sistent with Secretary Connor's statement that our policy must assure "that American business has available to it the kinds and qualities of service necessary for trade expansion."

A few illustrations of the adverse effects of a "roam-as-you-wish" policy will highlight its impracticability: (a) at the present time, the volume of trade to South America and Africa is relatively low. If immediate profit alone is to determine service to and from ports, any businesslike firm is likely to ignore these ports of call in favor of the more profitable Asian and European ports. Yet the need for the United States to develop closer associations with other countries of the world is most great in the developing countries that will be neglected. The Department of State must acknowledge this fact, (b) an abandonment of the trade route concept will penalize that liner operator of the United States, who was willing to undertake losses or forego profits for the purpose of slowly building up a trade relationship for the future time when the importexport volume would warrant the investment expended.

Another area to which the essential trade route concept is absolutely vital is that of the United States ports. Relying upon the guarantee of ocean service which the subsidy program and the essential trade route concept provide and compel, the ports of the United States have poured huge sums into the provision and development of facilities. As of 1963 the total investment by U.S. ports in their facilities amounted to $4,500,000,000 of non-Federal public investment, all predicated upon the assurances of continued dependable ocean services that in the ultimate rest upon the guarantee of our nation through the essential route concept that such services shall be provided. These very considerable investments could be jeopardized by the repudiation of the concept. Moreover, absent the assurance of reliable service from U.S. flag liners, the local port groups will be reluctant to invest additional money for new and automated facilities increasingly demanded by modern cargo handling techniques. It would be ridiculous to ask the ports to go to their voters for bond authority or to seek other capital sources, such as revenue bonds, for capital funds when all they can offer is the tenuous hope of continued foreign flag service uncompelled by the competitive impact of guaranteed U.S. flag service under the essential route concept.

The affirmation of the trade route concept is accompanied by a recognition that, at times, a liner operator would be able to maximize the utilization of his ships by having more freedom in selecting ports of call and routing. This goal, however, can be achieved by realistic administrative judgment on the part of the government agency involved, and more careful thought should be given to this need.

Wise administrative decisions are not easy to make. Therefore, there is often the temptation to substitute inexorable rules to avoid the need for judgment. This Committee does not believe that the abandonment of trade routes for our liner operators is preferable to the occasional inadequacies of government decisions as to trade routes and service requirements. On the contrary, it would be an action contrary to the public interest.

(2) THE CONFERENCE SYSTEM

The Shipping Act of 1916, as amended, specifically exempts ocean carriers from the anti-trust laws to permit them to engage in ocean rate-making conferences. When a steamship line operating as a common carrier elects to join a "conference", it must accept the transportation rates and other conditions of the carriage of goods or passengers that are set by the joint conference members. Normally a separate conference is established for inbound and outbound cargo moving over the same trade route.

Inevitably the actions of some conferences have come under attack. Some critics have said that the rates discriminate against U.S. exports, yet the record shows that our relative export surplus is as great, or greater, now than it has ever been, with the exception of the war years and the years immediately thereafter (1942–1949). In a technical note on "Competition in World Shipping," prepared at the Harvard Business School, it was concluded that:

"Almost all students of the shipping industry agree that conferences are both necessary and desirable."

The report goes on to quote from a special study of Daniel Marx, Jr., International Shipping Cartels: A study of Self-Regulation by Shipping Conferences: (1953).

"The basic purpose of shipping conferences is to minimize losses, or to maximize profits. Historically, it seems that most conference agreements were prompted by the necessity of stopping or at least of avoiding, the insanity of cutthroat competition which is so apt to occur in industries characterized by increasing returns and decreasing costs. In short, the confer ence system provides a method for the self-regulation of an industry, most of which is subject to multiple jurisdiction of several sovereign nations with disparate legal codes and diverse commercial practices."

In the absence of a supernational regulatory body, Marx finds this form of selfregulation to be desirable.

To the trader the existence of a stable and reliable rate structure is an absolute necessity. He must have it if he is going to compete in the world markets. The Conference system is the only assurance of it that he has. Without it he is the victim of day-to-day rate fluctuations, destructive of long-term and sound trading commitments.

