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I think if these things are being introduced and conferences be allowed to handle their business in this way, I think that we can eliminate malpractices to the largest possible extent.
We must realize also that the world has changed in liner shipping over the recent years. I would figure that today about 50 percent of the world liner cargoes are under some kind of state control. We can take most of the developing countries and all COMECON countries. The freedom of the sea is not what it was 50 years ago.
We, the German shipowners, are therefore in favor of some kind of an international regulation for liner shipping and asked our government to adopt the UNCTAD code which provides-on a very liberal basis--for cargo sharing and equality of trading countries. We feel that the American liner industry could also benefit to quite an extent, if the United States would sign that code.
Finally I want to comment the previous speakers.
I would like to state that foreign lines are equally suffering from the weak conference system and the malpractices in the American trades. This particularly goes for my company-we have services to the East Coast, to the South Atlantic, to the Gulf, and the Pacific Coast—and I can assure you that it is very hard for us to watch COMECON carriers taking more cargo out of German ports than our company in the North Atlantic. But we also realize that if we would engage in malpractices, Pandora's box is open and we will cut our revenues very quickly in half.
One final remark. Statistics show that the German liner carriers also participate in the German liner trade with only 25 to 30 percent. So we are pretty much in the same position as our American colleagues.
Thank you very much.
Senator INOUYE. Thank you very much, Mr. Sager. Your solution would include the following, that we liberalize our antitrust laws? In other words, advocating what Mr. Diaz has proposed, and providing for a more effective self-policing neutral body system. If we were not able to amend the antitrust provisions of our laws, would you be able to under the present setup effec. tively police cash rebates?
Mr. SAGER. I would say it is difficult. Talking from experience, which we have not only in the American trades, I agree with Mr. Diaz, because I think it is very, very difficult to effectively eliminate malpractices unless you take away the incentive to do so. But that is really only possible if you have arrangements with your conference colleagues on pools or cargo-sharing devices.
Then the lines know that every penny paid out by anyone in their organisation, agents, stevedores, etc. is money thrown out of the window. Unless the incentive is taken away, I think you will never be sure that a trade is 100 percent clean.
We are in many trades where we have these pools and rationalization schemes, and I can assure you they are virtually clean.
Senator INOUYE. Do you say the closed conferences and revenue pools would be the answer now?
Mr. Sager. Right. This is also in my presentation which I handed over to you.
Senator INOUYE. You are suggesting no rebating or no malpracticing existing in these arrangements?
Mr. Sager. Yes. The incentive is just not there, because you have a certain share of the trade which, of course, you have to keep through good service, but the service is watched very carefully. If a line still rebates, it doesn't make sense.
Senator INOUYE. So even with the overtonnage, if you have closed conferences and revenue pooling, it would work?
Mr. Sager. Yes, because if you have closed conferences and if you have effective tying devices or contracts conference lines will adjust their ships to their share and against outsiders you can defend yourself. But right now the conferences are just sitting like dead ducks and cannot really do anything. On the other hand the outsiders, independent carriers have a much easier life.
Senator INOUYE. Do the laws of your country include very strict antitrust provisions like those found in the United States?
Mr. Sager. They also have strict provisions. It may be interesting, because some years ago the question of closed conferences was under dispute before our Kartellamt (Antitrust Authority) in Berlin, and the conference came out as a clear winner after, I would say, almost a year of proceedings. So conferences are accepted, and the international conference system is exempted from our antitrust laws.
Senator INOUYE. So your laws are a bit more liberal than ours?
Senator INOUYE. I would like all of you who have participated in our hearing to know, that we will keep our record open and permit those who have testified to include additional remarks or make corrections. Those who have not had the opportunity today and submit their statements, the record will stand open. The hearings will stand in recess, subject to the call of the Chairman.
[Whereupon at 12:08 p.m., the hearing was adjourned, subject to the call of the Chairman.)
Mr. RUSSELL. I should perhaps mention that in this testimony Mr. Sager advocates adoption of the UNCTAD code of conduct. I should state that CENSA, as an organization, is not prepared to make any pronouncement on the UNCTAD code as the views of its members are divided on this issue.
Nevertheless, I believe your committee will find that the evidence in Mr. Sager's testimony speaks for itself on the question of the high cost of being unable to rationalize services in the U.S. trades.
