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PART V. SUBSIDIES GRANTED BY FOREIGN COUNTRIES TO SAIPPING AND SHIP

BUILDING

Tabular comparison showing nature of subsidies granted by foreign maritime

powers Great Britain

Beginning with a system of discriminatory customs duties as early as 1349, the English Government has substantially aided her merchant marine and

continues to do so at the present time. France

Government aid to shipping and shipbuilding in France dates from 1661 with the establishment of a subsidized packet service. Since that time, government aid to shipping has been greatly extended until today France is recognized as a leading advocate of a state-aided merchant marine as a

national necessity. Germany

Government aid for shipping in Germany dates from about 1886, when an annual subsidy in the form of a mail contract of 4,400,000 marks was granted

to the North German Lloyd for a period of 15 years. Italy

Italian ship subsidies date from 1851, when a bill was introduced in the Sub-Alpine Parliament for the letting of contracts to private contractors for passenger and mail services based upon government subsidy. Today Italy undoubtedly leads all maritime nations in the various types of government

aid to shipping. Japan

Japanese ship subsidies date from 1876 when the Japanese Government transferred 13 of its own vessels to the Mitsubishi Co. (organized in 1870) and granted it an annual subsidy of 250,000 yen. The phenomenal growth of the country's merchant marine has been due, in no small part, to a consistent system of Government aid to Japanese shipping and shipbuilding.

PART I. SUMMARY OF AMERICAN SHIPPING AND FOREIGN TRADE

MANDATE OF CONGRESS

Congress passed the Shipping Act of September 7, 1916, "for the purpose of encouraging, developing, and creating a naval auxiliary and naval reserve and a merchant marine to meet the requirements of the commerce of the United States."

The United States participated in the World War shortly thereafter and under the provisions of this act and other specific authorizations of Congress, built over 2,300 merchant vessels. After the war the existence of this large fleet of merchant vessels offered an opportunity to the United States to reestablish itself in its trade to and from foreign markets.

The Merchant Marine Act of 1920 provided means of making use of the wartime-built ships by establishing services oni mportant trade routes and of disposing by sale, or otherwise, of those ships not needed and as a preamble to the act it specifically provided that

"It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency, ultimately to be owned and operated privately by citizens of the United States."

This act also attempted to encourage the construction of new vessels by the establishment of a construction loan fund, by the granting of mail contracts for short periods of time, and by other means.

As time went on shipping services were established under the provisions of the act but encouragement for the building of new vessels was inadequate and mail contracts, which it was ruled could be placed for a period of only 1 year, gave insufficient security to the American operator to encourage the development of these services by the replacement of old tonnage with new.

In anticipation of further legislation the Senate, by resolution 262 of July 3, 1926, requested the United States Shipping Board to prepare and submit to the Senate comprehensive and concrete plans for building up and maintaining an adequate merchant marine.

The sentiment expressed in hearings held at 33 cities throughout the United States and the responses to 9,000 letters sent out by the Shipping Board were unanimous in favor of an American merchant marine and almost wholly unanimous that it should be privately owned.

The Shipping Board's report was submitted to the Senate on January 11, 1927.

When Congress passed the Merchant Marine Act of May 22, 1928, it reaffirmed the preamble of the act of 1920.

Under the terms of the act of 1928 mail contracts could be granted for a term of 10 years. By June 30, 1933, the Government had entered into mail contracts covering 44 trade routes.

From its inception up to June 30, 1934, nearly $147,606,000 were loaned from the construction loan fund for the building and reconstruction of vessels in American yards.

Thirty-two vessels, aggregating 363,027 gross tons have been built as a result of mail contracts under the act of 1928.

Forty vessels have been extensively reconditioned by loans under the construetion loan provisions of the act.

Ten vessels were built under the 1928 act with construction loans but not enjoying mail contracts.

Twenty-four additional vessels are called for to be built under existing mail contracts but have not yet been constructed and 12 other vessels are required conditionally.

The World War brought home to the American people the necessity for American merchant shipping under its own control at any time that other nations are at war and whether this country is a participant or not, as at such times our own ships under our own control are absolutely essential to the maintenance of our foreign trade.

Due to the lack of American ships at the outbreak of the World War in 1914, freight rates increased manyfold, deliveries in many cases could not be made at all, and the loss to the American people is estimated to have been hundreds of millions of dollars. American vessels in 1914 were carrying only about 10 per. cent of our own trade.

The value of a merchant marine for national defense is self-evident. In a time of national emergency merchant ships become both naval and military auxiliaries and for this reason alone an adequate merchant marine is a necessary factor in national security.

SHIP OPERATION, A BUSINESS The mandate of Congress as contained in the acts of 1920 and 1928 stipulates that its vessels in trade are ultimately to be owned and operated privately by citizens of the United States."

