seeking in the Multilateral Trade Negotiations currently underway in Geneva new rules to deal more effectively with subsidies.

Since in principle we would oppose export subsidies, and since they probably would be contrary to our international trade obligations, we do not believe it would be worthwhile to expend resources doing studies on the possible results of export subsidies.

Question 10. Please provide recommendations for ways to stimulate competition in ocean freight services and for ways to insure against foreign collusion in shipping which could disadvantage U.S. trade.

Answer. The Treasury agrees that two of the goals of the maritime program should be to stimulate competition in ocean freight services and insure against foreign collusion which could disadvantage U.S. trade. As Treasury becomes more familiar and involved with the program, we hope to develop recommendations along these lines. In addition, we will urge that these issues be included in the program of work being undertaken by the interagency group headed by the Council on International Economic Policy.

Question 11. On page 17 of your testimony you say that the subsidy may actually misdirect resources and reduce the aggregate level of national economic activity. What evidence is there that this has occurred because of maritime subsidies?

Answer. As a general economic principle, investors will seek the highest returns available on their investments after allowing for all taxes that must be paid and subsidies that may be received. When no particular sector of the economy receives special subsidies or tax advantages, then investors who maximize returns after payment of taxes and receipt of subsidies will also be undertaking investments which yield the highest benefits in terms of before-tax or before-subsidy returns. However, when a sector of the economy, such as shipping, receives special subsidies, then private investors in shipping will be able to realize higher after-subsidy returns even though the before-subsidy returns are lower than those available elsewhere. In other words, the higher level of investment in shipping will be at the expense of more productive investment elsewhere. This resource misallocation inevitably means less real output and income than we might otherwise have. The extent of the resource misallocation and the resulting real income loss depends upon the size of the subsidized sector relative to the rest of the economy. Since shipping is small relative to total economic activity, the economic loss is not great. However, whatever the size of the income loss, special subsidies and tax advantages cause economic inefficiency and misallocation of resources.

Question 12. On page 17, you also conclude that to the extent the maritime industry is expanded, there are likely to be revenue losses since shipping is one of the most preferentially-taxed industries in the economy. Doesn't this conclusion assume that the major competitors of the merchant marine are domestic industries when, in fact, the competition comes primarily from foreign industry which provides no tax revenue?

Answer. The conclusion that a subsidized expansion of the maritime industry leads to Federal revenue losses requires no specific assumptions regarding the major competitors of this industry. It only requires the assumption that we can achieve full utilization of our labor and capital resources with various mixes of economic activity. To the extent that the mix is shifted towards an industry where the income from capital is lightly taxed, we will generate a smaller amount of total revenues than if the mix were shifted towards capital which is more heavily taxed. A smaller domestic merchant maritime sector may imply a greater volume of imports of shipping services, but this in itself says nothing about the level of Treasury revenues. These revenues depend upon the taxes paid out of labor and capital income employed domestically.

Question 13. You indicated that the Economic Policy Board and the National Security Council have been undertaking an intensive joint study to determine whether a fundamental shift in world economic policies is taking place. When will this study be done? Can this Subcommittee receive a copy of the report? Are international shipping policies a part of this study? If not, will Treasury recommend that they be made a part of it?

Answer. The Economic Policy Board and the National Security Council are conducting a comprehensive joint study on non-agricultural, non-fuel commodities that was called for by the Economic Policy Board on February 25, 1975. An Interagency Task Force has been examining and evaluating U.S. commodities policy and developing a U.S. posture toward commodity issues which were ex

pected to arise at the U.N. Seventh Special Session in New York which began September 1.

Reports of the study have been made during July and August to the EPB. None of them have been released to the public as they have been in the form of internal decision making memoranda. Phase I of the report is tentatively scheduled to be released to the public in the Fall, and at that time we could furnish a copy to the Committee.

International shipping policies are not directly considered in the study although they are one of the several cost factors affecting the price of commodities. If the study is extended to the point where secondary costs are examined or if the focus of the study changes, issues such as ocean transportation and shipping policies then could be given separate treatment.

Mr. DOWNING. Thank you very much.

Our next witness is Mr. James J. Reynolds, president, American Institute of Merchant Shipping.

