bahamas). The ship registry is a source of additional income for these governments; even the landlocked country of Mongolia offers ship registry services. Still, ship registries have to abide by international standards, which are becoming increasingly more stringent. This is notably the case concerning ship emissions. Therefore, the regulatory arbitrage of registries is becoming less relevant.
Many open flag registry countries have developed expertise in the governance of registry regulations, implying an effective oversight of the involved regulations and recognized standards for ships registered under their flag. This commitment has an important impact on international relations since the most prominent registry countries are small and have limited resources to maintain an extensive diplomatic network. For instance, Panama, which is the leading flag country, focuses on providing consuls for countries that have seafarers and build ships. This strategy is mainly based on registry support purposes.