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case then decides whether the information that the staff has developed that appears to point to a criminal violation should be made available to the prosecutor. I might add, that under the latter informal procedure, we make no recommendation. We only give facts.

Mr. McCLOSKEY. I appreciate what you have said and I appreciate the reasons which cause you to couch it in that manner. But we have a specific cases here of Sea-Land or R. J. Reynolds, and United States Lines, Walter Kidde & Co., and they have made filings with the SEC that have disclosed illegal rebates.

The question that I am trying to get at is; as a result of those litierally hunderds of facts, I think Sea-Land had over 40 lawyers and maybe an equal number of accountants working on this over a long period of time who turned over voluminous records, when you become aware of facts in the Sea-Land disclosure or the United States Lines disclosure indicating that a crime may have been committed did you in fact, turn those facts over to the Justice Department with the recommendation for prosecution

Mr. ROSENBLAT. I think Mr. Clark could answer that better than I could, sir.

Mr. CLARK. Perhaps, Mr. McCloskey, this could answer your question

Mr. McCLOSKEY. If you cannot answer it, tell me why you cannot answer it. I would like to stop beating around the bush. Can

you

tell me that some procedure or due process or constitutional provision prevents you from doing it? But we are getting besides the point. You are a lawyer and you can answer yes or no or ask me to phrase it differently.

Mr. CLARK. Your question is directed obviously toward Sea-Land. There are facts of which I am aware that

Mr. McCLOSKEY. As far as I know, there is no inhibition against your revealing whether or not you recommended a prosecution.

Is there any such inhibition against you sitting here in a public room and revealing to the committee of the Congress whether or not you have referred a case to prosecution?

Mr. Clark. Without the Commission's prior authority to do so, yes.

Mr. McCLOSKEY. Is that why you are dodging? Because you have to have the Commission's prior approval before you are allowed to speak to a committee of Congress?

Mr. CLARK. As to an action involving that subject, yes.

Mr. McCLOSKEY. Rather than beat around the bush any further, may I ask the Chair for unanimous consent that these questions bé referred to the Commission, so that the witnesses are no longer inhibited, and that they will then be able to state squarely, whether they can discuss these subjects, so that we can have a clear record of exactly what the objection is?

Mr. BREAUX. Without objecttion, so ordered.
[The material was not received at time of printing.)
Mr. McCLOSKEY. Any problem with that?

Mr. CLARK, I think from the committee standpoint, it could simply ask for the status—with respect to Department of Justice interests of each of the shipping company disclosures, by each of the 400 companies.

Mr. McCloskey. If we could have your suggestions on how to frame the questions so that we could get simple yes or no answers.

I apologize to you, if Commission policy or some law was barring a frank and candid discussion. I would not have asked the questions.

Is there anything else that I should know before we take each others's time with innocuous discussions?

Mr. CLARK. Not that I can think of.

Mr. McCloskey. Mr. Hufbauer, I share the philosophical statements that appear in your testimony about the free enterprise system, but we have had unequivocal and persuasive testimony, testimony before the committee that the problems in the U.S. shipping industry as far as illegal activity is concerned, are caused by the inability to control entry into the field.

Now, if we start with your testimony that and I am going to quote it to you:

We are familiar, Mr. Chairman, with the arguments that transportation is a unique sector, a quasi-governmental service that needs special protection, or regulation by the Government.

However, the Treasury is not convinced of the merits of this argument. Evidence is beginning to show that regulated industries are less efficient than they would be otherwise.

Well, I quite agree with you. But in public utilities, like gas companies and telephone companies, even though they are less efficient, we have accepted it for a given purpose, and in the case of airlines in foreign commerce of the United States, recognizing that we are in competition with foreign carriers, our airline commerce with foreign nations is certainly highly regulated.

Now, in that context, in the shipping business, if we are going to deal effectively with illegal rebating, which you say you are not surprised to find in a system like we have, if our open conference system has failed to prevent it, and if our regulatory scheme is not effective to prevent corruption, and also not effective to prevent the tremendous difficulties that our own companies have in competing, obviously Government has to get into it in a different way than we have thus far.

