These facts help make the point that the United States can no longer endure, if it ever could, the incompetence of costly obsolescent ships. If oil cargo preference for U.S. flag tankers is deemed essential to the nation's economy and security let us plug the holes to keep our maritime program from foundering by not repeating the same mistakes of the past. I would suggest that H.R. 8193 be amended to include a strict provision to the effect that U.S. tanker operators benefiting from cargo preference agree to contract to replace their tankers at an age spelled out in the legislation with new construction from U.S. shipyards. A capital reserve fund for that purpose under the control of the Maritime Administration should be mandatory to insure that the tankers will be replaced and penalties specified if they are not. Only in this way can the costly effects of subsidizing obsolescence on the national economy and security begin to be overcome. For each is and will be dependent upon a lifeline of U.S. flag tankers.

con

It should be noted that our cargo preference legislation has always referred to U.S. government impelled cargo. H.R. 8193 proposes to give cargo preference to a commercial type cargo. This leads to the second point I should like to make. Although foreign maritime nations have never been happy with our cargo preference laws, they have reluctantly had to acquiesce to an accomplished fact because the shipments were government impelled. I am cerned, however, that cargo preference for U.S. tankers at the 20 percent to 30 percent rates noted in H.R. 8193 poses a problem that might involve international political and economic considerations. In this instance the oil producing countries, particularly the Arab exporters, are looking ahead to sharing not only in the production of their oil but in the transportation and marketing of this commodity. If their tanker fleets are small today, they have not minced words as to their intentions for the immediate future. The Organization of Petroleum Exporting Countries (OPEC) have tanker fleets totaling 59 tankers of 1.7 million deadweight tons. Presently on order and under construction are 21 tankers of 2.6 million deadweight tons. Should they find it expedient the Arab members with their tremendous excess wealth need not wait for tankers to be built but could buy outright existing modern VLCCS and the more handy 80,000 to 120,000 deadweight ton tankers aggregating millions of tons. They have made known their needs for such fleets as part of their plans for participating in the downstream operations of their oil resources, and emphasized they want to carry at least half of their oil exports in their national flag tankers. This is not an idle threat; they have demonstrated all too clearly in recent weeks what they can accomplish in the way of restricting the flow of oil upon which the economies of the industrial world depend.

The United States is certainly not in a position to impose transportation or other conditions upon the importation of crude oil. It is inconceivable that at the present time or in the immediate future that the United States would impose any penalties which might restric or discourage maximum imporation of petroleum and its products. Therefore, it seems to me that before the United States considers a program of oil cargo preference the groundwork should be laid for negotiating with exporting nations to insure that the net result of oil cargo preference, including possible retaliation, will not be detrimental to the U.S. merchant marine and the American economy. The mechanics for such a program are in being today. They are to be found in the U.S./USSR Maritime Agreement of October 1972. Third flags have not been excluded in this program and, indeed, are carrying a very large share of the cargo tonnage compared with that carried by U.S. and USSR flag ships.

In conclusion, therefore, I would not oppose oil cargo preference legislation that woud include:

1. proper safeguards to require the beneficiaries of cargo preference to build new tankers in U.S. shipyards:

2. a provision for some form of negotiation, perhaps similar to the U.S./USSR Maritime Agreement, between the United States and the oil exporting country for the transportation of oil between the two countries. Thank you for the time you have given me.

TABLE 1.-SHIPS BUILT IN U.S. SHIPYARDS FOR U.S.-FLAG OPERATION IN U.S. FOREIGN TRADE, JAN. 1, 1922 TO

TABLE 2.-CONTRACTS AWARDED BY THE MARITIME ADMINISTRATION AND ITS PREDECESSOR AGENCY FOR U.S.FLAG MERCHANT SHIP CONSTRUCTION IN U.S. SHIPYARDS, JAN. 1, 1948 THROUGH OCT. 20, 1970

TABLE 3.-NUMBER AND DEADWEIGHT OF U.S.-FLAG TRAMP SHIPS IN U.S. FOREIGN AND DOMESTIC TRADES

Rear Adm. ALBERT G. MUMMA, USN (ret.),

Chairman, Commission on American Shipbuilding,
Washington, D.C.