Shipping is no different from any other business in that it cannot secure the investment of capital unless it can give assurance of a return upon the investment. The development of a privately owned American merchant marine must be protected as to such assurance, and where an American operator is faced with handicaps that are beyond his control our Government itself must provide the means of overcoming such handicaps.

DOMESTIC AND FOREIGN SHIPPING (a) Domestic trade.Under the act of Congress passed in 1817, vessels operating in the coastwise trade of the United States are confined to those built in American shipyards or specifically exempted from this provision by other acts of Congress.

Such exemptions have been granted from time to time but they have affected only a minor number of vessels with the one exception of the Merchant Marine Act of 1920 which admitted to coastwise trade_foreign-built vessels which had been admitted to American Registry under the Panama Canal Acts of 1912 and 1914 and other acts and which were under American registry on February 1. 1920. Under this act about 600,000 tons of shipping were admitted to the coastwise trade. Since that time, however, the coastwise trade has again been restricted to American-built vessels. Shipping in the coastwise trade is subjected to the competition of railroads and other means of transportation but it is distinctly a domestic problem and is within our own control.

Congress recognized the difference in treatment of shipping in coastwise trade from that in foreign trade by imposing a higher rate of interest on construction loans granted for building vessels or coastwise service than for foreign service.

During the past 10-year period the tonnage of vessels engaged in the coastwise trade of the United States was approximately equal to that engaged in our foreign trade.

(b) Foreign trade.- American ships in foreign trade, however, are in an entirely different category as they are faced with the competition of vessels of other nations whose cost of building is less than in the United States and whose cost of operation under the navigation laws is also less. Furthermore, such foreign vessels are aided by their governments which encourage the development of their services. American vessels in foreign trade must, therefore, be aided in some way to place them on an equality of operation with the vessels of the nations with which they compete.

HANDICAPS TO OPERATION IN FOREIGN TRADE

(a) The higher cost of building ships in the United States.-Since the introduction of iron and steel for use in shipbuilding it has cost more to build ships in the United States than abroad. This is primarily due to the higher standards of living in the United States brought about by our higher wage scales.

At the present time wages in the shipbuilding industry in the United States are somewhat more than double those prevailing in the same industry in Great Britain and the differential is still greater if wages in the United States are compared with those of other foreign maritime nations.

While in some industries where there is a great mass production of articles of the same type, as in the automobile industry and agricultural machinery industry, the differential in wage scales as affecting cost has been largely wiped out, this is impossible in the shipbuilding industry except to a very limited extent. Ships are highly specialized articles, each one of which is constructed to a series of carefully developed plans especially designed for the purpose, and the fabrication and assembling of the parts is a highly specialized job.

About one-half of the total cost of ships is directly proportional to the labor . rates existing in the respective countries where ships are built. The materials and equipment used in building ships constitute approximately the other half of the cost. Articles such as steel products, brass products, lumber, paints, and others are produced in such quantities for domestic use other than shipbuilding purposes that their cost approaches more closely to that abroad and is not proportional to the existing labor rates in the respective countries. The net total result is that ships of the cargo, combination, or tanker type cost considerably more in the United States than in foreign countries.

TABLE I.--Monthly wages foreign and American cargo vessels 5,000 gross tons and

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American Steamship Owners' Association, Nov. 21, 1934. The Shipping Board Bureau, Department of Commerce, assisted by the National Council of American Shipbuilders, has recently developed a formula from which approximate differentials in cost as between an American and a foreign-built ship are obtainable.

(b) Higher cost of officers, crew, and shore staff.-A recent analysis by the American Steamship Owners' Association shows differences in the wage scales for seagoing personnel of maritime nations as shown on table I.

There is also a somewhat higher cost of subsistence on American vessels brought about by the requirement of the navigation laws of the United States:

Ship repairs are affected in the same manner as shipbuilding by the higher wage scales in the United States and consequently the cost of repairs in this country is higher than abroad. With a view to giving employment to labor in American ship repair yards and in American industries that furnish materiais for ship repairs Congress, in the Tariff Act of 1930, imposed an ad valorem duty of 50 percent on the cost of repairs performed on American vessels in foreign countries.

The cost of shore staffs for ship operation, together with the cost of operating floating equipment for the handling of cargo, is also affected by the wage scales in this country and is consequently higher than abroad.

Ship operating charges of interest on investment, insurance, and depreciation of the vessel are all factors of the cost of the ship itself, and it is for this reason that the cost of the ship, which is a capital charge, plays such an important part in the higher cost of operation to the American owner.

Figures show that from 60 percent to 80 percent of the total operating differtial, varying with different services and ships, is due to the higher cost of the ship itself.

Conversely the higher operating cost of all other items on American ships ranges from 40 percent down to 20 percent of the total differential depending again upon the services in question and the particular ships involved.

