yards to apply to the Secretary of Commerce for a construction differential subsidy (CDS) to aid in constructing, reconstructing or reconditioning vessels to be used in U.S. foreign commerce. This subsidy is to compensate for the difference between the U.S. shipyard price and a fair and representative foreign yard price, as determined by the Secretary of Commerce. Under provisions of the 1970 Act, the maximum subsidy percentage was to be reduced 2 percent per year from 45 percent in fiscal year 1971 to 35 percent in 1976, with the Secretary of Commerce permitted to make exceptions. All subsidized contracts awarded to May 1974 have been within the limits of the 1970 Act.

The CDS program has considerably expanded since the 1970 Act. It has been the major part of a surge in demand on the shipbuilding industry that has carried the industry to a record peacetime high backlog of orders. Figure 2 on page 6 shows the history of MA appropriations for ship construction from fiscal year 1964 through 1974 and CDS expenditures through fiscal year 1973.

CDS ships represented 71 percent of all merchant ship contracts awarded between fiscal years 1964-73. As of October 1, 1973, about $2.3 billion of subsidized ships were ordered but undelivered from U.S. yards.

MA recently forecast over $14 billion of subsidized merchant ship construction contracts to be awarded between fiscal years 1974-85 with CDS payments to be about one-third of this total, or almost $5 billion. These contracts, it is predicted, will account for 75 percent of the value of all merchant ship construction contracts awarded during this period.

As of January 1973 there were 24 major private U.S. yards and 8 naval shipyards, of which, only 12--all private yards--have been active in constructing either major commercial or naval ships. Since the end of fiscal year 1970, only 8 of the 24 private shipyards have been awarded contracts for constructing ships under the CDS program. As of October 1, 1973, of the 69 ships these shipyards had on order to be delivered after January 1, 1974, 42 were subsidized, 16 were Navy ships and 9 were being built for charter to the Military Sealift Command. Twelve of the Navy ships were at one yard.

Jones Act

Section 27 of the Merchant Marine Act of 1920, commonly known as the Jones Act, requires that, with minor exceptions, all waterborne merchandise between points in the United States be carried on U.S.-built and documented ships. Land and air transportation not so restricted are allowed to purchase capital equipment on the world market. Virtually all U.S.-built merchant ships are constructed either under the CDS program or for Jones Act domestic shipping.

MA recently forecasted more than $4.7 billion of Jones Act merchant ship construction contracts to be awarded between fiscal years 1974-85, or 25 percent of the value of all merchant ship construction contracts to be awarded during this period.

Mortgage insurance

Title XI of the Act of 1936, as amended, allows the Secretary of Commerce to guarantee payment of obligations incurred for financing construction, reconstruction or reconditioning of vessels built and documented in the United States. The lessened risk through the Government guarantee improves financing terms for American-built ships. So, although shipyards receive no direct subsidy from this program, American yards appear to share an indirect subsidy with ship owners when the ship owner's decision on where to have his ship built is influenced by the U.S.-ship-financing package.

The ceiling authority for such outstanding loan guarantees is $5 billion. During fiscal year 1973, the Government approved guarantee applications totaling about $965 million. At the end of fiscal year 1973, total outstanding principal and interest under this program was $2.5 billion, with $1.3 billion more in pending applications.

The program had a net income of about $7 million in fiscal year 1973, bringing total retained income to $45 million.

Cargo preference

Three major laws give U.S. ships preference in carrying Government-related cargoes.

--The Military Transportation Act of 1904 (10 U.S.C. 2631), requiring military cargo to be carried in U.S. ships if freight charges are not unreasonable.

--Public Resolution 17 of the 73d Congress (15 U.S.C. 6168a), requiring that Government-aided exports be carried in U.S. ships where transportation is available at reasonable rates, and

--Public Law 664 of the 83d Congress, also known as the
Chief Cargo Preference Act, requiring that at least
50 percent of the gross tonnage of goods for U.S.
Government use or overseas aid or assisted export
be carried in privately owned U.S.-flag vessels to
the extent they are available at fair and reasonable
rates.

Nine other aid or emergency relief laws contain similar cargo preference restrictions.

The U.S. merchant marine's foreign trade has depended on preferred cargo for its outbound business. It has been calculated that between 1964-69, preferred cargo comprised 78.1 percent of export tonnage and 5 percent of import tonnage carried on U.S.-flag ships, 52.8 percent of all U.S.flag tonnage.

The Chief Cargo Preference Act was amended in 1961 to require that U.S.-flag ships, for cargo preference purposes, be U.S.-registered for at least 3 years if built, rebuilt, or registered outside the United States. U.S. yards are assisted by cargo preference provisions to the extent this 3-year qualification period encourages ship construction in U.S. yards.

Tax deferrals

Section 607 of the Merchant Marine Act of 1936, as amended, authorizes any U.S. citizen owning or leasing any U.S.-flag vessel to establish a capital construction fund for that vessel by agreement with the Secretary of Commerce. Each fund consists of a capital, capital gains, and ordinary income account. Amounts representing vessel depreciation costs are deposited in the capital account and are generally not taxable. Deposits in the capital gains and ordinary

income accounts are tax deferred while in the fund. If the funds are used for constructing, reconstructing or acquiring a U.S.-flag vessel the deferral continues unless the vessel is to be used for trade between contiguous U.S. points. Because the new vessel's earnings can be deposited in the fund and reinvested in a succeeding vessel, payment of tax can be deferred indefinitely. At the end of fiscal year 1973, there were 140 interim agreements and over $2 billion in shipyard work was expected to result over the next 10 years.

COMMISSION ON AMERICAN SHIPBUILDING STUDY

The 1970 Act established a Commission on American Shipbuilding (hereafter referred to as the Commission) to determine whether the industry could achieve a level of productivity by fiscal year 1976 such that the CDS rate would not exceed 35 percent of the U.S. cost of each vessel and to recommend a course of action for Government and industry to improve the industry's competitive situation in world shipbuilding markets. If the Commission determined that CDS could not be reduced to 35 percent, it was to recommend alternatives to the ship construction program.

The Commission's October 1973 report concluded that the fiscal year 1976 goal of a 35-percent CDS rate would be attained, barring major unforeseen developments attributable to (1) changes in currency exchange rates, (2) rates of foreign wage increases and (3) productivity improvements. The report recommends several methods of Federal support of the shipbuilding industry. (See app. I.)

SCOPE OF REVIEW

Decisions on ship construction funding levels are based primarily on military justifications for new ships rather than on the need to maintain private shipbuilding capability. Therefore, we gave special emphasis to the role of the merchant ship construction subsidy program in maintaining the shipbuilding industrial base needed for national security and economic reasons.

We reviewed the laws authorizing the CDS program and policies and stated objectives affecting its scope and administration. We analyzed the program's effects, both