strongly recommended that the national defense need for shipbuilding capabilities be examined in detail, and that these needs be expressed in terms of the specific amounts of construction capacity and labor skills that must be maintained by subsidy in order to provide the necessary defense posture in shipbuilding.

Sad to relate, the contractor's recommendation apparently was never carried out and no Government agency has determined how large a shipbuilding base it would be prudent to maintain. Until this is done it is nearly impossible to comment intelligently on the national security value of any additions currently being made to shipbuilding capacity.

I shall confine my remaining remarks to the security value of the U.S. merchant marine. A sizable, healthy U.S. merchant marine may increase national security in two ways: By preparing to serve the Nation's Armed Forces during conflicts abroad, carrying material to theaters of action at a time when foreign carriers may be unwilling or unable to perform as needed; and by safeguarding the Nation against a withdrawal from service by foreign-ship operators in times of peace.

So long as the United States has worldwide responsibilities and risks involvement in conflicts abroad, the Nation must recognize the necessity of safeguarding lines of supply between this country and distant lands. This requires above all else a strong Navy; but it also requires that we should be confident of obtaining the merchant shipping we need when emergencies arise.

There are several sources of supply that the Nation might draw upon. Unfortunately, the largest source is foreclosed to us by lawthe Military Transportation Act of 1904 prohibits our armed services from engaging foreign-flag vessels, even those of our allies.

I presume that in a sufliciently grave emergency this act would be suspended, and that we would be glad to make use of the ships of friendly nations if otherwise our survival would be imperiled. But during less serious emergencies, when the act remains in force (as it did during the Vietnam War), it can seriously embarrass efforts to procure all the shipping we need.

Although this hearing is not concerned with the cargo preference laws, it is impossible to discuss the military requirements for merchant shipping without referring to the legal environment in which those requirements are determined. If we insist on barring access by the Department of Defense to foreign-flag shipping, or ignoring the fact that foreign-flag shipping not only can function as a resource available to the U.S. armed services, but in fact would so function if circumstances were extreme enough, we are exaggerating the national scenrity value of the U.S. merchant marine. The fleet's value is artificially enhanced because we insist on foregoing the valuable services that are often available from foreign operators.

I might notice in passing that some representatives of U.S. shipping lines have complained that much of the commercial business the lines lost during the Vietnam war, when they left their trades to serve the Department of Defense, failed to return after the lines resumed normal service, causing them financial hardship.

This is just another way of saying that the cost of moving ships between commercial service and defense service is high. One way to reduce the cost would be to allow some foreign-flag vessels to serve

Department of Defense needs, enabling other U.S.-flag vessels to remain in commercial service. The U.S. ships would still constitute a valuable resource, available if needed in the event that foreign carriers withdrew from the service.

Nevertheless, few Americans would, I believe, be comfortable if the U.S. armed services had to depend for most of their shipping on foreign-flag carriers. There exists a reasonable presumption that U.S. carriers are apt to be more responsive to U.S. defense requirements than foreign-flag carriers.

Accordingly, a solid case can be made in favor of maintaining a U.S. merchant marine large enough and with the right kinds of ships to meet most U.S. defense needs in the event of an emergency. How large a fleet should be maintained? No exact answer is possible.

We must recognize that there are some risks that cannot be reduced to zero, and that even the United States cannot afford to maintain a fleet large enough to meet every demand that conceivably might be made upon it. Advice must be sought from the Department of Defense concerning the likely contingencies that may arise and the demands the Department may make upon U.S. shipping resources.

Apart from the services it might render to the U.S. Armed Forces during conflicts abroad, the U.S.-flag merchant marine is also said. to add to the Nation's security by protecting the country from disruptions to foreign commerce that would be caused if foreign-flag carriers abandoned service to American ports.

Insofar as this protection is desirable, the fleet may be said to increase U.S. economic security. Proponents argue that maintaining this security is an important reason for granting Federal aids to the

merchant marine.

If the current maritime program is adding to the Nation's security, it must be doing so primarily by adding to its economic security. Construction subsidies are currently building vessels that have little or no military value-very large crude carriers, for example. The justification for their construction has to be sought in the role that they play in safeguarding U.S. economic security.

I believe that the economic security of this Nation is not much threatened by our dependence on foreign-flag vessels to carry the bulk of our commerce, and that therefore the current maritime program is misdirected. Instead of building vessels of little military value, we ought to be maintaining a merchant marine-or a reserve merchant fleet-that in time of emergency would be available to serve the needs of the U.S. armed services.

Such a fleet would presumably be composed of general purpose cargo vessels capable of carrying the diverse supplies that the armed services need and delivering them to poorly developed ports near the front lines of action.

Persons who advance the economic security argument for Federal maritime assistance appear to be concerned primarily about the threat of economic warfare that might be waged with merchant shipspresumably a shipping boycott of U.S. commerce.

In my opinion, there is little cause to fear such a boycott. Leaving aside for the moment the question of who it is who would promote such a boycott, let us observe how extraordinarily difficult it would be to mount an effective one.

