A fourth specific step taken to encourage and assist U.S. exporters was the initiation in FY 1974 of a separate commercial budget in the State Department to identify world-wide commercial program needs. This is an attempt to rationalize commercial program expenditures by the State Department component of the joint State-Commerce commercial program. The budget assembles and analyzes the resource requirements of the operational areas of the State Department needed to achieve commercial program goals and objectives.

In addition to these new initiatives, we continue to promote exports through our ongoing programs. For instance, in FY 1975, 14,800 Trade Opportunities were submitted (TOP program), 18,800 World Trade Data Reports were completed, 1900 American exporters participated in U.S. Trade Center shows, and 14 Trade Missions visited 33 cities.

Erport Financing: Although the State Department does not engage in export financing, through its Foreign Service it does identify major export opportunities for U.S. exporters to the Export-Import Bank, which, with commercial banks, shares in the financing of these export opportunities. A recent example of the role such financing plays in fostering U.S. exports was in Indonesia where following the Export-Import Bank President's visit in September, 1975, Ex-Im committed approximately $206 million for financing 11 Indonesian projects. These projects thus far have yielded $621 million dollars in U.S. exports of goods and services.

Thank you very much for this opportunity to elaborate on my testimony of June 19, 1975.

Sincerely,

RAYMOND J. WALDMANN,
Deputy Assistant Secretary,
Bureau of Economic and Business Affairs.

Mr. DOWNING. Any further questions of this witness?

Well, we want to thank you, Mr. Waldmann and Mr. Bank, for appearing here this morning. You have been very helpful, and your testimony has been of significant value to these hearings.

Our next witness will be an old friend of the committee, Mr. Alfred Maskin, executive director, American Maritime Association.

Mr. Maskin, you have a fairly long but comprehensive statement. In view of the time, would you like to summarize it?

STATEMENT OF ALFRED MASKIN, EXECUTIVE DIRECTOR, AMERICAN MARITIME ASSOCIATION; ACCOMPANIED BY JACK GOLDSTEIN, ECONOMIC ADVISOR; AND JOSEPH KLAUSNER, COUNSEL Mr. MASKIN. Mr. Chairman, you are right. I do have a rather long and detailed statement, which I have submitted to the committee.

In view of the time, however, for purposes of my appearance here this morning, I would like to present a summary of that statement, and to have the entire statement included in the record at this point. Mr. DOWNING. Without objection, the entire statement will be printed in the record at this point.

[The statement referred to follows:]

STATEMENT OF ALFRED MASKIN FOR THE AMERICAN MARITIME ASSOCIATION Mr. Chairman and Members of the Subcommitte: I am Alfred Maskin, the executive director in Washington for the American Maritime Association, which consists of 40 companies operating 128 American-flag dry cargo merchant ships and tankers in the foreign and domestic commerce of the United States.

The press release issued by the Committee on May 27 indicates that this initial phase of the oversight hearings on U.S. maritime policies, which the Committee has scheduled, will concentrate on the national security and economic benefit aspects of those policies.

I am here today to present the views of our Association on both of these matters.

The first subject for discussion is national security requirements, and the Committee indicates that it seeks quantitative estimates of the shipping needed in that interest.

I have on previous occasions remarked to the Committee that commercial operators naturally approach with diffidence the role of shipping in national security, simply because it seems more appropriate for that role to be defined by the Government, with all its necessarily secret information, especially under the extraordinary conditions that modern warfare will probably dictate. One has nowadays a vision of impressive statistical models erected to encompass every possible military assumption whether of limited or nuclear warfare, with computers printing out figures all the more convincing for their numerical exactness to the fractional deadweight ton of whatever notional ship.

We believe, however, that it is possible to make a useful contribution to your analysis of this problem without trenching upon purely military considerations that may not be in the public domain.

1. In the first place, the conception of national security is much broader in shipping terms than the operational requirements of the military arm. The most recent expression of the Congress, which appears in the Trade Act of 1974, directs the President "to recognize the close relation of the economic welfare of the nation to our national security." 19 U.S.C. § 1862 (c). This recognizes that the nation at war becomes a vast fighting machine involving the whole industrial mechanism, agriculture and mining. The shipping instrument must function rather along its normal lines of importing raw materials and exporting supplies not only for the armies but to sustain the economies of allies and friendly neutrals; but this operation is tremendously intensified and concentrated. I am assuming here, of course, a conventional war of any duration.

