ing U.S. carrier, Captain J. W. Clark of Delta Steamship Lines, Inc., in his evidence before you on October 20, when he said: *** I submit that the proposed closing of our ports to carriers failing to provide documents or other information requested will only magnify and escalate unfortunate and nonproductive confrontation between our country and its trading partners. In addition to this, we must anticipate that massive retaliation in kind would ensue. The United States has no monopoly on the regulation of international commerce: our trading partners have an abundance of laws and regulations on their side. We simply cannot export our stringent antitrust philosophy without reprisal. This aspect unquestionably influenced the conclusions and recommendations of the Alexander Committee Report, preliminary to the enactment of the 1916 Shipping Act. In short, it is my view that the port closure suggestion is something in the nature of a rusty blunderbuss which, if fired, is likely to cause damage at one end as at the other. It is essential that we avoid the prospect of such a backfire which would injure both U.S. merchants and carriers. The current debate about secret rebating seems to us in Europe to be being conducted here with limited experience as to its existence, or its extent, particularly in the light of the extensive self-policing machinery recently developed, and now fully operational, in some areas, and maturing in others. As far as we can see, the debate rests on the well-known case of one U.S. carrier which opened its books to your authorities: and on statements made by the Chairman of the Federal Maritime Commission that a number of other carriers are being investigated. What is the outcome of those investigations, and what trades are involved-is it across the board, or isolated to one or a very few trades? In this connection, we note Captain Clark's testimony on October 20 when he said: There have been a number of statements attributed to the representatives of a major U.S.-flag line-after admitting its own guilt in committing long term rebating practices-to the effect that it rebated because almost everybody else does it, in an apparent attempt to rationalize its own illegal acts. This unethical-and inaccurate-tactic has unquestionably damaged the good reputation of the American merchant marine, for example, guilt by association. Such statements are nothing more nor less than shotgun smear tactics which are detrimental to all carriers, and should be condemned in the strongest terms possible. And my own information from CENSA carriers in the U.S. Pacific and North Atlantic trades is that where there had been a problem in the past this has now been overcome through substantial and continuing investment in self-policing. May I now comment further on one or two other aspects on H.R. 9518 and various amendments suggested in the course of these hearings to it? It has been argued that one way to deal with secret rebating is to permit independent action by conference members. In practical terms. this could result in the destruction of a stable conference, and it would undoubtedly subject individual lines to intense pressure from strong shippers to depart from the filed tariff rates. You have received other testimony to this effect. Another suggestion is that foreign lines should make all their commercial confidential records available to an agent located in the United States who would be subject to U.S. jurisdiction, thus ena bling the subpena of such documents for investigatory and enforcement purposes. The effect of such a measure would violate foreign countries' jurisdiction at a time when what is needed is Western unity to tackle fundamental international shipping problems which include Eastern Bloc noncommercial encroachments into the ocean commerce of the Free World. And I note that this is a subject to which your committtee will shortly address itself in separate hearings. What we in CENSA have done is seriously to address ourselves to the particular problem of malpractices which you have singled out as a major issue in U.S. trades, and to assess this by comparing the structure of your trades with other trades, in order to evaluate whether the problem is universal or whether it is an isolated one derived solely from the structure of trade into and out of the United States. The first conclusion we reached is that wherever malpractices exist there is no legislative or regulatory measure that can stop them, unless every other country in the world changes its regulatory system-or its absence of regulation-to yours, so that there is universal and conflicting regulation throughout the world. I think we can all imagine the "Alice-in-Wonderland" or perhaps better, "Through the looking glass"-situation which would result. Let me elaborate briefly. The United States regulates not only through the Federal Maritime Commission and the Interstate Commerce Commission, but also through the Securities and Exchange Commission and other departments and agencies. In most other parts of the world there is nothing really comparable and-particularly relevant in this case-no regulatory check whatsoever on the inland movement of a foreign door-to-door shipment. For example, there is no filed tariff requirement covering the inland leg for conferences in Europe. Thus, there is no check at governmental level of the inland transportation costs. This is left entirely to the commercial parties involved, and if there is any secret rebating, the governments-American or European-will