Mr. Reynolds, this is the meeting hour of the House of Representatives. I was wondering if you could come back at 1:30 this afternoon? Mr. REYNOLDS. Mr. Chairman, I am at your service. I will be happy to return here at your convenience.

Mr. DOWNING. I do appreciate that, Mr. Reynolds.

With that understanding, the subcommittee will recess now until 1:30 this afternoon.

[Whereupon, at 11:56 a.m., the subcommittee recessed, to reconvene at 1:30 p.m. this same day.]

AFTERNOON SESSION

Mr. DOWNING. The subcommittee will please come to order.

Before proceeding with the next witness, I would like to read a statement which is submitted by Mrs. Sullivan, the chairman of the full committee. It reads as follows:

Mr. Chairman, before proceeding with the witness and with your permission and the consent of our colleagues, I think it appropriate to have the record reflect the loss of a great supporter of the U.S. merchant marine. I refer to Mr. Peter McGavin, general secretary and treasurer of the Maritime Trades Department of the AFL-CIO, who passed away yesterday. Peter McGavin leaves a host of friends from merchant marine management and labor and Government, to whom he was known as a good and decent man, devoted to a strong U.S.-flag merchant marine and the welfare of the men who serve within it.

Speaking for myself and the rest of this committee, we heartily concur with those comments and sympathize with the loved ones of Pete McGavin.

The next witness is a very old friend of the committee's, Mr. James Reynolds, president of the American Institute of Merchant Shipping; and I see that he is accompanied by Mr. Albert E. May.

STATEMENT OF JAMES J. REYNOLDS, PRESIDENT, AMERICAN INSTITUTE OF MERCHANT SHIPPING; ACCOMPANIED BY ALBERT E. MAY, VICE PRESIDENT, AMERICAN INSTITUTE OF MERCHANT SHIPPING

Mr. REYNOLDS. Thank you very much, Mr. Chairman.

I have taken the liberty to invite to the table with me Mr. Albert E. May, who is vice president of the American Institute of Merchant Shipping.

Mr. Chairman, we regard these hearings as matters of considerable. importance to the whole future of the U.S. Merchant Marine and the

welfare of the Nation; and I therefore feel that I must read the statement, if I may, sir.

I will attempt to shortcut where appropriate.

Mr. DOWNING. All right, sir. I must advise the witness that we have to relinquish this hearing room at 3 o'clock and so we will be governed by that time factor.

Mr. REYNOLDS. I understand that, Mr. Chairman.

Mr. Chairman, members of the subcommittee:

My name is James J. Reynolds and I am the president of the American Institute of Merchant Shipping, AIMS, the national trade association of the U.S.-flag steamship industry. Our 34 member companies own and operate about 350 vessels of all types in both the foreign and domestic commerce of the United States.

I am pleased to appear before you today to present a number of recommendations and comments which pertain to the national defense and economic benefit aspects of our merchant marine. I am also pleased to advise you that this statement has the support of Waterman Steamship Corp., a major U.S.-flag vessel operator that is not a member of AIMS.

It is tempting to begin a statement of this sort with a lengthy recitation of past history. Suffice to say the American merchant marine has made very substantial contributions to both the national defense and the economy throughout the entire life of our Republic. Well-documented and comforting though this record may be, we are confronted with the concrete realities of the present and the onrushing, inexorable demands of the future, thus must concentrate our attentions upon today and upon tomorrow.

What is the relationship between the national defense and the Americian merchant marine? A number of witnesses have used the words "national defense" somewhat synonymously with military considerations and Department of Defense needs, and I can understand this.

I suggest that for the world in which we now live and which we perceive for the future, we must think in terms much broader than just support for our Armed Forces, and would suggest we use the term "national security" rather than "national defense" to emphasize the change. To explain:

The national security interests of the United States clearly demand the sealift capacity to position and sustain our Armed Forces overseas under various wartime and contingency situations. However, our Nation's role as the leader of the free world-and indeed our very ability to survive-is by no means based on military power alone, but is in a real sense anchored in our basic economic strength and vitality. Thus, national security also requires the ability to sustain our civilian economy during these same situations, and indeed the economies of other nations as well.

We must recognize the United States is becoming increasingly locked in a form of economic warfare that presents a most serious challenge to us as a nation.