Now, the strictly military requirements for shipping are necessarily narrower than this total sphere of security requirements, which is nothing less than the maintenance of the whole economy at the enormously expanded pace of war. Indeed, one is not aware of any peculiarly military requirements, apart from actual naval vessels, other than a few nucleus merchant types, chiefly tankers, owned or under long-term charter to the Military Sealift Command. So far as one can judge, military requirements are expected to be met from the common pool of commercial shipping, and indeed Dr. Bennett testified before this Committee that the private merchant marine represents "essentially the total U.S. resources available to the Department of Defense."

Thus, the true measure of the fleet needed for defense must account for the operation of the entire economy under projected war conditions. That is why, no doubt, supervision and management of the merchant marine have always been reposed in the civilian arm of government even during wartime.

2. The second significant insight into this sphere probably derives directly from the conception I have just mentioned. It is an extraordinary fact that the merchant shipping required for defense is expected to be supplied by the commercial market place. The unarticulated assumption is that ordinary business opportunity will underwrite the national cost of defense for private account. This assumption arises from the fact that, perhaps alone among instrumentalities of war, shipping has an essentially commercial utility in peacetime.

From a national point of view, this identity or at least overlapping of interests presents the possibility of procuring an important instrument of war largely and in some important cases altogether for private account. To the extent that the merchant marine sustains itself in ordinary operations, it absorbs costs that would otherwise be defense costs. This is surely a major economy as compared with building a fleet entirely at government charge. When thus articulated. this previously unspoken basis of policy recommends itself as justified: in a broad but true sense one way may almost say that commerce is defense.

Of course, it is recognized that where American ships cost more to build and operate than competitors in the world market, defense cannot generally be purchased entirely on commercial account. The Government therefore comes forward with a proposal to make up the difference in some form. The earliest mechanism, going back to our first Congress, has been flag-preference, whether by duties discriminating against foreign ships or prohibitions against their participation in our foreign or coastwise domestic trade. If those who have been reared in a tradition of free trade feel any twinge of embarrassment at this history of American mercantilism, they may perhaps take consolation from the philosophical father of free trade, Adam Smith, writing in 1776:

"There seem, however, to be two cases, in which it will generally be advantageous to lay some burden upon foreign, for the encouragement of domestic industry.

"The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of great Britain the monopoly of the trade of their own country, in some cases, by absolute prohibitions, and in others, by heavy burdens upon the shipping of foreign countries."

You will notice that this ancient and, on this authority, respectable system, preserved in the present Jones Act for domestic commercial trade and in Public Resolution 17 for foreign commercial trade financed by the government, involves no federal expense except when the government itself utilizes the service as a shipper, as under § 901 (b) of the 1936 Act and under the 1904 military transportation act. This does not mean that there are no economic costs, but they are borne by private ship owners and commercial ship users and are reflected in the commercial price of goods.

A different form of government participation is the differential subsidy system, where the government contributes directly to the cost of producing and operating ships. But that does not alter the controlling conception. Even with these contributions, the private market is expected to supply the preponderant capital investment and the return tht makes any investment possible. All the statutory criteria for award of subsidy, mortgage guaranty and other aids are in strictly commercial terms; they may not be given except and only so far as necessary to meet foreign competition or unless the operation is economically feasible. The government would like the yards and operators to be efficient, so as to limit the amount of aid required; hence it introduces ceilings on construction and operating differentials and on preference freight rates that it is willing to underwrite; hence it worries whether recapture will stimulate or stunt competitive vigor, whether subsidies fixed for a period of time will give or withhold incentives for higher productivity, and so on, sometimes taking both sides in the course of a number of years. But the object here is to procure defense at minimum federal outlay, and in fact to the greatest degree possible as a by-product of commerce.

