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The expansion of the Soviet merchant fleet is of direct importance to United States shipping and commercial policy. Being state owned and operated the Soviet fleet can be used as an instrument of government policy independently from normal commercial considerations. This gives it a potential for rate-cutting that cannot be matched by privately owned fleets. Competition on these terms would be destructive not only of the interests of U.S. shipowners, but of shippers as well.

The Soviet Far East Shipping Company (FESCO) for several years has provided freight service between our Pacific ports and the Far East. FESCO has attracted a substantial share of the cargo moving on these routes by offering freight rates consistently lower than the established conference rates. We are highly concerned by this development. However, I will not go further into this specific subject since I understand that it is to be taken up in a subsequent hearing involving the Federal Martime Commission, which has primary jurisdiction in matters concerning rate competition.

The Soviets have long pursued the goal of carrying an ever-larger share of their foreign trade in their own ships. Realization of this objective will given them greater leverage in negotiations with their trading partners. If we are to bargain as equals with the Soviets concerning the conditions of our expanding trade with them, we must be prepared to carry an equitable share of that trade in U.S.-flag ships.

III. Summary

In summary, Mr. Chairman, our objectives in administering the Federal maritime program have been the objectives established in the Merchant Marine Act, 1936, as amended. We have supported industry initiatives in the interest of commercial competitiveness, and, at the same time, we have promoted the interests of national defense and security in all areas of martime activity. A high percentage of the ships in the subsidized fleet are useful for national defense, and all contribute to the national security.

We have rigorously analyzed the wartime requirement for shipping and determined that the U.S.-flag fleet is only marginally adequate, with the foreign flag augmentation expected to be available, to meet United States military and economic shipping requirements in a major war. In addition, the Maritime Administration has preserved the aging National Defense Reserve Fleet as an essential contingency resource, and it is seeking to renew it and to upgrade its readiness. With respect to the shipbuilding industry, we believe that subsidized construction contributes substantially to its adequacy as a mobilization base. Like its contribution to national defense and security, the economic contribution of the maritime program, representing the totality of its separate contributions in the areas of trade, employment, and balance of payments, is highly significant, and should not be discounted. Furthermore, the subsidized industry generates tax revenues that would not be generated without it, and which serve as a marginal offset to its cost. Finally, the U.S. maritime program stands as an effective counter to ambitious Soviet moves in the area of international shipping.

Without the maritime program, we could anticipate significant shortfalls in essential military deliveries in wartime, our shipbuilding mobilization base would diminish, and we would be much more heavily dependent on foreign flag shipping of undemonstrated reliability for the wartime movement of essential imports. Further, we could be vulnerable to rate discrimination detrimental to our trade and possibly to political pressures, our balance of payments deficit could be increased by nearly 20 percent over the 1974 level (of $3.6 billion), and employment opportunities would be reduced.

Although progress has been good, it would not be right to say that the objec tives set forth in the Act have been fully achieved. Much remains to be done. If more new merchant ships of the types most useful in military and essential economic support are to be added to the fleet beyond those needed as replacements, expanded trades and new trades must be promoted that will sustain such ships economically. This is not a simple matter. If subsidy requirements are to be reduced without reduction in capability needed for defense and commerce, efficiency and productivity in ship and shipyard operations must be increased. There has been progress in this area, but gains do not come easily. These are the real problems that face the Maritime Administration in fulfilling its mandate under the law, and we would welcome constructive commentary that would help us to solve them.

Mr. Chairman, this concludes my statement.

APPENDIX

Answers to questions posed in Chairman Downing's letter of June 18, 1975 to the Assistant Secretary of Commerce for Maritime Affairs.

Question 1. What is the minimum number of United States-flag merchant vessels that are necessary for national defense needs, given the Maritime Administration's various contingency plans and assumptions?

Answer. In our estimates of wartime shipping requirements we include both the numbers of ships required for direct support of military forces, that is, those required for national defense, plus those required to meet minimum essential requirements for economic support, with the sum of the two representing the national security requirement.