In this international economic order, we stand firm in our commitment to free enterprise, free trade, and healthy, vigorous competition, where efficiency and service are generously rewarded. Many of our

trading partners and our competitors in the world arena espouse no such philosophy.

I am convinced that many of our current economic woes can be traced directly to coordinated attacks on the position of the United States as the leader of the free world. It seems increasingly evident that, without a sound, healthy economic base, there can be no enduring strength to our international, political, and military posture among the family of nations.

Thus, in viewing the needs of our Nation's national security, its economic aspect, and the threat to the United States in this area, must be kept in mind. For our merchant marine, as part of that economy, this threat is a very real and immediate one.

In recent years, the Soviet Union has committed substantial resources to the development of a large and modern merchant fleet, and has placed its ships on a growing number of the world's strategic trade routes. This fleet recently replaced that of the United States as the world's sixth largest, and I understand it is presently the most rapidly growing fleet as well.

Only 10 or 15 years ago, the Soviet fleet was composed almost exclusively of small coastal vessels. Today, new Soviet ships rolling off the ways are among the most modern afloat and are specifically designed for competition in world trade. Large, fast container and barge-carrying ships, and increasingly tankers and liquefied-natural-gas (LNG) carriers are becoming a significant part of their fleet.

The intense and ever-growing competition from state-owned fleets in such major trades as those between the United States and Europe and the United States and Japan, has been widely publicized. However, the Soviets and their bloc nations have obviously made a decision to penetrate all of the world's sea trades and the hammer and sickle is commonly seen today in virtually all world ports. For instance, they have recently instituted a service in the strategically vital trades between the Caribbean and Latin America.

As state-owned enterprises, they have the ability to cut rates and sustain losses that simply could not be tolerated by privately owned companies. The aims of he Soviet fleet are, of course, closely woven into the political and economic goals of the U.S.S.R. as a whole. We also understand that their merchant fleet operations and capabilities are well coordinated with those of their naval fleets.

With your permission, Mr. Chairman, I would like to submit for the record a paper which discusses the Soviet maritime program and and its commercial activities in some detail. This is attached as AIMS exhibit No. 1.

Mr. DOWNING. Without objection, that exhibit will be made a part of the record at this point.

[The document referred to follows:]

AIMS EXHIBIT NO. 1

GROWTH OF SOVIET MERCHANT FLEET AND ITS SIGNIFICANCE FOR U.S. MARITIME POLICY

Soviet merchant tonnage has grown several fold since the mid-1950's and now approximates that of the privately-owned U.S. merchant fleet, about 14.5 million deadweight tons.

The Soviets have placed much greater relative emphasis on general cargo ships, and they have one of the world's largest fleets of such vessels.

The Soviets have only a few container ships and they are small and slow by our standards. The Soviet fleet has, however, provided stiff competition on a number of trade routes of great importance to the United States, such as those serving our Pacific ports.

The Far East Shipping Company (FESCO), based in Vladivostok, has been operating between U.S. and Canadian Pacific ports and the Far East for several years. FESCO rates are substantially lower than those offered by the established conference carriers and as a consequence the Soviets have captured a considerable portion of the cargo moving on these routes.

The Soviets are vigorously expanding their merchant fleet, with particular emphasis on ship-types that pose the greatest competitive threats. Examples of ships recently acquired or on order by the Soviets are:

A series of sophisticated roll-on/roll-off container ships built in Finland, Poland and the Soviet Union. These ships, in the 20,000 DWT range, will have a speed of around 25 knots and are apparently intended for use in the Atlantic trades by the Baltic Steamship Line of Leningrad.

Several new LASH and See-Bee barge carriers to be built in Finland and Poland.

A variety of new full container ships are scheduled for delivery from both Soviet and foreign yards.

In total, the Soviets are expected to acquire some 300 new general cargo ships between now and 1980.

The competitive threat posed by the Soviet merchant fleet is amplified by the fact that since it is state owned and operated the policies governing its employment need not be constrained by normal commercial considerations. Destructive rate cutting or other disruptive practices can be adopted whenever the Soviets perceive it is in their interest to do so.

U.S.S.R.-FLAG PENETRATION IN SELECTED U.S. IMPORT LINER TRADES, 1974