I invite the Committee to focus on this fact with particular clarity. Much intellectual and political confusion has resulted from failing to recognize it. Shipping is not one of the industries for which the country has hitherto been concerned on the humane grounds that have produced federal support for certain other industries or for certain areas of agriculture that might otherwise be displaced by foreign competition. This Committee can recall from its own records a hundred occasions on which it has pronounced in favor of shipping as contributing to the national security. Even the broad sense in which the Merchant Marine Act desiderates the development of our domestic and foreign commerce is probably subsumed within the conception expressed in the Trade Act of 1974 of "the close relation of the economic welfare of the nation to our national security". The Committee reports accompanying the Trade Act specifically point to merchant shipping as within the ambit of this conception.

3. Recognition of this essential point will clarify much that is obscure in the national approach to shipping.

a. In the first place the market will only underwrite the most serviceable equipment. I notice that this is made a point of criticism in some quarters as implying a contradiction, particularly because the Defense Department is said to have to adjust its operational requirements to the available shipping rather than the other way round. But in the larger security configuration of commerce that we have been discussing, it is obvious that ships best serve security ends when they are commercially most efficient (with the exception of direct naval auxiliaries).

Not only is there no contradiction in this larger security sense, but even in the narrower military sense the Department of Defense itself points out, in Dr. Bennett's testimony of June 5, that if foreign competitors, such as the Russians. succeed in driving American operators from certain trades, the result may be to reduce the number of ships available for military use. The Department is certainly entitled to the greatest credit for its strong support of the container revolution. No one at all acquainted with the facts doubts that without this

support the transition would have been longer and more painful. The Military Sealift Command not only did not resist but actively promoted this major development, and that in the midst and in the service of the Vietnam war. In his testimony, Dr. Bennett indicated that container ships as at present designed and operated have their main military use in the important area of resupply, while other ship types are flexible for operations essentially equivalent to participation in direct combat. The Department of Defense is, however, not only continuing to support, but to advance its own technical cargo adaptation to the enormously productive container instrument (which our information permits us to say is much more flexible structurally than Dr. Bennett seemed to suppose). Moreover it recognizes the place of this instrument, together with large tankers and specialized carriers for which it envisions a limited military part, in the movement of strategic commercial materials during war. The suggestion is therefore erroneous of a significant divergence between what is commercially practicable and what is useful for security in either sense.

All this aside, it may be fairly asserted that if the market made no contribution to shipping, then indeed we should see the military coat cut down to fit an exiguous supply of shipping cloth.

b. If defense is to be a by-product of commerical profitability, we must expect from time to time an interruption in the steady process of expanding or maintaining our shipping resources. Looking, for example, at the differential subsidy system, and assuming that it achieves its object of efficient-cost equalization, it remains the fact that the profits to be found in the market place after all determine whether the operation is worth going into in the first instance. But if market conditions, reflecting independent forces of supply and demand, happen to produce negative profitability, either absolutely or in relation to other investment opportunities, ships will not be built, although the defense requirement continues unabated. There are after all times when even foreign companies do not build for commercial trade. In the present world tanker market, cost equalization will not produce construction. On the contrary, cancellations of existing contracts, stretch-outs of delivery dates and scrappings will probably result during the present crisis in the elimination of between 60 and 100 million tons of the world fleet. The Maritime Administrator does not expect any new contracts for American tankers during the next several years, and will be very glad if no further cancellations take place.

Here then is apparent the hitch that develops in seeking to achieve the objectives of defense by means of a system which depends on the world market for the decisive conditions of investment.

At such times, the Congress naturally becomes concerned with the slowing down of its program, especially in the presence of the commercial agony that very often accompanies even cyclical downturns, let alone such crises as the world is now experiencing in oil.

c. At such times, a debate generally ensues which tests the assumptions of the national maritime program. This is a perfectly valid process. The general question whether the country requires shipping for any purpose at all is recanvassed, and Congress explores again to what extent it is willing to rely upon foreign resources, which represent the available alternative to a flag fleet. I think it is fair to say that the result has always thus far been a decision reaffirming the need for an American fleet privately owned and operated.