I should also like to state that in rebuttal of the Department of Justice study on the regulated ocean shipping industry, to which one of your witnesses referred at earlier hearings, we have commissioned an independent study by academics of the line-conference system in general and the regulated system in the U.S. trades in particular, Interim advice is that the study concludes conferences are in the public interest, and closed conferences more so than open ones. That study is nearing completion, and we would seek an opportunity once it is finalized in January or February to submit it to your committee for consideration. We are informed that it contains compelling evidence on this whole subject which your committee would wish to consider before recommending legislation.
The third disadvantage in the U.S. trades which I mentioned concerns effective shipper contracts. You will all recall the extensive debates on this subject at the Bonner hearings which go back almost 20 years. Those hearings reestablished some sort of order in the U.S.-liner conference trades following the unfortunate Isbrantsen Supreme Court case. But the remedy did not go far enough.
As it is accepted throughout the world, including the U.S. Congress, that the organization of liner services into conferences is whatever its imperfections—the best system man can contrive in the interests of international liner seaborne trade as a whole, then experience dictates that if the conferences are to be viable and efficient they must be permitted to offer their shippers loyalty contracts which on the one hand guarantee the shipper a concessional rate of freight and, one the other, enable the conferences to make a reasonable calculation of the cargo which will be offered them during the term of the contract. Only such an arrangement will provide the groundrules which will give exporters the most economic freight costs while providing the commercial investment incentive and reward required by the shipowner.
The only type of contract permitted in the U.S. trades is the dual rate one, and even that has been stripped of almost every effective
tying device so that the contract no longer offers any real protection to the shipowner, or to his loyal shippers. There is no convincing argument why the deferred rebate system should not be authorized again, particularly in view of increasing competition by noncommercial COMECON-Hag lines, able and prepared to offer rates of freight funded from a state purse,
The fourth impediment I mentioned, which inhibits conferences in the U.S. trades, is the uncertainty of antitrust immunity in the foreign trade, to agree amongst themselves the charge to quote shippers who choose to use conference facilities for the inland leg of a foreign door-to-door movement.
Absent such facility, intermodal conference operations into and out of the U.S. are unique in providing a mechanism whereby individual line members of a conference are virtually incited to inalpractice and undermine the ocean freight tariff by quoting independent inland rates which may be artifically low to favored selected shippers. Such a limitation and distortion of conference authority and rates is not permitted in non-U.S. trades.
An efficient and effective conference relies on two factors:
(i) The ability to equate tonnage volume and quality to the trade.
(ii) A fully effective loyalty tie which protects both the conference and its shipper customers, and it is just as much the latter as the former who are interested in the tie being as foolproof and effective as possible.
In the U.S. trades neither of these factors is permitted to apply. This is why, in my opinion, your liner conference trades—which are also ours are in almost permanent instability and, therefore, open to malpractices, whereas the conference trades which do not touch the United States are inherently stable, effective, and responsive to shipper requirements—and, in the most tightly controlled system, totally free of malpractices.
Thank you for giving me this opportunity to testify before you. I shall now be glad to try to answer any questions you may wish to ask me.
The CHAIRMAN. Thank you, Mr. Russell, the committee is grateful to you for your testimony, and also for your taking time to come from England to be with us to engage in this colloquy that hopefully will permit us to resolve some of the problems in our industry. Our questioning may at times get very pointed, and I do not want anybody to feel that the fact that we are trying to get at the very core of a difficult problem, in any way impedes the full courtesy that this committee, and the appreciation that this committee has of your being here this morning. I am going to ask counsel, Mr. Kyros, to proceed.
Mr. KYROS. Thank you, Mr. Chairman.
Mr. Russell, one of the statements you made in your testimony is quite striking. Although it is nice to be lectured by someone of such lengthy experience as yourself on our shipping laws, nevertheless I think this remark really cannot go unanswered.
You state on page 2 of your testimony that, "the current debate about secret rebating seems to us in Europe to be conducted here with limited experience as to its existence or its extent." I am certain that the Chairman of the Federal Maritime Commission, a gentleman to whom the Congress has entrusted the international shipping expertise in this country, would be amazed to hear that.