have no chance of discovering it, whatever legislation is passed in this House. In Europe, the monitoring of fair trading practices involving international shipping is left to self-policing undertaken by the commercial sector, and it is only at that level that there is any prospect of keeping the problem under control while at the same time avoiding clashes of jurisdictions between governments. May I now turn from the practical mechanics of dealing with the symptoms, to the fundamental causes of the problem, which I believe is much more important? The universally recognized objective is that there should be conferences regulating liner shipping, and that they should be strong, effective and fair. The accomplishment of this objective in every deep sea trade in the world, bar those into and out of the United States is achieved by the following essential tools: (i) To enter into meaningful consultations with shippers' councils on their trade routes on all matters of mutual concern, at the request of either party. (ii) To rationalize their services by equating the tonnage and its suitability to the trade of existing and new members, to the requirements of the trade. (iii) To enter into effective contracts with their shippers, whereby conferences obtain reasonably assured support and shippers a discounted freight rate. (iv) For the lines members of a conference to agree amongst themselves what rate the conference should charge shippers who wish to use conference members' arrangements for the inland leg movement of an intermodal movement. Let us examine how this works in the non-U.S. trades. There are basically two ways in which rationalization is undertaken. One is the fairly loose rein of the conference regulating the frequency of sailings of member lines, and the other is the more tightly controlled system of the conference operating a volume/ revenue pool. In the first case, regulation of sailings, the relatively loose control system does not eliminate all incentives to malpractice, as I know from my own experience. In the second case, a pool trade, any commercial or economic incentive for the lines to malpractice is virtually removed. Attached to my testimony, as appendix A, is a paper prepared by my colleague, Mr. L. G. Hudson, which explains fully the different types of pooling arrangements and their relative weaknesses and strengths. [The following was received for the record:] ENCLOSURE A POOLS IN LINER SHIPPING (Paper Presented by Leo G. Hudson, OBE, Chairman of India-PakistanBangladesh Conferences) POOLS IN LINER SHIPPING General Taking the India, Pakistan, Bangladesh Conference trading with Europe as an example, a pool has been operated in that trade for 17 years with no problems of: (1) Satisfying new entrants or existing entrants shares. (2) Providing adequate coverage of trade. (3) Providing equitable freight rates. (4) Justifying freight levels. (5) Rationalisation to avoid waste. (6) Reasonable profitability. (7) Satisfying Governments (16 on this particular conference route). (8) Eliminating malpractices of and between shippers, agents or shipowners. (9) Adjustment of over/under-earnings/liftings. (10) Financial annual pool settlement. (11) Stability of rates. (12) Enforcing no discrimination between shippers or lines. (13) No exclusion of outsiders. (14) Open disclosure to Shippers' Councils. (15) Ensuring rates and services are competitive with the market. In fact, the IPBC is the oldest Liner Conference in the world having been formed in 1875 and operating continuously since then. It has always operated on a closed Conference system and now embraces some 16 different nationalities of Member Lines comprising 26 different shipping companies. It covers the whole liner trades of the Indian Subcontinent and Europe, both ways. It was the forerunner of the Conference system as it exists today and originated the rebate system, the contract system and the pooling system. Over the period of its existence the Conference has grown from a membership of seven British Lines in 1875 to the present international representative membership as follows: Line: Anchor Line Ltd.. P&OSN Co.-. BISN Co Ltd. Flag British. Do. Do. Do. Do. Do. East German. West German. Yugoslav. Spanish. Pakistani. Dutch. Pakistani. Indian. Swedish. The classic situations which arise in many Conference trades are either too many ships chasing too little cargo, or cargo reservation practised by Government or by commercial means. The result of too many ships chasing too little cargo is usually malpractice which reduces the shipowners' freight income to uneconomic levels and causes discrimination between Shippers. Cargo reservation causes traffic to move by Lines which are not necessarily, and certainly then do not need to be, the most economic Lines and it creates tensions in the other Members who might, in deference, resort either to malpractices or to various countermeasures supported by their Government. These then are some of the main causes of Pooling. Sometimes the need for rationalisation to elect economy is claimed as a cause. This however is usually a result and not a cause. I turn now to the Method of Pooling. A very good illustration of the sequence of events leading to the development of Pools can be traced for a history of the oldest Conference in being-the India-Pakistan-Bangladesh Conference trading with Europe, which was created firstly as a closed Conference in 1875, then as a partially pooled trade in 1885 at that time called a joint purse. The creation of the closed Conference in 1875 arose because of the malpractices and rate cutting between the Lines operating originally in an open Conference system--all fighting each other for cargo. The joint purse or pool arose later because the resulting closed Conference system operating over a wide range, with Members each covering part of that range only, allowed cargo deviation to develop. That joint purse was simply a money pool-a proportion of the freight income from each Line being returned to a pool and then shared according to agreed percentages held by each Member, which percentage was roughly proportionate to his entitlement of the normal flow of traffic in that part of the Conference range covered by the Member. This method continued and expanded as the Conference area increased and with varying success until the entry of the national Lines of the Subcontinent of India upon those countries obtaining independence in 1947. At that stage there was added to the original problem, the need to find a method which would not only prevent Lines from adopting malpractices to secure cargo, but also contain the flag preference methods practiced by the newcomers and especially by their Governments. These two practices both had become widespread so that the ships were tending to move filled with national export cargo but only half full with national import cargo-an excessive and costly waste of space which required excessive freight rates to be charged and which again allowed room for extensive malpractice by secret rate reductions. There also developed pressures at each end of induce greater selling on c.i.f. terms and buying on f.o.b. terms. To overcome this problem one essential factor had to be recognized and dealt with in a manner helpful both to the trade and to the shipowners. Crude competition was not the answer because this would have merely encouraged greater Government intervention to protect trade and ships. The essential factor which had to be recognized was that, in this trade, many of these Lines. as national representatives. were there to stay and had to be accommodated and enabled to obtain what they, or their Government, considered a rightful slice of their trade whereby all would abandon flag discrimination or malpractices and each would feel secure enough to practice rationalisation and thus obtain the maximum service economy at fair rate levels whilst giving adequate coverage for shippers' requirements. The only method found to deal with this was a tightly regulated pool. This could allocate trade shares and with that security any Member would then be willing to agree to rationalise his service since the fear of malpractice or flag preference would not be there. To overcome the possible disadvantages of pooling-over-rationalisation and lack of competition-other safeguards were necessary. Before I discuss the methods to overcome those disadvantages I should mention that many pools exist within Conferences in the simple form of an agreement within a Conference which stipulates for example, that within a fixed period, Member Lines cannot exceed a certain cargo lifting expressed either in tons or as a percentage of the trade, or it might stipulate a limit to the number of sailings. Other variations relate to the cash adjustment system which I exampled earlier under the joint purse arrangement. All these however have certain deficiencies which can affect the trade as well as the Members adversely. I will enlarge upon those deficiencies to illustrate further the methods of Pooling and deal later with the establishment of shares in Pools which falls under the heading of Need for Pooling. I would draw attention, however, that all Pools operative to date, deal solely with income and not expenditure. A purely 100% Earnings Pool has the advantage of simplicity in its administration compared with other types of pool, but it has the disadvantage of not legislating entirely for all the complex difficulties that are inherent in any pooling scheme. It is, in fact, very doubtful whether any scheme is completely watertight but a 100% Earnings Pool without any qualifications whatsoever is open to many abuses and it is for this reason that it can be recommended only if certain safeguards are incorporated, for example, it must embrace: Aspects: i. 1. Malpractices and discrimination; 2. Continuance of the Pool and include Safeguards i.e.: 3. Control by limitation of sailings; 4. Control by space provided; 5. Control by Tonnage liftings. Aspects 1. Malpractices and Discrimination.-In limiting each Line to a fixed percentage of the total earnings it would be possible to ensure that no Line was able to obtain more than its fair share of the pool. By attracting a large proportion of high-paying cargo to its ships, however, it might be possible for a Line to earn its percentage on considerably smaller carryings. Instead, therefore, of requiring (say) twenty sailings to earn its share, fifteen might suffice. To achieve this a Line might be encouraged to resort to malpractices in order to obtain the resultant saving in having five fewer sailings to finance, out of the same amount of earnings. From this it follows that other Lines would require to increase the number of their sailings in order to carry the remaining cheap-rated cargo which they would need to bring their earnings up to the required level. In the same way, a Line might condone or induce discriminatory measures by Government or semi-Governmment organisations to ensure that it received preferential treatment in the allocation of cargo. |