GOVERNMENT AID TO SHIPPING

To encourage the development and operation of privately owned ships in foreign trade the Government must in some manner compensate the owner for the higher cost of the ship itself, for the higher cost of its operation, and for the subsidies paid to foreign competitors by their respective governments.

Throughout our history as a Nation shipping has been aided in some form or other, at first through discriminating duties and tonnage taxes, later through compensation for the carriage of mails and at the present time through mail contracts and construction loans. Under past and under existing laws aid has been granted directly to the ship operator to compensate him for his differential in cost.

A form of aid by which the Government would assume directly the higher cost of a ship in the United States over one built abroad is practicable and would in such a case become a direct subsidy by the Government to the shipbuilder.

Foreign countries have adopted almost every conceivable kind of subsidy both to the shipbuilder and to the operator to encourage the home building of ships and their operation in foreign trade under their respective flags.

Government aid to American shipping is justified because the development and growth of our foreign trade and the control of our freight rates to foreign markets are matters of national importance, affecting all of our people through the products which we sell abroad and through the foreign goods which we buy for domestic use. Further justification lies in the fact that American merchant vessels are auxiliaries for our Navy and are, therefore, an important factor in national defense.

Since the World War our foreign trade has averaged from 8 percent to 12 percent of our total business. In many of our industries this may be just the difference in the volume of business to show a profit instead of a loss and as such it is believed to play a very important part in the maintenance of the high standards of living in the United States and in our national welfare.

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Shipbuilding is an important national asset for any maritime nation. It exists for the building of both merchant and naval vessels, and in both cases it gives employment to labor.

It is inconceivable that the American merchant marine should be developed and maintained by ships other than those built in American shipyards. All vessels receiving Government aid are built to certain specific requirements for quick conversion to national needs in a time of emergency. For this reason their plans must be prepared by our own designers and the work must be subject to the approval of the various Government departments and other agencies preseribing requirements for merchant shipbuilding.

No argument is needed as to the necessity of building Government vessels in our own shipyards.

Table II shows the need of private shipyards for the building of naval vessels in a time of war. Out of a total of 260 contracts for naval vessels placed during the participation of the United States in the World War 243 were awarded to private shipyards and only 17 to Government navy yards. TABLE II.-Contracts placed for naval vessels in the United States from Apr. 6, 1917,

to Nov. 11, 1918

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Building ships in American shipyards gives employment to American labor. Only about one-half of the cost of a ship is expended within the shipyard, the other half being broadly distributed ail over the United States to those industries engaged in making materials and equipment from which the ship is constructed. At least 80 percent and probably a larger percentage of the total cost of building & ship is for the money paid directly or indirectly to labor in producing materials and equipment or in fabricating the ship itself. Ten million dollars expended annually in the building of ships will give employment to approximately 5,600 persons a year.

SHIP REPLACEMENT PROGRAM In order for it to be effective, any merchant marine program must provide for & reasonable replacement of old ships that have become obsolete by modern ships that are up to date. Foreign nations keep their shipping up to date by a reasonable addition of new tonnage periodically.

The average life of a ship which is limited by wear and tear, obsolescense or casualty is generally admitted to be about 20 years and it should be replaced within that time.

The National Council of American Shipbuilders has made a study of the future requirements of shipping for foreign trade. On the conservative basis of a total import and export trade of $3,500,000,000 annually and on the carriage of only one-third of our trade in our own ships, à condition which exists at the present time, the approximate amount of tonnage to be replaced annually in order to maintain our shipping in foreign trade is at least 150,000 gross tons a year. It is imperative that such a replacement program be undertaken without delay. Part II, which follows, presents an analysis of world shipping.

PART II. WORLD SHIPPING The tonnage of world shipping required in foreign trade is dependent upon the volume of water-borne trade carried between the nations of the world. The United States is primarily interested in direct trade, that is, its carriage of its own imports and exports; it is interested only to a very limited extent in indirect trade, that is, its carriage of goods between other nations. PERCENTAGE OF OUR WATER-BORNE FOREIGN TRADE CARRIED IN OUR OWN VESSELS

Chart 1 shows the value of our water-borne foreign trade for the years 1922 to 1933 inclusive. With the exception of the years 1932 and 1933 the annual value of this trade has not been less than $3,870,000,000 during which period we have carried from 33 percent to 36.5 percent by value in our own vessels. Chart 1 is informative because it shows that for the past 12 years the vessels of foreign pations have carried over 63 percent of the water-borne foreign trade of the United States.

It is the mandate of Congress that we should have a merchant marine sufficient to carry the greater portion of our commerce in our own vessels. This means that we should carry at least 50 percent, although as shown by the chart we have not carried more than 36.5 percent during any year since 1922.

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