It would be next to impossible for shipowners themselves to enforce a boycott of U.S. commerce. The ocean shipping industry is highly decentralized. There are many shipowners, of many nationalities. The task of coordinating their actions would be extremely difficult. Almost certainly the cooperation of many nations would be required if a boycott were to have any chance of success. Ships are mobile resources; hence the boycott would have to be worldwide to prevent other ships from entering the U.S. trades.

The chief reason, however, why a boycott could not succeed is that shipe are reproducible resources. They can be built in large numbers and in reasonably short times. The threat of new construction alone makes a boycott unlikely; the fact of new construction would put an end to one.

The fact that ships can be built is the principal reason why it is misleading to compare the threat of a shipping boycott to the embargo that certain Middle Eastern countries imposed an oil shipments to this country in 1973. There are other reasons also why the analogy is false, but the chief one is this.

Quite apart from the technical difficulties-the near impossibilityof enforcing a boycott, what on Earth makes us think that there are parties abroad that would like to impose one on us?

Who stands to gain from such a boycott? Not shipowners, who would lose jobs. Not maritime nations, who would lose their fleet's earnings. Not the trading partners of this country, who would lose markets. Only our enemies would gain-and then only the satisfaction of witnessing our discomfiture.

In summary, I find it very difficult to understand why this Nation should fear a boycott. We recently fought a war that was widely unpopular abroad, even among our allies, but no attempts were made to curtail shipping services to this country-to my knowledge no such attempts were even threatened.

U.S. foreign policy has had its ups and downs, but I do not judge that this Nation is today pursuing policies that on balance are antagonizing our friends or generating widespread hostility. If I were a citizen of, say, South Africa. I might feel differently. I might feel that my Nation had to maintain its own sizable merchant fleet to guard against threats of economic blackmail.

But the United States is no pariah among nations. I see no evidence that our major maritime allies would give their assent to economic warfare against this country. On the contrary, relations with our allies may well have improved lately. In time these conditions may change and we may one day have to safeguard our supply lines even in peacetime; but that time lies well in the future, and before then ample preparations can surely be made.

This concludes my statement. Madam Chairman. [The full prepared statement follows:]

STATEMENT OF GERALD R. JANTSCHER1

Mr. Chairman and members of the Subcommittee: It is a privilege for me to appear here today and share with you some of my thoughts about the current

1 Gerald R. Jantscher is a Research Associate in the Economic Studies Program of the Brookings Institution and the author of Bread Upon the Waters: Federal Aids to the Martime Industries (Brookings Institution. 1975). The views presented here are those of Mr. Jantscher and should not be ascribed to the officers, trustees, or other staff members of the Brookings Institution.

U.S. maritime program. I believe the Subcommittee is performing a signal public service by conducting these oversight hearings and inviting the expression of diverse views on this important subject.

Today's hearing is concerned with the economic and national security benefits that are presumed to flow from the current promotional program. I propose to discuss these benefits, explain why I believe that the program's contribution to national security furnishes the only authentic justification for maintaining it, and recommend ways in which the program might be changed in order to add to its value.

The maritime program is a very costly one. In my recent book I estimated that since the Second World War promotional aids to the U.S. shipbuilding and ship operating industries have cost the nation more than $10 billion. Even if we restrict our attention to the direct aids that the Subcommittee is examining in these hearings-the operating and construction subsidies and the tax aids to the industries-and ignore such indirect aids as cargo preference and the cabotage laws, the cost has been nearly $6 billion. The amendments to the program added by the Merchant Marine Act of 1970 ensure that the annual costs of these aids will continue to be sizable for some years to come. Just recently your parent Committee recommended that over $550 million should be authorized for construction and operating subsidies in fiscal year 1976. If we add to this sum reasonable estimates of the cost of the indirect aids, the costs of the total program cannot be far short-if short at all-of $1 billion a year. So substantial a program cannot escape the attention of budget-cutters in a time of financial stringency. I know that this Subcommittee is eager to determine which parts of the program make a genuine contribution to the nation's welfare, and to defend them against unwarranted attacks, while pruning other parts that add little to U.S. security or prosperity.

Four rationales have commonly been offered in support of Government aids to the shipbuilding and ship operating industries. The first maintains that a U.S. flag merchant marine is necessary even in peacetime to serve the needs of U.S. shippers. The second cites the favorable employment and output effects of these aids. The third rationale emphasizes the contribution that these industries make to a more favorable U.S. balance of payments. The fourth says that the nation's security depends in part on a strong shipbuilding industry and sizable merchant marine. I shall deal with each of these rationales in turn.

1. SERVING THE PEACETIME NEEDS OF U.S. SHIPPERS

Years ago it was sometimes suggested that the United States required a domestic-flag merchant marine to serve the peacetime needs of U.S. shippers. Since this argument is occasionally resurrected today,' I believe a few remarks on the subject are warranted. I emphasize that I am speaking here only of the normal needs of U.S. shippers in time of peace and the role that a U.S. flag merchant marine might play in satisfying those needs, not the extraordinary requirements that arise in time of war or other emergency. That subject I deal with below under "National Security."

