Policy ForumENVIRONMENTAL ECONOMICS

# Subsidies, efficiency, and fairness in fisheries policy

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Science  05 Apr 2019:
Vol. 364, Issue 6435, pp. 34-35
DOI: 10.1126/science.aaw4087

A trawler hauls in haddock, pollock, dogfish, and lobster at Georges Bank, off Massachusetts, USA.

PHOTO: JEFF ROTMAN/NATUREPL.COM/GETTY IMAGES

In January 2019, World Trade Organization members began developing a plan to fulfill Sustainable Development Goal 14.6, which aims to reduce subsidies that make it cheaper to fish illegally or unsustainably. In the United States, combating illegal fishing is among the priority issues of the bipartisan Senate Oceans Caucus, and controlling overfishing is the central focus of federal fisheries management. Yet in late 2018, the National Marine Fisheries Service proposed a rule that takes policy in the opposite direction and expands commercial fisheries subsidies (1). This seemingly small rule change represents a major policy reversal, with potentially broad implications beyond the United States. This contradicts fisheries science and economics and ignores evidence that any fishing capacity increase would likely make its way into unregulated fisheries. Such a rule, although a final decision is still pending, would undercut economic and biological objectives in U.S. fisheries; would undermine global efforts to reduce illegal, unreported, and unregulated fishing; could increase impacts on habitat and nontargeted species (bycatch); and is unfair to taxpayers, other industries, and the next generation of fishers. After spending millions of dollars to get capacity out of fisheries, the government now proposes to spend millions more to inject capacity back in.

## An Inefficient Proposal

The rule would allow the agency to use public funds to offer low-interest, fixed-term loans for new vessel construction (1). There are two reasons given for the rule. First, it is argued that the private banking industry offers unfavorable loan terms for new vessel construction, including high interest rates and short amortization periods. However, the proposal offers no evidence that private banks systematically overprice risk or fail to offer appropriate terms. Commercial fishing is risky for many reasons (2), including “variations in weather, prices, and total allowable catch” as acknowledged in the proposed rule (1). Higher risk should lead to higher interest rates on loans. In the absence of evidence to the contrary, we should expect that the private sector would offer appropriate terms. The presumption that financial markets are failing unless proven otherwise flips the standard approach to evidence justifying regulation in a market economy.

Second, the rule suggests that federally managed fisheries that are not currently overfished and that have limited access will be immune to future overfishing, and to the ecosystem damage and economic waste it entails. Theory and evidence in fisheries economics refute this claim. Because fisheries are common-pool resources, subsidies that lower the cost of fishing can lead to overcapacity, economic loss, and overfishing (3). In fisheries, capacity includes the size, power, and number of fishing vessels, the amount of fishing gear, and the amount of labor. Overcapacity means that the fish could be caught for a lower cost by reducing fishing capacity in one or more of these dimensions. Economists largely agree that there is global overcapacity in fisheries (3). Substantial overcapacity in U.S. fisheries co-occurs with overfishing, weak economic performance, unsafe working conditions, bycatch, and habitat impacts (4). The race to fish is a wasteful vicious cycle linked to overcapacity. Fishers ratchet up the number and power of fishing vessels each season to catch a finite supply of fish before their competitors (5).

Reducing costs—which subsidized loans will do—simply worsens overcapacity and the race to fish (6). Theory and evidence strongly suggest that subsidized vessel construction would steer capital into fisheries that could be used more productively in other sectors of the economy. The proposed rule attempts to address critiques by restricting eligibility to “limited-access” fisheries that are not “overfished” (1). Many limited-access fisheries in the United States are managed with catch shares, which allocate the total quota among individual participants in the fishery as a means to solve the common-pool problem. Regulation by catch shares slows the inefficient race to fish (5) and curtails overfishing (7). However, catch shares do not eliminate all racing (5). Incentives to race within a fishing season can persist (6). Injecting capacity into fisheries managed with catch shares would likely reduce efficiency gains and could undo improvements in safety (2).

Moreover, the definition of “limited access” is broad. Unlike with catch shares, other limited-access systems are less restrictive and allow permit holders to catch as much of the total as possible. Fisheries that only limit the total number of permits would be eligible for subsidized loans (1). Such limited-entry fisheries are hampered by racing (5) and latent capacity that undermines efforts to eliminate overfishing.

## Policy Reversal and Leakage

Adopting more capacity-enhancing subsidies would constitute a rejection of sound fisheries management that has achieved so much. The proposed rule is a reversal of U.S. fisheries policy that prohibits subsidies for new vessel construction. Since the 2007 reauthorization of the Magnuson-Stevens Fishery Conservation and Management Act of 1976, U.S. fisheries have made substantial progress in reducing overfishing and rebuilding overfished fisheries (8). A growing share of federally managed fisheries have adopted catch shares to address the common-pool nature of the fisheries problem (5). Currently the United States spends a small amount by global standards on “bad subsidies” that encourage overfishing or excess capacity (3).

