The flag state of a merchant vessel is the jurisdiction under whose laws the vessel is registered or licensed, and is deemed the nationality of the vessel. A merchant vessel must be registered and can only be registered in one jurisdiction, but may change the register in which it is registered. The flag state has the authority and responsibility to enforce regulations over vessels registered under its flag, including those relating to inspection, certification, and issuance of safety and pollution prevention documents. As a ship operates under the laws of its flag state, these laws are applicable if the ship is involved in an admiralty case.
The term "flag of convenience" describes the business practice of registering a merchant ship in a state other than that of the ship's owners, and flying that state's civil ensign on the ship. Ships may be registered under flags of convenience to reduce operating costs, to avoid the regulations of or avoid inspection and scrutiny by the owner's country. Normally the nationality (i.e., flag) of the ship determines the taxing jurisdiction.
Since the Flag Right Declaration of 1921, it has been recognised that all states—including land-locked countries—have a right to maintain a ship register and be a ship’s flag state. Because of the failure of some flag states to comply with their survey and certification responsibilities, especially flag-of-convenience states that have delegated their task to classification societies, a number of states have since 1982 established Port State Controls of foreign-registered ships entering their jurisdiction.
As at January 2010, Panama was the world's largest flag state, with almost a quarter of the world's ocean-going tonnage registered there. The United States and the United Kingdom had only about 1% each.
Until World War II nations were able to maintain their dominance, or in some cases, even improve their position in maritime trade by offering vessels exclusive protection for flying their flags, which would in turn give the nation exclusive control over the vessels. Shipowners during this time needed protection from pirates and privateers which was provided by naval vessels of the flag state. In some cases states offered subsidies to the shipbuilding industries. In addition to these incentives, states might impose restrictions based on flag State, closing ports to other ships. One well known example of how this was applied is the case of England, which restricted the import of Asian goods only to American and British vessels. England only opened its ports after it had maneuvered itself into a position of strength, and then most like only to gain access to other continental ports. Similarly, France imposed a trade monopoly on its colonies which remained in place until 1869.
Ships must be registered in the ship register of the jurisdiction whose flag it is flying. Flag registers in many countries are open to ships with foreign owners. Normally, each flag state has only one ship register, but several countries have more than one register:
Each flag state has set up its own flag state control system: