can-flag fleet, and that "substantial" was always determined, as we go back and examine the record, to be 50 percent. And this committee, in its very liberal interpretation of that, along with its examination of the UNCTAD debates that have taken place over the last 5 years, felt that not less than 40 percent would be a fair share for America's maritime elements to participate in America's com

merce.

Mr. KLUSS. I may be wrong, but I thought that the 50 percent applied to certain types of programs which the U.S. Government was particularly interested in, and we feel that having the 40-4020 UNCTAD pattern apply does two very deleterious things.

One is that it encourages all the other countries in the world to do the same thing, and then the second effect of all this is then we have a multitude of ships which are locked into various trades with no flexibility. They have a protected trade which means that if the rates start going up, the developing countries which are on the other end and putting in their own 40 percent start putting up the rates and we have a very inflexible system which is expensive, and we have escalating rates which make it further expensive.

The CHAIRMAN. You did not get to the point of flexibility in this bill. We want to get the United States out swinging again, getting it into the cross trades, getting it into the more competitive areas. You criticized the tax elements in your testimony, but you do not point out where all of these things are geared to American production, American employment, the further competitive ability of the United States to get into areas where, at the present time almost by American law, it is prohibited from getting into, with the sole purpose of providing the United States with a fleet available to carry a fair share of its own commerce.

And to answer your previous statement, we generate 25 percent of world commerce and yet we carry about 1 percent of world commerce in our own fleets. I think that any objective analysis by even a gold ribbon panel would indicate that that was totally unsatisfactory.

And here we see the United States with the inability today to support any movement of the United States strategic forces anywhere outside of this hemisphere, and it is problematic whether it could support it in the southern part of this hemisphere.

And what are we down to. We just look at the numbers, and you, of course, do not want to talk about figures. We have 19 ships in our drybulk fleet, average age of 25 years old, and they are supposed to, in an emergency or some other contingency this Nation may face, be able to supply the American industries that we have seen boycotts and threatened boycotts threatened against us.

Now, that drybulk fleet, I think, by anyone's yardstick or evaluation, is totally inadequate to U.S. strategic security needs, let alone economic needs. We go to our petroleum, and I think you probably are more concerned about petroleum carriage than anything else, and I particularly noted your continual referral using the term "cargo preference" to try and bring back the odyssey of about 21⁄2 years ago where the industry, through tangential means, was able to defeat legislation that had passed a number of Congresses, at level below 40 percent, below the 30 percent that it had passed.

And here we see the Nation totally transfixed by energy considerations and yet we have the energy interests of America not willing to see that the United States has the ability to even carry a substantial portion of its imported petroleum in American-flag vessels.

Mr. KLUSS. Well, Mr. Chairman, there are, obviously, a lot of points that you have made in that statement.

The CHAIRMAN. I have a few more to come.

Mr. KLUSS. But I would like to comment on what I think are the two major ones. One is that, I think, we all have to face the fact that in international trade American-flag ships are noncompetitive. So what we are talking about is how to give them some share of that trade, and our contention is that the way to do this is not by locking ourselves into bilateral trades and setting an arbitrary limit or an arbitrary requirement of what volume of any particular trade of commodity should be carried in U.S.-flag ships.

And the second major point I would make is that I would differ with your conclusion that we do not have the logistics capability to supply the United States, because we add to this the very effectively competing and competing in worldwide trade the very effective United States effective controlled fleet. And this has proved itself in a number of national emergencies since it originally started during World War II. It has been reexamined a number of times by the Joint Chiefs of Staff, and they consider that this is, in fact, a very valuable national resource.

And we do have the capability, under American control, of moving petroleum and other cargoes. I cannot speak to the bulk cargoes, but I have the impression that even in the bulk cargoes the effective controlled fleet makes a very substantial contribution. The CHAIRMAN. Well, when we talk about not less than 40 percent, we are actually dealing off maybe 55 percent or so into the area of competition that you are talking about, and this is the ability of so-called elements in the other than U.S. world to carry cargo at less than U.S. prices. Well, let us call it compensatory prices or rates.