And that is because in his testimony he stated just a few days ago, "since August of 1976, we have initiated investigation of 27 ocean carriers, based"~Mr. Russell—“upon solid information, indicating the payment of rebates, 9 are American companies, and 18 are foreign companies."
Now, by what warrant sir, do you make the statement that there is only limited experience for the Chairman of the Federal Maritime Commission to assume that he has information as to rebating by other carriers ?
Mr. RUSSELL. Well, Mr. Chairman, I think the basis of the comment, as I have made it, refers to the situation as we know it at the present time, or as those involved in the trade know it.
There are references to the number of cases that may have been put up to the FMC, or to the Department of Justice, and investigated. But what we have is a statement based upon the submission, I gather, by one U.S. line, that there has existed on their part malpractices, and from there FMC has said that they are investigating many others.
But we have no knowledge of any evidence involved, the extent to which these cases extend, and it is on that basis that one makes the comments.
There is, so far as those who are engaged in the trades, and as I am positively advised, a very considerable change in what has been happening in the past. The introduction of the neutral-body, selfpolicing arrangement has been effective, and it is anticipated it can be continued effectively, but it requires other infrastructures behind it in order to get the full benefit from it.
Mr. KYROS. Mr. Russell, other than the statement you just made. do you have any facts that indicate that the FMC does not have solid information indicating that 18 foreign-flag have allegedly been rebating?
The FMC has also stated that, in addition to the information generated by the Sea-Land settlement, they have had information from 215 consignors and consignees, so they have cross related this information and, as a matter of fact, absent some information from some people coming forward, the FMC indicates that they are in a position to act on any of these carriers.
Isn't that the case ?
Mr. RUSSELL. That is as I understand the case, Mr. Chairman. But, as I say, there is no positive information other than the statements.
Mr. Kyros. Assuming for the purposes of discussion this morning that the FMC does have data to proceed against the 18 foreign-flag carriers, do we understand from your testimony that these foreignflag carriers are not intending to come forward with any of their records to assist the FMC in reaching settlement with them?
Mr. RUSSELL. We have no knowledge as to who is involved. There has been no disclosure. And as CENSA, we would not be aware of the situation of the individual carriers.
Mr. Kyros. But you do make the statement on page 3, of your statement that:
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 enabling the subpoena of such documents for investigatory and enforcement purposes.
Then you say, "The effect of such a measure would violate foreign countries jurisdiction.” Is that correct?
Mr. RUSSELL. I am stating there a practice which is anticipated will be adopted. What individual carriers who are engaged in the U.S. trade would not deal with.
Mr. KYROS. Mr. Russell, the Chairman of the Federal Maritime Commission, the officer sworn to carry out the laws of the United States in regard to international shipping, has recommended to this committee in testimony in this same matter that each foreign-flag carrier seeking to engage in U.S. ocean commerce be required, as a condition precedent to its tariff's becoming effective, to establish a resident agent in this country who would be a citizen of the United States, in control of original or duplicate original records of the carriers.
Are you saying that his recommendation is not only futile but senseless?
Mr. RUSSELL. Well, as I said in my testimony, if there is an attempt to legislate, so that information which normally would lie in head offices of organizations outside this country should be brought within the jurisdiction of the United States by such measures that may be put forward, then there is a movement by the United States which impinges on the sovereignty of other countries. Apart from this question of the impingement, it would perhaps result in some of your allies aligning themselves with the COMECON countries who would no doubt assume much the same opposing attitude in such a matter.
May I also suggest, from a practical standpoint, it would put a substantial and probably over a period of time almost unbearable burden on the people concerned in providing and maintaining such information.
The CHAIRMAN. If I could interject right here.
Within the United States a carrier doing business in interstate carriage must have an agent in each of the States in which he deals for this very purpose.
Mr. RUSSELL. Mr. Chairman, I do not think it is for me to comment on what regulation you carry out here.
The CHAIRMAN. The purpose, though, was to have accessibility within a state, of records that were necessary for carrying out the laws of that state, insuring that they were being adhered to and that there were no violations. And the fact that the FMC Chairman suggested strongly to the committee that an agent be in this country with those records and that that access be available so that we could get to the heart of the problem to see when and where it exists, or the simple fact that that agent was there, it would deter the rebating or other malpractices from taking place.