The ports of the United States rely on the Conference system for the reasonable parity of rates necessary to them and to the trading areas they represent. Without it there is no assurance to anyone that the man shipping to London from Atlantic Coast Port A on the basis of today's rates will not find himself completely proscribed by tomorrow's rates from Atlantic Coast Port B. The Conference system has grown painfully through the years, constructed by the minds most experienced and knowledgeable in the complexities of ocean transportation and trade. To anyone even cursorily familiar with the threat of rate wars, the dilution of the Conference system is a dismal prospect.

The public members conclude that the Conference system is the only system yet devised to provide protection from rate wars and to insure rate stability so necessary to the nation's commerce. We believe that the Federal Maritime Commission, as now constituted, is adequate to the task of protection against discrimination and has been doing a commendable job. The decision as to liner conference membership should remain in the hands of knowledgeable steamship operators whose interests are concomitant with the protection and promotion of our commerce.

Recommendation

We recommend that the present basic arrangements for participation by American flag liners in conferences be continued. Any corrective measures, if such are deemed necessary, should be instituted only after a thorough study of the problem by a special Government commission created for this purpose.

B. UNSUBSIDIZED LINER CARGO SERVICE

At present there are several unsubsidized American companies that are operat ing approximately 100 liner cargo ships. These companies receive no direct subsidy from the government. The Malott Subcommittee report stated that there has been virtually no renewal of this fleet in the last twenty years and "we are fast approaching the point where these ships will be lost to the American flag, either through transfer of registry or obsolescent old age." These companies take the position that on the basis of their present financial resources it would be impossible for them to replace their present fleet.

The public members believe that the demise of this portion of our fleet would have a very detrimental impact on the commerce of the United States. Recommendations

(1) We recommend that a construction program be planned to provide for the replacement of the total deadweight tonnage and cubic capacity represented by the existing unsubsidized liner fleet. This program should be undertaken as soon as possible for the purpose of completing the replace ment within five to eight years.

(2) We recommend that special financial arrangements be developed by the Government that will meet the problem of transition. However, such arrangements shall be designed to avoid giving an unfair advantage to these operators over the presently subsidized operators.

(3) Operating subsidy should be extended to these companies immedi ately, provided they commit themselves to a fair and equitable expedited vessel replacement program referred to in recommendations (1) and (2).

(4) As a condition for receiving operating or construction subsidy, the companies involved must (a) subject themselves to all the regulations that

apply to presently subsidized liner cargo operators and (b) divest themselves of all foreign flag operations.

The unsubsidized liner fleet constitutes an integral part of the American Merchant Marine. These 100 vessels are included in the consideration by government officials as to the adequacy of existing ships to meet "presently established requirements for services by the military." In the introduction of this report the adequacy of American flag ships for defense needs was challenged. But, as the Malott report states, quite apart from this challenge, it is reasonable to infer from government estimates that if these 100 unsubsidized liner ships were not replaced under U.S. flag, then the American fleet clearly would no longer be adequate. It is important for us to retain the capability of these vessels.

Furthermore, these liners are important to the commerce of the United States. Of the 33 trade routes now established, 21 are served by two or fewer American carriers; on five of the 21, at least one of the American liners is an unsubsidized carrier. Of the remaining 12 essential trade routes, six had two or less subsidized lines serving them; four of these six are also served by two or more unsubsidized liners and the other two by one unsubsidized liner. These liners also service the six trade routes on which there are three or more subsidized lines. It is apparent that these ships are active in serving American ports and in promoting the import-export commerce of the United States. It is also evident that their elimination would have a substantial impact upon the competitive situation of the 15 subsidized lines.

The efficacy of our subsidy program, discussed under (A) above, is proved beyond any doubt by the plight of the unsubsidized liners. The close relationships between operating under the 1936 Act and the ability to replace ships, thereby insuring an efficient, modern fleet, is clearly demonstrated. These companies are unable financially to replace these ships by building in American shipvards, and some assert that they cannot even plan for replacement at the substantially lower foreign shipbuilding costs. The result is a rapidly aging fleet. Nearly all are over 20 years of age, have an average deadweight tonnage of 10,000 tons, an average cubic capacity of 500,000-550,000 cubic feet, and an average speed of only 16 knots. They are in sharp contrast to the modern, efficient fleet being developed under the replacement program of the subsidized liners.