Further, in computing minimum ship requirements, we select the contingency plan that would impose the largest demand for ships. This establishes a limiting requirement. Capability to meet the limiting requirement would by definition be more than sufficient to meet needs arising under other contingency plans. At present, the limiting requirement for most ship types is based on demands arising from an intensive, relatively short war with conventional weapons between NATO and Warsaw Pact countries, with an assumed ongoing lesser contingency in the Middle East. In the past, limiting requirements have been based on other potential contingencies. We follow DOD guidelines with respect to military contingencies.

In the limiting-case contingency I have referred to, and under current, classified, assumptions regarding enemy submarine deployments and tactics, there would be a requirement for the total U.S.-flag dry cargo fleet plus several hundred NATO-flag ships to meet military plus essential U.S. economic requirements in a contingency arising in the period 1975-1980.

There would also be a requirement, albeit of lesser magnitude, for augmentation of the U.S. tanker fleet by foreign flag tankers. On the basis of current, tentative, estimates we do not foresee a significant requirement for dry bulk carriers during the short, intense war in question, but that requirement could become critical in an extended emergency and would probably exceed the very limited capability of the U.S.-flag dry bulk carrier fleet, necessitating dependence on foreign flag carriers.

About 700 U.S.-flag ships would be available, including the NDRF, in the period 1975-80. We think that a sufficient number of foreign flag ships would probably be made available to meet the need for augmentation in a NATO/ Warsaw Pact war, but we believe it would be preferable if the total requirement for 900 to 1000 vessels, could be met by U.S.-flag ships.

Question 2. Are the United States-flag merchant ships presently receiving operating-differential subsidy the types best suited for national defense purposes? Answer. A mix of different ship types is required for national defense purposes. Tankers are included, with priority given to those below 50,000 deadweight tons because of their flexibility in fleet support and ease of access to smaller ports. Larger tankers are efficient in moving essential oil imports under the broader heading of national security, and DOD has recently indicated that large tankers will have direct defense utility when superports are built.

With respect to general cargo ships, priority is assigned to breakbulk types for defense purposes because of their particular utility in the early deployment of wheeled and tracked vehicles. Roll-on/Roll-off ships, barge carriers, and general freighters are well adapted to the movement of breakbulk cargoes. There is concern lest breakbulk capacity may be supplanted by containership capacity, which would be less flexible in moving deployment cargoes dominated by wheeled and tracked vehicles. However, containerships can be adapted inexpensively to carry considerable amounts of deployment tonnage, and they are highly efficient in moving resupply. Army resupply systems are now designed to capitalize on this efficiency. Offloading container cargo requires special provision where containerports are not available. Containerport capacity would be more than adequate in Europe to meet U.S. needs in a NATO war, but not necessarily in some other areas. The basic feasibility of offloading containerships without containerports has been demonstrated, and development work in this area is continuing.

Dry bulk carriers, which are needed for the movement of essential raw material imports, are not required for the direct support of military operations. In summary, considering current priorities, the types best suited for national defense purposes are small tankers and breakbulk carriers, including ro/ros,

barge carriers, and freighters. Containerships are useful and efficient, but with current systems their defense potential is limited in some areas. Bulkers do not have direct defense utility.

To assess realistically their suitability for national defense purposes under these criteria it is necessary to consider ships presently receiving operating differential subsidy on a type-by-type basis:

Tankers.—Six of the 245 tankers in the privately-owned U.S.-flag fleet are receiving ODS. Of these six, three at 39,700 DWT, have current direct defense utility and the other three, in the 80, 0-90,000 DWT class, which have potential defense usefulness, are particularly propriate for essential economic support. Defense needs can be met by unsubsidi: d U.S.-flag tankers. Breakbulk.—Freighters-Of the 138 U.S.-flag fleet, 105 or 76 percent, are rec Ro/Ros-Four combination ro/ro-co ainerships are now receiving ODS and 4 full ro/ros-scheduled for ODS support are under construction. The other 8 ro/ros in the privately-owned fleet are cerating largely in the protected domestic trade.

;eneral freighters in the privately-owned iving ODS.

Barge carriers-20 of the 23 U.S.-flag carriers are receiving ODS. Containerships.-44 of the 135 U.S.-flag containerships are receiving ODS. Dry Bulk Carriers.-Two of the 19 U.S.-flag dry bulkers are supported by ODS.