The legacy of open access left many fisheries around the world with overcapacity. When federal managers were empowered to address overfishing with the passage of the Magnuson-Stevens Act, they inherited massive overcapacity. Managers attempted to reduce excess capacity by spending public funds on buyback programs, with the expectation that efficiency gains would offset the costs (9). Between 1995 and 2001, the federal government spent $140 million on buybacks of permits, vessels, and gear (9). In some cases, the presence of latent capacity limited the effectiveness of the buybacks [e.g., the$24.4 million spent to remove 79 vessels in New England led to 62 “previously inactive vessels” entering the fishery (9)].

The proposed rule could cause overfishing and economic losses in other fisheries, including high-seas and other unregulated fisheries. The rule stipulates that only permit holders in fisheries that are not overfished would qualify for a subsidized loan. However, a new, modernized vessel makes other vessels less competitive. Some of the less competitive capacity may leak from the more stringently regulated fishery to other fisheries with less strict regulations. Catch-share fisheries from which capacity leaked into a less strictly regulated fishery include New England ground-fish (into Mid-Atlantic fisheries) (10) and Alaskan halibut, sablefish, pollock, king crab, snow crab, and rockfish (into many other fisheries) (11).

Increased capacity could contribute to global overcapacity that ranges across national and international waters to exploit unregulated fisheries (12). The logic is consistent with the connectivity of fisheries (11): A subsidized vessel enters fishery A and replaces a vessel that moves to fishery B, and a vessel from fishery B is sold internationally. The United Nations Food and Agriculture Organization's vessel database includes 133 vessels once flagged by the United States but most recently flagged by another nation. Subsidies support fishing on the high seas that in many cases would otherwise be unprofitable (13). Even if U.S. managers control overfishing domestically, some excess capacity could make its way onto the global market and contribute to overfishing elsewhere.

The proposed rule allows leakage of a replaced vessel, stipulating one option to be “[t]he vessel will continue to operate in a federally-managed fishery under limited access” (1). There is no requirement that the alternative fishery not be overfished or subject to overcapacity. Nor is there recognition of potential spillovers across multiple fisheries that contribute to illegal fishing on the high seas. Yet the science is clear that the economic connectivity of fisheries, and its concomitant potential for leakage, is a general phenomenon (11). Spillovers can induce a “chain reaction” (11) that extends the reach of subsidies beyond a single fishery. Management with limited access does not immunize a fishery against leakage.

## Ecosystems and Fairness

The proposed rule could harm ecosystems through increased bycatch. Vessels race to catch fish in areas where the bycatch species are abundant before the common-pool bycatch quota is exhausted (e.g., Alaskan trawl vessels targeting yellowfin sole, which are not allowed to retain bycatch of Pacific halibut) (14). Increasing capacity would likely worsen this problem, and similar mechanisms could lead to impacts on threatened or endangered species. Subsidies could encourage habitat destruction. The program does not restrict the type of vessel eligible for loans, so vessels using more destructive fishing gear could replace ones with less destructive gear. Leakage into high-seas fisheries could trigger habitat loss. Deep-sea bottom trawling, which destroys habitat, is generally unprofitable without subsidies (13). The proposed rule claims exemption from the National Environmental Policy Act, which requires assessment of environmental effects of government actions (1).

Subsidies for new vessel construction are unfair to other industries and to taxpayers because the fishing industry already benefits from major public contributions. First, fishery resources in federal waters constitute a public-trust resource. Because fisheries are common-pool resources, regulators must limit access to a subset of the public to prevent overfishing and generate economic value. Participants usually are grandfathered these limited-access privileges for free in the United States, Australia, Iceland, New Zealand, and many other nations. With free grandfathering, new entrants purchase quota from incumbents such that the industry never compensates the public for the use of its most important input: the fish themselves. This contrasts with the timber industry, which pays stumpage fees to harvest timber on public lands, and the oil and gas industry, which pays royalties and rent to extract subsurface minerals on public lands or to drill offshore.

Second, the fishing industry benefits from scientifically sophisticated fisheries management, which is costly. Provision of regulatory infrastructure is a public good, necessary to sustain fish stocks. However, all members of the public do not benefit equally. Fisheries management is a specialized contribution to the industry provided by general funds without expectation that the costs will be recovered from the industry. These public contributions should weigh heavily in the discussion of whether it is fair to offer even more public support to the fishing industry.

Lastly, the proposed rule is unfair to fishers who wish to enter the industry. The rule states “[t]he value of harvesting rights will be taken into consideration when determining the adequacy of collateral” (1). The government would treat quota as a property right in offering subsidized loans, even though the law states that quota holdings are “limited-access privileges” that can be taken away. As a result, incumbents are more likely to receive the subsidies, and the rule would increase the barriers to entry for new fishers.

For the reasons above, the proposed rule should be rejected. The notion that government should subsidize fishing beyond what the market deems profitable is a turn away from a market economy toward central planning. Even if leakage into high-seas fisheries would be minimal, rejecting the rule allows the United States to lead globally on reducing subsidies and maintain a consistent commitment to stopping illegal, unreported, and unregulated fishing. Rejecting the rule would signal a step away from an outdated single-fishery paradigm. Fish stocks are connected ecologically, fishing vessels can range across the water, and ownership of fishing capital can cross political boundaries. Policy should reflect these realities.

## References and Notes

Acknowledgments: I thank M. Dietz for research assistance.
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