Now, we all have the privilege, as each of the agencies have done, of pointing out that we do not like the situation, but no one has yet recommended an affirmative solution to the quandary that we find ourselves in.

Now, does the Treasury Department have any specific recommendations as to what we ought to do with respect to the ocean conference system? You criticized the ocean conference system here, but what is the alternative to it?

Do you have any further alternatives for us?

Mr. HUFBAUER. A short answer, Congressman, is that I do not have a Department affirmative recommendation at this time. I could go on and give a somewhat longer answer.

Mr. McCLOSKEY. I understand that, and I guess in part I am trying to stimulate a thorough departmental study of this, because the assets of your Department to study solutions is probably as good as anybody in the Government.

Mr. HUFBATER. Thank you very much, Mr. Congressman, for that remark.

My colleagues, I will say, are very competent, and I think that is true of the people in the Treasury Department, also our resources are quite thin, and unless we feel that we have a mandate to go into an area, we have so many mandates in other areas that we do not

Mr. McCLOSKEY. Let me, ask you a specific question.

With what you are saying in your testimony, would you not agree that the United States, from a national security and a promotion of international trade standpoint, must have a merchant marine capable of carrying 30 to 40 percent of our international trade?

Mr. HUFBAUER, I would like to step back and put it in a somewhat broader context, if I may.

I will try to be brief. You referred to gas companies and public utilities as monopolies, where in fact we do have Government regulation. In our mind there is a real distinction between gas companies and public utilities, and a telephone company, where the technological conditions are such that there is a natural monopoly, and the conditions of this industry, where many disinterested objective observers have pointed out that far from a natural monopoly, the situation obviously breeds competition, given the size, the economic size of units of operation.

Mr. McCloskey. But let me stop you at that point. Let us assume that we want a lot of elements of competition in the shipping business, but that we impose on our companies strict rules of conduct that are not imposed on their competitors. What do we do to remedy the fact that then our companies are not going to be able to compete?

Mr. HUFBAUER. I was just coming to that, if I may.

The unique feature of this industry is just that point, that other countries do in fact intervene heavily, other countries do in fact have cargo preference laws. They subsidize extensively, in various ways they intervene, and here we have a head on competition of an industry, members of which are based in different countries, with their different national laws, structures, subsidy systems, and so forth, and to my way of thinking, that feature does invite an element of Government intervention, that is, U.S. Government intervention, merely for protective purposes.

There is probably no reasonable alternative. I would like to see the United S.G. intervention framed in a way that it responds to the challenges offered by other governments, rather than leapfrogging those challenges, and there is a difference.

Mr. McCloskey. But, just a minute. You referred to a law that we might enact, which would deny the ships of foreign registry, which did not comply with U.S. laws, the right to enter our ports. You referred to that as draconian.

I understand draconian to be an overly rigorous code of conduct.

Now, if your last statement is correct, that we must be in a posture to respond to foreign nations who make it impossible for our companies to compete, why is it draconian to deny them entry to our ports ?

What other remedy would you recommend !

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Mr. HUFBAUER. It seems to me that an attempt to put the price conference level up at a level which is substantially above the market clearing level for this particular trade, inevitably invites widespread abuse, and we

Mr. McCloskey. But do you assume then that the conference level of rates is unduly high?

Mr. HUFBAUER. Yes, Congressman, we do, and we think that part of

Mr. McCLOSKEY. Excuse me just a minute. I think that is such a significant statement that you ought to back it up with specific facts furnished to this committee. If that is the underlying principle for the testimony of Treasury, then it ought to be laid out squarely on the record that the conference had been gouging the public unfairly. We have no such evidence to support that hypothesis from any source at this point.

Can you furnish us the backup for that statement?

Mr. HUFBAUER. We can refer, certainly, to other studies which have been done, testimony of other individuals.

Mr. McCLOSKEY. I have heard Mr. Janfscher, to whom you referred to, but quite honestly, I could not tie in the specifics of his testimony with the strength of your statement.

We have seen the Justice Department study of what conferences may do, and have done, but again if you could furnish us a complete bibliography, and the facts that back up that statement, I would ask unanimous consent to put it in the record at this point.

Mr. BREAUX. Without objection, so ordered.
[The material was not received at time of printing.]

Mr. HUFBAUER. I would like to emphasize, and that is, I think the word gouging is inappropriate. I do not think this system is a gouging, it is an invitation to substantiate overcapacity.

Mr. McCLOSKEY. Let met ask this question then.

What are we talking about as far as an acceptable return on capital investment in the shipping industry?

What would Treasury believe is appropriate, and in the best interests of the United States, for those who invest in our merchant marine, what should they receive as a fair return on capital?

Mr. HUFBAUER. The return on capital is a-oh, if there were normal practices imposed, which there are not, in this industry, would be ten to 20 percent. In this industry, where various rules have insured that the taxes paid are small, probably in the neighborhood of 8 to 10 percent.

Mr. McCLOSKEY. Is that because of the special tax benefits alone, or because of construction subsidies

Mr. HUFBAUER. The capital subsidy has a tax element attached to it, the investment tax, credit is there, and the rapid depreciation provisions are there, and the sum total of these means that the corporate tax burden on this industry is modest.

Mr. McCLOSKEY. Just to make sure we operate on the same basis, if it were not for other tax benefits, subsidies, or the sum total of the laws of the United States which impact on the shipping industry, you believe a strong U.S. merchant marine would be able to achieve a return on capital investment between 15 and 20 percent?

Mr. HUFBAUER. That is correct.

Mr. McCLOSKEY. That would be consistent with our 1936 Shipping Act, where we want to carry a substantial portion of our commerce in U.S. vessels.

Mr. HUFBAUER. Whether it would achieve a given percentage in U.S. bottoms, I honestly cannot say. But it would be consistent with the general returns in other industries, and I would like now to say that so far as I am aware, the industry is not earning substantially higher rates of return than the eight to ten percent figure I mentioned, over a long period of time, and the reason for that is that open-entry in this industry invites new firms to come in, additional ships to be built, and also I think the extensive Government regulation in turn invites rules on crew sizes, and so forth, which insure that the return on capital is not abnormal, is not abnormally high.

Mr. McCLOSKEY. In your judgment, is the remedy to shut off entry into the United States trades. Would that, in your judgment, cause this rate of return on capital?

Mr. HUFBAUER. No.
Mr. McCLOSKEY. What is the remedy?

Mr. HUFBAUER. Mr. McCloskey, as a purely personal remedy, it seems to me that the correct approach is along the subsidy line rather than the price control line. I think that the number of observers who have looked at this industry, and take, say, a target of a given size of fleet, relative to our carriage of cargo, or a given size of fleet to achieve a given amount of employment, in the merchant marine, would come to the conclusion that the most efficient way to do this is through subsidies, and not through an attempt at price controls.

Mr. McCloskey. But if we go to subsidies, what do you do about the probability of rebates, which you say you are not surprised to see exist in this industry?

Mr. HUFBAUER. It seems to me, and again I would like to emphasize that I am speaking personally, it seems to me that the problem of illegal rebates should largely be dealt with by opening up the conferences to the so-called right of independent action, and ending the so-called system of dual conference rates.

Mr. McCLOSKEY. But how does that affect, for example, an Israeli line, or a Norwegian line that wants to rebate?

Mr. HUFBAUER. If I may continue, I think that these steps would bring the conference rates closer to the competitive rates, and therefore the problem would be reduced. There would still, short of a wide open competition, which I am not advocating, I do not think the industry is in a position to have that type of transition in a short period of time, there would still be some rebating problem, and the remaining rebating problem would probably have to be dealt with through civil or, indeed, criminal penalties.

Mr. McCLOSKEY. The earlier testimony before us indicates that criminal penalties are required, rather than disclosure. We have had civil penalties for the past 5 years, and they have not inhibited the practice.

Mr. McCLOSKEY. Again, speaking personally, I feel a certain revulstion at the imposition of criminal penalties for economic crimes, and I think they are

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