DEAR ADMIRAL MUMMA: I have signed the Report of the President's Commission on American Shipbuilding because I agree with several of the conclusions and recommendations of that comprehensive study. I do beileve, however, that the Report is too orientated to the needs of the ship operating industry to the neglect of several legitimate needs of the shipbuilding industry. Specifically, I have the following objections to the Report:

(1) The third general conclusion in the letter to the President and the Congress reads: "Because of the relatively higher wages and cost of materials in the United States, the [shipbuilding] industry has not been competing ou a cost basis in the international market despite its potential equality in productive efficiency."

While it is true that wages and costs of materials in the United States are higher than those in other shipbuilding countries, I do not believe that this is the principal reason why ships are not built in the United States for export.

At the present time, LNG tankers can be built in the United States at costs comparable to construction costs in Japan or Europe, and, from time to time, the cost differential for other types of ships, for example, very large crude carriers, would be more than offset by the rapid delivery available from a shipyard in the United States.

The shipyards in the United States do not produce vessels for the export market because United States government aids for ship construction are limited to United States citizens. Japan and other shipbuilding countries subsidize the construction of ships for export usually by guaranteeing loans or subsidizing the interest rates on construction and long-term loans irrespective of the citizenship of the borrower. The United States has a similar program to guarantee loans used to construct ships (Title XI, Merchant Marine Act, 1936, as amended) but the United States program is restricted to borrowers who are United States citizens.

It is impractical at the present time to obtain financing for the construction of ships without some form of governmental assistance. Our failure to furnish such assistance to foreigners is, therefore, a policy determination not to encourage the construction of ships in the United States for export. I do not recommend that this policy decision should be changed, but I think that we should accurately describe the reasons why ships are not built in the United States for export.

(2) I refer to the conclusion in the sixth paragraph of the letter to the President and the Congress.

While it is true that the basic market in the United States for commercial shipbuilding has been limited to ships needed to "carry United States domestic and foreign commerce," this results primarily from the statutory requirement that ships built with United States government aid are required to engage in such trades except to the extent that the Secretary of Commerce acting through the Maritime Administrator approves the use of such vessels in the foreign-to-foreign trades. I believe that this trade restriction of general application places an unwarranted burden upon the owners of ships constructed with a United States subsidy or with government assistance. These ships should be free to operate in the foreign-to-foreign trades without specific approval as similar ships built in foreign shipyards at comparable costs are free to operate in such trades.

(3) I do not agree with the conclusion in paragraph 12 that a cargo preference system in the form recommended should be adopted. The reasons for my disagreement are:

(a) Cargo preference invites retaliation. Whether or not such a system should be imposed, in my opinion, requires far more careful study of particular trades than we have been able to give to the problem. Specifically, before we enter into such a program, I should like to see negotiations with individual foreign countries so as to assure that the net result of such cargo preference and expected retaliation by foreign countries will not be detrimental rather than helpful to the American Merchant Marine.

(b) In my opinion, cargo preference without some requirement for new building by those receiving the preference will not result in the construction

of new ships. We have had carfgo preference laws with respect to military and AID cargoes ever since World War II and, so far as I am aware, such cargo preference has not resulted in the construction of a single bulk cargo or tanker ship.* On the contrary, with respect to shipbuilding, cargo preference has been counter-productive because it provides a ready market for overaged ships and, in effect, has subsidized obsolescence. I would, however, not dissent from a system of cargo preference which was based upon some form of negotiation with foreign countries and which contained proper safeguards to require the beneficiaries of cargo preference to construct new vessels. (4) I disagree with the Commission's recommendation in paragraph 15 concerning freight rate equalization. There is nothing in our extensive and voluminous study upon which an intelligent evaluation can be made as to the need or effect of such a program. Moreover, the program seems to be related to the operation of a limited portion of liner services rather than to American shipbuilding. Further, I do not see how we, on the one hand, can defend operating-differential subsidies pursuant to the Merchant Marine Act, 1936 which enables certain American liner vessels to carry cargo at rates below actual cost, and, at the same time, complain that other countries are permitting their liner services to do the same thing. It seems to be that the adoption of this recommendation would open a Pandora's Box of retaliation and counter-retaliation.

(5) I believe that some recommendation should be made with respect to the effect of the citizenship requirements for American shipping and banking companies as contained in Section II of the Shipping Act of 1916. That statute defines a citizen as, inter alia, a corporation organized under the laws of the United States or a state, territory, district or possession thereof, and for operation of a vessel in the foreign trade, a corporation with 51% of its stock owned by U.S. citizens, and for operation of a vessel in the domestic trade, a corporation with 75% of its stock owned by U.S. citizens. It is impractical to determine the actual stock ownership of a public corporation, therefore a rule has been adopted that 75% ownership will be presumed only if 95% of the stockholders are residents of the United States, that 51% ownership will be presumed only if 65% of the stockholders are residents of the United States.

and

United States corporations which are commonly regarded as United States citizens are barred from all participation in government aid shipping programs including guaranteed mortgage and construction loans unless they meet the above stockholder requirements. Moreover, United States national or state-chartered banks not meeting such stockholder citizenship requirements are barred from making loans secured by mortgages on American flag ships. The effect of this is already important and may become far-reaching. At least two major United States oil companies because of some stock ownership by foreigners cannot transport crude oil or petroleum products between United States ports except under the limited conditions of Section 27A of the Merchant Marine Act, 1920. Further, the citizenship of other oil companies may become affected by pass-through agreements currently being made by such com panies with old producing countries. These agreements may raise serious questions as to whether the oil producing companies will exercise such a degree of control over the involved United States oil companies as to endanger their Section 2 citizenship. I, therefore, believe that serious consideration should be given by the President and by the Congress to modification of these citizenship requirements.

It was a great honor and a most stimulating experience to serve on the Commission and I hope that our study will have a beneficial effect upon the American shipbuilding industry.

Sincerely yours,

Mr. CLARK. Meeting is adjourned.

ARTHUR M. BECKER.

[Whereupon, at 12:10 p.m., the meeting was concluded.]

I am told that probably some of the liner ships built with construction differential subsidies and with operating differential subsidies might not have been built had it not been for cargo preference. Liner ships, however, represent a decreasingly small segment of the world's merchant marine.

ENERGY TRANSPORTATION SECURITY ACT OF 1974

TUESDAY, FEBRUARY 5, 1974

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON MERCHANT MARINE OF THE

COMMITTEE ON MERCHANT MARINE AND FISHERIES,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10:20 a.m., in room 1334, Longworth Office Building, Hon. Frank M. Clark [chairman of the subcommittee] presiding.

Mr. CLARK. Good morning.

The Subcommittee on Merchant Marine will please come to order. This morning we continue hearings on H.R. 8193.

For a number of years this committee has viewed with grave concern our then impending energy crisis, and especially the dual dependency of the United States on both foreign oil and foreign-flag tankers to import such oil. It has now become all too clear that our concern was, and continues to be, justified.

As we all know, there have been drastic changes in the international oil situation since the various Government departments testified last fall. Despite the turmoil created by the so-called Arab oil boycott, it has become increasingly clear that the United States can no longer be dependent on foreign-flag tankers for oil imported.

by sea.

Today we are engaged in a worldwide economic conflict for oil. For the good of our country, we must never forget that in this conflict, foreign-flag tankers are manned by mercenaries.

Our first witness this morning is Mr. Herbert Brand, president of the Transportation Institute.

Herb, we are very glad to have you with us this morning.

STATEMENT OF HERBERT BRAND, PRESIDENT, TRANSPORTATION INSTITUTE, WASHINGTON, D.C.; ACCOMPANIED BY BERT GOTTLIEB, DIRECTOR OF RESEARCH, AND CAPT. RICHARD STONE

Mr. BRAND. Thank you.

Mr. CLARK. For the record and for the reporter, give your name and address and anyone you have with you.

Mr. BRAND. Yes. I would like to have two of my associates up here with me. Bert Cottlieb, who is director of research of the Transportation Institute, and Captain Stone, another associate of mine at the institute-Richard Stone.