There is an urgent need to honor the applications of these companies for coverage under our subsidy program. Failure to do so may mean that many of these American vessels will not be replaced. We reject the view that the remedy rests exclusively in the expansion of the presently subsidized fleet. Extension of operating subsidy, however, must be accompanied by a commitment to an expedited program for the subsidized replacement of these vessels. This is essential to minimize the financial burden of operating subsidies, which would be high, given the larger manning scales and lower productivity of these old ships. More important, it is essential to insure continuity of efficient service. We believe that a special construction program, with some ad hoc financing features, should be developed to effect the transition.

The program for the unsubsidized liners should not be developed to the detriment of the subsidized fleet. Thus, the construction program recommended should in no way interfere with the vigorous replacement activity now in progress for our subsidized fleet. Nor should the special financing arrangement give the unsubsidized operator any long-range advantage over the present subsidized operator. Finally, these operators should be subject to the same conditions and regulations that are now applicable to the presently subsidized group.

C. DRY BULK CARRIERS

The unsubsidized U.S. bulk carrier operators have suffered considerably because of foreign competition. Both the dry bulk and liquid bulk commerce handled on American bottoms has dwindled almost to the point of extinction. The present section will discuss only the dry bulk carriers; the liquid bulk or tanker recommendations are covered in Section D. In addition, there are some observations applicable to both groups in Section H, Flags of Convenience. In the period 1951-1963, the volume of U.S. dry bulk cargo imports and exports carried on dry bulk carriers of all flags has increased by 132 percent. These exports increased from 47 million long tons to almost 80 million tons, and the imports increased even more sharply, from approximately 22 million tons to over 61 million tons. The exports have consisted largely of grain, coal, phosphate rock and other fertilizer products; the volume of exports was stimulated con

siderably after the enactment of Public Law 480 in 1954. The imports have been principally unprocessed ores (iron, bauxite, gypsum or plaster rock) and sugar.

Yet during this period of substantial growth in dry bulk cargo, the amount handled by American bottoms decreased from 41 percent in 1951 to less than 7 percent in 1964. Our serious deficiencies in dry bulk capacity are matched by the qualitative deficiencies in the fleet.

There is a very simple explanation for this alarming reduction in our dry bulk shipping capability: neither construction nor operating subsidies have been available to these operators. The Merchant Marine Act permits the payment of construction subsidy on non-liner vessels, but this authority has never been utilized by the Maritime Administration. As recently as 1962, Secretary of Commerce Hodges supported the denial by Marad of a Bethlehem Steel Company application for construction subsidy to build two bulk carriers in the United States. In any event, the applications for construction subsidy have been limited, because of the high unsubsidized operating cost that would attach to such U.S. manned vessels after their entry into service. Under the 1936 Act, operating subsidies cannot be given to bulk cargo vessels. As a consequence, this growing trade has been dominated by foreign flag vessels, many of which are actually owned by American citizens and operated under the "flags of convenience" concept. Much of our so-called proprietary dry bulk cargo is handled by Panlibhon flag ships.

The survival of the few American bulk carriers we have has been based on our cargo preference program. Public Law 664 (1954) provided that at least 50 percent of the aid cargoes of the United States were to be carried by U.S. flag vessels. The cargo rates were to be "fair and reasonable rates for U.S. flag commercial vessels." As a consequence, the bulk cargo rates have been higher than world market rates because of the higher U.S. vessel costs. It is this law and other related regulations (all defense cargo must be handled on American bottoms) that has maintained what non-liner dry cargo fleet we have.

The public members believe that if the American Merchant Marine is to carry a "substantial" portion of our export-import commerce we must undertake immediate measures to revitalize the dry bulk carrier fleet. Our present capacity is wholly inadequate, and it is imperative in the national interest to reverse this trend.

Recommendations

(1) That the Government commit itself to a construction program that will insure, over a reasonable period of time, the attainment of United States dry bulk fleet capacity to handle 30% of this import-export commerce. (2) That these vessels be built in United States ship yards with provision made for a construction differential subsidy.

(3) That the design of the bulk cargo vessels be as standardized as possible to insure the lowest possible costs of ship construction but at the same time to insure maximum productivity and efficiency for competing in the world market.

In this connection it is urged that representatives of the shipping industry, shipbuilding industry, and the government confer to formulate a design program. This matter will be discussed further under (F) below.