Summing up, all of the ships now supported by ODS would be useful in a national emergency. A mix better suited for direct military support under current circumstances would undoubtedly have more ro/ros and fewer containerships, but 132 of the 187 ships currently receiving ODS, or 70 percent, fall into the category of those best suited for national defense purposes.

Question 3. One commentator has suggested that it would be virtually impossible to boycott the United States because: (a) of the great diversity of ownership of foreign-flag fleets, (b) most of these fleets are controlled by countries friendly to the United States, (c) the United States is the world's largest trading nation, and (d) the United States would retain some shipping capacity through its domestic fleet required by the Jones Act. In your view, what is the validity of this position? In addition, what nations would you expect to take positions against our shipping needs in the next decade?

Answer. As the world's largest trading nation, the United States would be particularly vulnerable to a shipping boycott if it were without a foreign trade fleet of its own. The existence of the domestic fleet that is protected by the Jones Act would not significantly mitigate that vulnerabiliy because the domestic fleet is itself essential to the U.S. economy and could not be diverted to any appreciable extent even in wartime.

Under normal conditions a successful shipping boycott of the United States would appear to be extremely unlikely because of the diversity of ownership of foreign flag fleets and because they are largely controlled by countries presently friendly to the United States. Refusal by one or a few individual countries to move U.S. export and import cargoes could have little effect under the more or less "normal" conditions that now prevail.

However, it cannot be assumed that conditions will necessarily continue to be "normal." Maritime nations could impose economic and political pressure on the United States if it did not have a foreign trade fleet. Political alignments are subject to change, and groupings of industrial maritime nations unsympathetic with specific U.S. objectives are entirely conceivable. Other industrial maritime nations have not consistently shared U.S. objectives in the past. Further, although its ultimate extent is indefinite, a significant shift in the control of tanker tonnage to OAPEC countries is now underway, and some transfer of general cargo and bulk tonnage to developing nations that are frequently unsympathetic with U.S. objectives is to be expected. It should also be noted that selective pressures can be exerted on countries without ships through control of ocean freight rates as well as through the threat of boycott.

Question. 4. The Department of Defense currently has contracts signed within the United States' owners of foreign-flag vessels. This so-called "Effective U.S. Controlled" fleet is pledged to respond to our needs in time of war or national emergency. In your opinion, is this fleet reliable? What are its numbers? Would it be feasible to meet our national defense needs by expanding and developing this concept rather than subsidizing a United States-flag fleet? What efforts has your agency taken to expand this concept?

Answer. In the view of the Maritime Administration, the EUSC fleet is inherently less reliable than the U.S. flag fleet as a U.S. national security resource, although we would expect some response from the EUSC fleet in time of war or national emergency. As of December 31, 1974, there were 468 vessels in the EUSC fleet as it is listed for DOD purposes by the Military Sealift Command, subdivided as follows in terms of ship types and deadweight tonnage:

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We believe that it would not be feasible to meet our national defense needs by expanding and developing this concept. This judgment is based on the composition of the EUSC fleet as well as on the factor of reliability.

National Defense requirements for shipping are interpreted as requirements for the direct support of military forces. Large numbers of dry cargo ships capable of carrying breakbulk and containerized cargo are required for the deployment and resupply support of U.S. military forces in a major war. As the above breakdown indicates, however, this type of shipping capability is not available for practical purposes in the EUSC fleet. As to reliability, EUSC ships are manned generally by foreign nationals, many of them from countries that have been unsympathetic to U.S. policies and objectives. In this light, although we anticipate a requirement for some EUSC augmentation of the U.S.-flag bulk fleet in a major war, we would consider it contrary to the national interest to substitute a policy of dependence on foreign-manned EUSC vessels for our present policy of maximum dependence on U.S.-flag ships manned by U.S. citizens to meet our national defense shipping requirements.

Question 5. In our view, what is the possibility of concluding a number of bilateral treaties with friendly foreign countries to make certain portions of their merchant fleets available to the United States in times of war or national emergency? Has the Maritime Administration explored this possibility with the Department of State?