Another fruitful part of these debates has concerned the form of federal stimulus: whether the subsidy or preference or other aid is excessive or represents a source of windfall profiteering. Here I think the most rigorous review is always proper. Contrary to what is said in some quarters, the 1970 amendments were in this sense a quite important reform. While the subsidies were extended to new classes of operators, ceilings were imposed both on the construction and operating differential subsidies; the tax benefits were extended to unsubsidized carriers for the first time, but instead of what had been previously in effect a tax exemption, there was substituted a true tax deferment for a calculable period of time substantially less than half the life of the vessel in practically all cases. (Of course I must say here again that tax benefits are benefits only to the extent that profits are earned.) The long history of maritime legislation, which has constituted what I may term an organic growth, reflects this process throughout, with false starts and corrections. I say all this with particular reference to the critical studies to which the chairman has adverted in the press release of May 27.

But the underlying reason for the recurrent reliefs that this Committee has from time to time recommended to the Congress, corrected by criticism in frank debate, should be clearly recognized. The economy that government achieves in throwing most of the cost of defense upon the private sector entails an intermittent interruption in supplying the defense need whenever the shipping market declines below the point of profitability. But Congress has not usually considered safe the long-range assumption that defense is worth having only when world market conditions make private investment a paying proposition. To fill the gap, which is sometimes large, and frequently protracted, in turn entails a further stimulus and support of the market just at those points of cyclical or extracyclical downturn. No one should be surprised by this circumstance, although everyone is entitled to test anew the premise for a merchant marine or the specific cost of any particular stimulus under consideration.

4. The Committee has enquired concerning the impact of certain developments in international affairs on considerations of defense. I testified on this subject at some length in the last Congress while the Committee was considering the Energy Transportation Security Act of 1974, and deeper reflection has only confirmed my conclusion, which the Committee itself endorsed, that world conditions require us to maintain a standard of self-sufficency in all brances of shipping. However close our ties to Europe, and to whatever extent Europe may appear to be closing ranks with us in the field of energy, which is by no means certain, the whole international structure has sustained a series of profound shocks. We have seen that in a crisis we cannot count upon the support even of allies where their policy differs from ours or where their economic interest is threatened: worse, they have interfered physically with out own conduct of policy, and we have seen the spectacle of our resupply aircraft obliged to refuel from carriers strung down the Mediterranean, while all along the northern shores of the Mediterranean, from Spain to Turkey, they were denied access to the facilities we have constructed largely or altogether at American expense.

Further than that, we have seen that shipping resources under third-country flag, like other property of American citizens in such countries, are not automatically available to us in crisis and are always subject to local domination and control, if not yet to outright expropriation. The country must remember that American oil companies were not able to resist foreign prohibitions against supplying our naval installations during the boycott. The day of the pliable third flag is over. I was glad to see Dr. Bennett's recognition of these disagreeable facts in his testimony.

This is the answer to those who suggest that we need no shipping of our own because we can always hire what we need, being rich enough, it is said, to outbid any other potential users. Even if this latter statement were true, we must now recognize that the availability of tonnage turns on political considerations, not economic. Even assuming the most perfect political unity, it overlooks the needs of allies and friendly neutrals, which must also be accommodated in war, regardless of their relative bidding power, under what becomes an international rationing of limited resources. I should add that those who argue in this fashion under-estimate wartime costs, which have their own political implications when, as happened during the last war, a 20-year old Hog Islander, valued at $5 a ton in 1939, was deemed reasonably priced at $75 a ton a year later.

Looking about, one perceives no real amelioration of the tendencies that reached a premonitory crisis in October 1973. On the contrary, at this moment we are undergoing virtual or threatened eviction from our military installations in many countries on grounds that suggest a new alienation from us on the part of nations whose independent survival has hitherto been thought to depend on us. Further, the burgeoning nationalism of what is called the third world is extending into wider areas, specifically including shipping. Every oil-producing nation but our own, acting in regional concert or individually, has instituted or is publicly contemplating national-flag preference avowedly to control exports to the point of delivery. Saudi Arabia has actually decreed a 100 percent preference. In the depressed tanker market, these oil-rich countries can acquire relatively new unemployed tonnage at 25 percent of current construction cost for a vessel under 100.000 tons, and 50 percent of the current construction cost of a VLCC-and there are plenty of such vessels available for purchase. Moreover, companies of almost every major importing country in Europe as well as Japan are entering into collaborative ventures to transfer tonnage to OPEC flag. It is reported, for example, that one British company is to transfer 2 million tons to Iranian flag