(4) That to make certain that no disputes over manning and related questions interfere with the prompt introduction of these ships into service after they are built, we recommend that the application for the construe tion of each vessel include a signed statement by the shipowner applying and all of the unions representing the employees indicating that they have agreed on the manning and stating the arrangements that will prevail. Since there is the possibility of changes in the course of construction and early operation which might influence the manning, we likewise propose that the shipowner and all of the unions agree that any dispute arising there from, if not settled through collective bargaining, should be submitted to arbitration for final and binding determination. It is imperative that the same arbitrator or board of arbitration be used for all of the unions so that no conflict can develop between or among any of them. It is likewise im perative that the Government accept the determination of the parties in collective bargaining or through arbitration as binding insofar as subsidy payments are concerned. This subject is discussed more fully under section G below.

(5) That the cost-parity principle of operating subsidies be extended to American flag dry bulk carriers constructed under this program.

We recognize that the computation of such subsidy cannot be on the same basis as that used for general cargo liner service. These ships operate on a world market and do not necessarily cover a fixed trade route. A special study should be undertaken promptly to determine how the parity approach to subsidy can be applied most equitably and economically to these carriers.

(6) That the Government support be made available for the carriage of proprietary cargoes as well as for other dry bulk cargoes.

(7) That operating contracts to be executed with qualified carriers should be for a 20-year period and should include provisions for vessel replacement and should allow world-wide trading privileges.

However, rate

(8) That cargo preference laws should be continued. differentials now paid on the transport of Government supported bulk cargoes should be phased out as new vessels are constructed and placed into service.

This recommendation requires further explanation. Under our preesnt cargo preference laws half or more of the oceanborne cargo financed by the United States government must be carried on American flag ships. This regulation, to which there are few exceptions, applies without regard to whether the ships are subsidized or nonsubsidized, liners or tramps. As the law has been administered, the percentage has been held to the bare minimum. The cargo preference laws have been attacked as costly and discriminatory. It is estimated that the cost to the government for the handling of government-generated cargoes at United States rates is approximately $80,000,000. As the new ships are built and as operating subsidies are applied, it may reasonably be expected that the operators of these ships should be entitled to government cargo only if they compete at world market rates. They should be in a position to do so. However, if they are required to compete at world market rates, there is absolutely no reason why all government generated cargo should not be offered first to American flag ships. The net effect will be a substantial saving that will offset a portion of the extended construction and operating subsidies.

There is a tendency on the part of some critics of the cargo preference provisions to combine indiscriminately routing preference and rate preference as if they involved the same thing. Our recommendations contemplate the gradual elimination of rate preference, which is a cost to the U.S. taxpayer. Routing preference at the going world rate should be expanded. It is the common practice of all maritime nations to reserve for their own ships the bulk of the cargo generated for their own account by the governments involved.

(9) That the administration of the cargo preference laws be placed in the hands of the Maritime Administration.

D. LIQUID BULK CARRIERS

The problems of the American liquid bulk carriers are very similar to those of the dry bulk carriers. As the Kheel Subcommittee report states, "with respect to tankers engaged in foreign trade, we are presently faced with the virtual extinction of the U.S. flag fleet." From 1951 to 1963, the amount of bulk cargo handled in tanker vessels has increased considerably, mostly in the form of imports of petroleum products. In 1951, 45.1 millions of long tons of this cargo were imported; by 1963, these imports had increased to 112.1 million tons. Total imports and exports had increased from 56.2 to 126 million tons in this 13 year period.

Yet in this same period of time the U.S. tanker fleet has decreased to an alarming extent. In 1950 we had 158 U.S. flag tankers in the foreign trade, with a deadweight capacity of about 22 million tons. By 1964, this fleet had fallen to a low of 33 tankers with a deadweight capacity of only 745,000 tons. Furthermore, most of the few remaining tankers are obsolete. Despite the considerable growth in liquid bulk cargo, our tankers carry only about 5 percent of the tanker traffic. Most of the surviving tankers rely heavily on the carriage of cargo preference grain, thus aggravating the problem of the dry bulk cargo fleet described above (B).

Again, the explanation of this adverse trend is to be found in the absence of any governmental policy for the direct support of this essential part of our fleet. The sharp disparity of both construction and operating costs between here and abroad has made it impossible for the unsubsidized U.S. tanker operator to compete in the World Market. The recourse to foreign flags, very often to the Panlibhon "flags of convenience," has been considerable.