Answer. There are in existence certain classified NATO agreements regarding NATO flag shipping assistance to the United States in the event of a NATO war. The most recent of these agreements resulted from a Maritime Administration initiative under general State Department auspices.

With respect to other potential U.S. military contingencies, we believe that blank check pre-commitment of shipping resources to the United States by treaty is not appreciably more likely than equivalent pre-commitment of military forces. We would strongly oppose any commitment of U.S. shipping resources to a foreig. country except under the terms of a firm political and military alliance reflecting explicit mutual commitment to a common objective, as in the case of the NATO alliance. We believe that other maritime countries are bound by similar considerations. Further, it is observable that our NATO allies have not been consistently supportive of U.S. policy in non-NATO areas.

We have not explored this possibility with the Department of State.

Question 6. Do you have any information as to the reliability of foreign-flag ships that carried military cargo to Vietnam?

Answer. Our information on this subject comes from the Navy, which arranged for the foreign flag ships that carried military cargo to Vietnam. We understand that there were over 80 transactions with foreign-flag carriers, and that there were three instances in which ships failed to move cargo they had been committed to move. This sort of failure can be critical in military support because, depending on circumstances in the combat theater, any given shipment can be crucial.

Question 7. Are you in a position to inform the Subcommittee of the amount of cargo, on a tonnage basis, carried by subsidized versus non-subsidized United States-flag vessels in the Vietnam sealift?

Answer. We are not now in a position to provide the Subcommittee with this information. We have asked the Military Sealift Command, which maintains

pertinent data, to provide us with carriage statistics on the basis of carriage provided by ships owned by subsidized operators as opposed to that provided by ships owned by non-subsidized operators. This information, which must be retrieved from magnetic tapes, will be conveyed to the committee as soon as it becomes available.

It is our general understanding at this time that much of the cargo moved to Southeast Asia during the war in Vietnam, was carrier by merchant ships under charter to MSC, by ships drawn from the National Defense Reserve Fleet, and by the relatively small government-owned MSC nucleus fleet. It is our present understanding that about 75 percent of the Vietnam sealift was accounted for by these combined resources, whose availability at the time minimized requirements to draw upon active berthline fleets, either subsidized or nonsubsidized. In addition, there was some movement of containerized cargo by the Sealand Corporation under special MSC contracts. Ships operating under MSC charter, even though drawn from subsidized lines, do not receive subsidy. Relatively little regularly scheduled berthline service to the area was provided either by subsidized or by non-subsidized operators. In this light, it seems clear that the percentage of DOD cargo carried to Vietnam on subsidized vessels was not large.

In addition, however, it must be remembered that DOD had substantial concurrent shipping requirements in other parts of the world that were met in large part by berthline operators, both subsidized and unsubsidized.

The table below shows total worldwide military dry cargo movements for FY 1965 through FY 1972 and the portion of that total which moved from the continental United States to Thailand and Vietnam.

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Question 8. What role does the Department of Defense play in determining which trade routes are "essential" in order to qualify for subsidized service? Answer. Since trade route essentiality is defined exclusively in terms of peacetime commercial requirements, the Department of Defense, has no role in determining which trade routes are essential. It should be noted, however, that the peacetime trade route assignments of commercial ships bear no necessary relation to their wartime assignments. When ships are requisitioned in wartime they are withdrawn from their peacetime trade routes and assigned as necessary to meet defense and other national security requirements. Similiarly, ships committed to the MSC Sealift Readiness Program would be withdrawn from their regular trade routes in non-mobilization contingencies and assigned as necessary to meet military support requirements. Some wartime assignments might entail operation on trade routes designated as essential, but such assignments would be coincidental.

Question 9. What is the minimum shipyard capacity necessary for national defense needs, given the Maritime Administration's various contingency plans and assumptions?

Answer. A joint Navy/Maritime Administration study of wartime shipyard capacity requirements initiated at the direction of the Under Secretary of Com merce and the Deputy Secretary of Defense is now underway. It is examining U.S. shipyard requirements in a short, intense NATO/Warsaw Pact war involving conventional weapons and in an extended emergency period involving low-level conflict preceded by a short, intense NATO/Warsaw Pact war. The results of this study are expected to be available early in 1976.

62-989-76-26

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