We realize that the United States today is dealing in a world where the only free trades are the U.S. trades, where so-called free trade itself is limited by restrictions in the vast majority of countries, where U.S. maritime interests are completely prejudiced and just to take not the underdeveloped countries and their ability to put substandard crews both as far as wages and abilities are concerned but the socialist countries, the controlled carriers that you are very familiar with, that for the United States to compete with controlled carriers, we are not talking the same free trade and free economic competitive ballgame that looks good in a textbook. We are dealing in a very hard, hard competitive world where the United States, if it is going to continue with its standard of living, going to continue its position of preeminence economically is going to have to pay, and pay in certain areas for the transportation as well as for the products that are transported.

And I think the United States has been able to do that, and I think it is going to be able to do that in the future. Unfortunately, one of those areas that have been dealt off as exposible or disposable happens to be the American flag fleet, and a glaring inequity

in America's whole economic security position as well as national defense position is this inability of the United States to have the American-flag fleet, as well as the shipbuilding base, and I noticed you very substantially mentioned in your statement the need for an American shipbuilding industrial base.

But these are all of the considerations that this committee is taking into consideration in firming up a legislative solution that we think is necessary in the very near term.

Mr. KLUSS. Well, we agree thoroughly that there should be an assessment of what is necessary for military requirements, and that this should be met, and the second step is to try and determine what amount of U.S. tonnage over and above that we need for a broad national policy.

I think where our thinking probably differs is that we think the way to do this is to continue to supply the United States with the effective control of ships which, in fact, are able to compete on equal terms with, and very effectively, with ships of other nations, and these are available to the United States and they have to be put in as part of this equation.

The CHAIRMAN. But those effective control ships have guaranteed cargoes. That is the only reason they are able to compete.

Mr. KLUSS. Well, they have guaranteed cargoes-

The CHAIRMAN. They have a cargo preference deal of their own. Mr. KLUSS. I am sorry I do not follow that.

The CHAIRMAN. Well, you do not want to follow what I have to say.

Mr. KLUSS. I would be glad to follow it, but——

The CHAIRMAN. You do not think for a minute Japan builds a ship that does not have the freight committed to it for the life of that ship through the interlocking directorates of the Japanese corporations from the shipbuilding corporation to the trading company to the steel corporation to the manufacturing corporation. You do not think Exxon builds a ship for a minute unless the cargo is guaranteed to that ship through the life of that ship. Now, if that is not cargo preference, you tell me what i

Mr. KLUSS. Well, the United States is going to have to continue to import oil. In that sense, of course, there is a continuing demand for oil, but if you consider that as being a cargo that is built-in, of course, that is true.

The CHAIRMAN. Sure it is.

Mr. KLUSS. But we need to have oil imported. All we are saying is that we should import our oil on a basis which is with that which any other nation does, the British, the French, the Norwegian, anybody else. We should not have to pay higher prices.

The CHAIRMAN. You are opposed to a cargo preference bill and yet you are the very example in each of your companies of cargo preference.

Mr. KLUSS. I am sorry. It is not a legislative cargo preference. It happens to be an economic cargo requirement because the cargo happens to be there. Just as we have to import bauxite, the same thing, a drybulk cargo that is there. We have to import chrome. The CHAIRMAN. We have the same condition of cargo preference existing in the domestic truck and rail industries as well. We have companies that will operate so many vehicles to take care of the

minimum requirements, and as they get over their minimum requirements, they will hire outside carriage, not unlike what your clients do as far as world transportation is concerned.

So you see you are tied right into cargo preference. In fact, you are the name of the game as far as cargo preference is concerned. As we analyzed your companies, we said, "Let us have the United States do what Exxon does. Let us guarantee cargo to our fleet." Mr. KLUSS. But the reason the United States has gone into foreign flag ships which we control is in order to be able to compete with other countries in the movement of petroleum.

The CHAIRMAN. Forget about the flags. I am talking about the fleet. The fleet has a cargo preference and yet you do not want to practice what you preach.

Mr. KLUSS. No, it is not a cargo preference-

The CHAIRMAN. Do not do as I do. Do as I say is what API is telling this committee today. You have reserved cargoes for your fleet regardless of flag. You have Liberian flag, Panamanian flag; you have got deals with other countries because of some bilateralism that you are into yourself that you are opposed to right here in this legislation.