In conducting its review of the American merchant marine in 1937, preparatory to implementing the provisions of the 1936 Act, the U.S. Maritime Commission considered at length the question whether a U.S. flag merchant marine was necessary to assure U.S. shippers of continuity of service, protection against exorbitant rates, a higher quality of service than would otherwise be available, and nondiscriminatory treatment. The first of these advantages-continuity of service will be discussed below under "National Security." Of the remaining three advantages, the Commission concluded that only one was genuine that U.S. flag ships indeed improved the quality of shipping service available to Americans.

The events of the past forty years and the great changes that have taken place in the requirements of U.S. commerce and the structure of the ocean shipping industry have weakened the "commercial argument" for Government support of a U.S. merchant marine. Whatever may have been the case between the wars, it is doubtful today whether the participation of U.S. flag vessels in the nation's foreign trade greatly improves the quality of service available to U.S. shippers. Since the end of the Second World War foreign flag vessels have steadily increased their carryings of U.S. exports and imports, until today U.S. flag ves

It was noted approvingly by the Commission on American Shipbuilding in its Report (Washington: the Commission, 1973), vol. 1, p. 6.

sels carry only a small fraction of U.S. oceanborne foreign commerce in 1972 just 22.2 percent by weight of all goods moving in liners and merely 3.6 percent by weight of all goods moving in dry bulk carriers and tankers. But I know of no organization of U.S. shippers that has complained of deteriorating service or protested the indifference of foreign carriers to their requirements. On the contrary, in at least one case, that of liner service into the Great Lakes, shippers assert that they are much better served by foreign flag carriers than by U.S. carriers, and that too little U.S. service is available to meet the 50 percent requirements of the cargo preference laws. And in the trade from which foreign carriers are barred-the U.S. coasting trade-shippers have frequently complained that their requirements were not being satisfied. On occasion they were threatened with such harm that Congress briefly suspended the cabotage laws to permit foreign flag vessels to enter the trade.

The practice, common today but not common before the Second World War, of registering ships under the flag of a different nation from that of the owner also affects the commercial argument. The necessity of maintaining a_U.S. flag merchant marine is greatly diminished if Americans can and do register vessels under foreign flags for service in U.S. foreign trade. Whether these vessels would be available to the United States in time of war is another question; but in peacetime it is plausible to suppose that these foreign flag vessels-owned as they need. No mater what flag these vessels sail under, their owners are proments as U.S. flag vessels also owned by Americans. Loyalty presumably is determined by the nationality of the owner, not that of the vessel.

On the subject of conference rates and the influence exerted on them by U.S. carriers, there is little one can do but speculate, since conferences keep their internal affairs secret. Suffice it to say that if it was ever seriously believed that U.S. carriers actively represented the interests of shippers when freight rates were set, the Douglas hearings of a decade ago on the subject of discriminatory freight rates have discredited the idea. It must be assumed, in the absence of contrary evidence, that within the councils of conferences operators represent the interests of nobody but themselves, and that the interests frequently differ from those of shippers. In any event, if U.S. shippers are thought to be the victims of discrimination, it would be more appropriate to explore regulatory remedies— despite the undeniable difficulty of regulating an international industry-than to subsidize a major expansion of the U.S. merchant marine in the hope that the U.S. shipowners might prevail over their conference colleagues on behalf of their countrymen.

The rapid growth since the Second World War in the movement of bulk commodities means also that conference rates are of less importance than they used to be. Many American shippers operate their own vessels to carry the commodities they need. No matter what flag these vessels said under, their owners are protecting themselves in the direct way possible against exorbitant freight rates or discriminatory practices. Other shippers charter tonnage in world shipping markets. The highly competitive nature of these markets probably affords shippers the best protection imaginable against discrimination and price gouging.

Notwithstanding the foregoing remarks, there may be one instance in which the commercial argument for maintaining a U.S. merchant marine has some validity. A tendency toward autarky in the ocean shipping industry is ob servable today, as more and more nations insist that their carriers should move a specified fraction of their foreign trade. Bilateral shipping agreements and cargo pooling agreements are expressions of these policies. Unhappily the United States must share responsibility for this trend, although I think it is chiefly attributable to the heightened self-consciousness of less developed nations and the generally autarkic policies that many of them are following. I believe that this trend is disadvantageous to the United States-not merely to our shipping industry but to our entire economy-and ought to be resisted. Possibly the presence of a U.S. merchant marine in the affected trades will make it easier to do so. Please understand that I am not saying that the participation of U.S. lines in cargo pooling agreements and the like lessens the damage to this country's interests. If restrictive agreements raise freight rates, reduce the frequency of service, and so forth the agreements themselves are injurious to our interests, whether or not U.S. lines are participants. But the U.S. Government may be able to resist such agreements more effectively if U.S. carriers serve the affected trades, provided the Government uses the carriers as instruments of its policies. Further discussion of this point would lead into the area of regulation, which is outside the scope of today's hearing.