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Flags of Convenience: Trump’s Secretary of Transportation’s Major Conflict of Interest

Elaine Chao’s family owns ships flagged abroad, a way to avoid U.S. taxes and higher labor costs. But one of Chao’s missions at the Department of Transportation will be to press American-owned ships to fly the U.S. flag.

By Josie Albertson-Grove & Masako Melissa Hirsch


Elaine Chao with husband Mitch McConnell (R-Kentucky) on May 20th, 2014 in Louisville, Kentucky. (Photo: Win McNamee/Getty Images)

President-elect Donald Trump has named Elaine L. Chao to head the United States Department of Transportation, overseeing the nation’s vast network of highways, railroads, and airports. The job also means leading the Maritime Administration, which supervises the shipping industry and has as one of its primary missions to advocate for American-owned ships to fly the U.S. flag.

That could pose a conflict for Chao, whose family owns a shipping business that, while headquartered in New York, operates 17 ships flagged in Liberia and Hong Kong. The ships are owned by subsidiaries of the main business, now called Foremost Group, and most of the subsidiaries are registered in the Marshall Islands, a secretive jurisdiction where companies disclose little about their finances or officers.

Chao, 63, has not worked for Foremost Group except for a two-year stint before going to Harvard Business School. A spokeswoman for Chao said there’s no conflict between her duties as secretary of transportation and her ties to her family’s company, stressing that Chao has no “ownership stake” in Foremost.

Financial disclosure statements filed by Chao when she was George W. Bush’s secretary of labor from 2001 to 2009 declare no interest in the company, nor do disclosure statements filed by her husband, Senate Majority Leader Mitch McConnell (R-Kentucky).

The company declined to respond to a detailed list of questions sent by email and to several telephone calls.

Chao’s nomination has been widely praised by industry and trade groups.

“Throughout her distinguished career in the public, private, and non-profit sectors, she has worked to strengthen our nation’s economy and competitiveness in a global economy,” Matthew Paxton, president of the Shipbuilders Council of America, said in a statement.

When reporters asked council officials if they were aware of her family’s holdings, and how that squared with Paxton’s statement, the council said it had nothing to add.

Washington University in St. Louis law professor Kathleen Clark, who focuses on ethics, said that Chao would have to recuse herself from proceedings dealing directly with Foremost as secretary of transportation, but that most of the issues posed by her family ties were more likely to be political than legal.

“We can’t allow this to happen anymore with our country. So many jobs are leaving and going to other countries.”

“This is about whether she is a credible advocate for U.S. flag vessels given this connection she has to a company that uses foreign-flag vessels,” Clark said. According to a 2011 Maritime Administration report, American companies typically flag their ships abroad to avoid taxes and safety, environmental, and labor regulations. “It’s a question of political credibility in that office.”

Chao’s father, James S.C. Chao, founded what’s now Foremost Group in 1964, just six years after arriving in the U.S. from Taiwan on a scholarship to train at an American maritime academy.

The company grew, in part by contracting with the U.S. government to ship rice to Vietnam during the Vietnam War and with the United Nations to bring humanitarian cargo to Bangladesh during that country’s civil war. It also experienced a brief moment of notoriety in 2014, when The Nationreported that Colombian authorities had seized about 90 pounds of cocaine from Foremost’s Ping May, finding the drugs inside a shipment of coal bound for Europe. (The company declined to comment to The Nation.)

Throughout its history, Foremost has remained a family concern: James Chao is still the chairman and Elaine Chao’s youngest sister, Angela, is deputy chairwoman and runs the operation. Another sister, Christine, is Foremost’s general counsel. A third sister, May, was a director of a subsidiary dissolved in 2006.

Elaine Chao has often touted her family’s ties to the shipping industry. “Shipping is our family tradition,” she said in a speech in October at National Taiwan Ocean University.

Chao herself worked in banking related to the shipping industry for several years, then became a fellow in the Reagan White House, working on transportation and trade policies. President Ronald Reagan appointed her deputy maritime administrator and subsequently chairwoman of the Federal Maritime Commission.

When Chao served as deputy secretary of transportation and then director of the Peace Corps under President George H.W. Bush, any conflict with her family’s shipping company doesn’t appear to have come up publicly.

Though Chao has never played a leadership role in the company, she and her husband have benefited from its burgeoning success. In 2008, Chao’s father gave the couple between $5 million and $25 million, more than doubling McConnell’s average net worth, according to the Center for Responsive Politics and Politico.

Today, Foremost’s ships transport bulk cargo, such as iron and coal, around the world. The company is growing, with seven more ships in the process of being launched or constructed. The ships are being built in China and Japan.

The company is far from unique in taking advantage of the tax and labor benefits of flagging abroad. Over 70 percent of privately owned American ships with a gross tonnage over 1,000 tons register outside of the U.S., mostly in the Marshall Islands, Liberia, and Vanuatu, according to ProPublica’s analysis of commercial shipping data. They save considerably by doing this: A 2011 Department of Transportation report said the total average cost of operating a U.S. flag vessel in foreign commerce was 2.7 times higher than foreign-flag equivalents.

Still, critics of so-called open registries, also called “flags of convenience,” say they cost the U.S. tax revenue and jobs. Crews on American-owned ships flagged or registered abroad are often paid considerably less and have fewer worker protections.

“Flag of convenience shipping is a precursor to globalization and outsourcing,” said Jeff Engels, an official with the International Transport Workers’ Federation. “It destroyed my industry, and it destroyed jobs for American seafarers.”

Most of Foremost’s ships are large bulk carriers known as “capesize,” which usually have crews of between 20 and 30 workers. According to commercial shipping records, 12 of the 17 have mostly Chinese crew members. Records are not available for the other five ships.

Its hiring and use of flags of convenience would seem to be at odds with the aggressive campaign to keep jobs in the U.S. espoused by Chao’s new boss, the president-elect.

“We can’t allow this to happen anymore with our country. So many jobs are leaving and going to other countries,” Trump said on December 1st, adding that “there will be consequences” for companies that do outsource jobs.

Chao declined to answer questions about the gap between Trump’s goals and her family’s practices.

This story originally appeared on ProPublica as “Family’s Shipping Company Could Pose Problems for Trump’s Transportation Pick” and is re-published here under a Creative Commons license.