Mr. KLUSS. I think the point, Mr. Chairman, with due respect, is that it is not a legislated cargo. It is a cargo of which there is a supply that is available. The United States needs the cargo. There are various ships that go out and compete. If you are familiar with the tanker charter market, as I am sure you are, it is almost the last living example of a completely free market. You have the Greeks, the Norwegians, the Hong Kong Chinese, the British, everybody in there competing for cargoes, including the oil companies. With our ships, we are able to compete effectively for those cargoes, and in my opinion, it is a far, far cry from cargo prefer

ence.

It is an open, competitive market to move a highly desired cargo to the United States from the producing sources.

The CHAIRMAN. I could probably subscribe to that if I had not been around the world a little bit and made a survey of world shipbuiding capacities and capabilities, and I get to one yard in Japan, and there is this ULCC being constructed, and we are going into the question of who it is being constructed for and for what purpose. It is not going out on any free competitive world market to compete. It is going to run a product from one point to another point throughout its lifetime, and it is committed to that, and the construction and design and the whole life of that ship-it is going to fly a foreign flag-is committed on a cargo preference deal, not in respect to so-called world charter prices. The freight is guaranteed to that vessel throughout its life to go from A to B. It cannot go through the Panama Canal. It cannot go through the Suez Canal. It is committed on a commercial deal for its life.

Mr. KLUSS. It is a commercial deal and they are hoping and speculating that that supply will be available and that that destination will be available and that the demand for that product will continue. But there is no legislation that says to them you've got to do this or you've got to stay in that trade.

And I, as a vessel operator, and I am sure my colleagues have had the same experience, know of situations when you build and

tailor a ship to a trade, and more often than not, over the course of years, something happens and that ship no longer fits the trade at all, and you have to go somewhere else.

This is what you are describing has been done, building the particularly big ships because you have to have particularly big facilities on each end in order to do this, but the reasons are economic and they are not mandatory requirements that this is the way it has to be done. I think that is the difference.

Now, the Japanese shipyards, as you know, have reduced their capacity by legislative fiat to some 35 percent of what they formerly had in 1973.

The CHAIRMAN. They did that because there is a world depression, and what they did was get rid of a lot of old, antiquated yards, and they have kept the Tiffany, competitive yards, because we have very carefully studied the Japanese shipbuilding capability as well as our own so that we can understand where we stand in a competitive world.

Counsel?

Mr. SEIFERT. Thank you, Mr. Chairman.

Just a point of clarification. When the chairman was discussing with you the substantial portion of cargo which was concluded by some to mean 50 percent, you said you thought that referred only to certain cargoes in which the Government had a special interest. I assume you meant the preference cargoes.

Mr. KLUSS. I was thinking of things like the grain export programs and things like that.

Mr. SEIFERT. Section 101 of the Merchant Marine Act of 1936 in which the phrase "substantial portion of our waterborne export and import foreign commeree of the United States" is mentioned makes no reference to those preference cargoes. It is all cargoes of the United States. That has been the law since 1936.

So that when we refer to a fair share being not less than 40 percent, it is a watered down version, as a matter of fact, of what has been the law since 1936. Does that change your testimony at all, Mr. Kluss?

Mr. KLUSS. No, I do not think it does, Mr. Counsel, because I think the principal point here is that we do not believe that it is in the best interests of the country to have a legislated percentage. We do not believe that the bilateral trade arrangements are the way to do this thing. And when you start putting 40 percent quotas on various trades, you inevitably lead to inflexibilities and increased costs, and we just do not think you should do that. In addition, it would require additional U.S.-flag ships, and we think before we make this sort of investment in this country, we should have a clear understanding of what sort of fleet is needed and useful to meet its national objectives.

Mr. SEIFERT. We will come back to that point in a minute, but before we do, there is another discrepancy aside from your understanding and our understanding of section 101 of the Merchant Marine Act. A discrepancy between testimony we received on November 13 from Mr. Loree, who is chairman of FACS, and your statement.

He said back then that the companies within FACS beneficially own almost 85 percent of the 50 million deadweight tons of modern