Steamship Co. by Chairman Murphy aired from States Steamship working m at a profit whereas States could not? indication of how the ro/ro vessels following purchase of one ro/ro and marad, it was necessary to accomplish and thence implement a schedule for were idled on the West Coast at the e for some time. The scheduling of the een accomplished and all three vessels e utilization of he initial voyages, while

representative considering the implesat voyage 2 of TYSON LYKES which substantial market improvement over ceration from the West Coast employing

the Lykes fleet will be substantially enced by States. Additionally, Lykes has in ghout the United States and the Far Fast service. The size of our West Coast required by States because of the support

urces. We feel that all of these factors, es in continuous service for an extended ewe.coment of market support which has not the ro ro vessels.

ciated with China shows a lot of initiative. will develop over the next couple of years? between the United States and China that shipping along the lines of the UNCTAD main American-flag participation in the Chinese ready opposition to such arrangements has been and the Treasury Department, all U.S. Pacific -ant tonnages of liner cargo even at present-day he US. and the People's Republic. At the present ina imports large quantities of cotton, machinery, er essential raw materials. It is anticipated that - the U.S. and the P.R.C. will include commerical credits, which should substantially expand this S are receiving high priority, and it is expected ay clothing, furniture, chinaware, and ceramics will nese exports to the United States.

ext witness is Mr. Edwin J. Hood, PresiSc of America.

have you here.

STATEMENT OF EDWIN M. HOOD, BOARD CHAIRMAN AND PRESIDENT, SHIPBUILDERS COUNCIL OF AMERICA

Mr. HOOD. Good morning, Mr. Chairman, members of the subcommittee.

The membership of the Shipbuilders Council of America, composed of major shipbuilders, shiprepairers and allied suppliers in all sections of the country (see attachment A), most respectfully urges approval of H.R. 2462 containing a budget request of $101 million to cover fiscal year 1980 construction differential subsidy (CDS) commitments under provisions of the Merchant Marine Act of 1936, as amended. This amount, plus the remainder of approximately $23 million from previously authorized and appropriated funds will very probably cover the few contracts for subsidized merchant shipbuilding now foreseen.

As you will note from attachment B, merchant ship construction prospects for U.S. shipbuilders in the 5-year period from fiscal year 1980 to fiscal year 1984 are projected to total 41 vessels. As a basis for measuring comparative utilization of industry capacity, it should be noted that 48 vessels were ordered in the single year of 1972 and contracts for 43 were placed in 1973.

It should also be noted that the 5-year naval shipbuilding program has been reduced by 90 vessels-from 157 to 100 to 89 to 85 to 70 to 67 ships in a period of less than 12 months. These depreciated availabilities for both merchant and naval vessels have serious implications for the U.S. shipbuilding industry.

Obviously, the full capabilities of the industry, reflecting more than $1.7 billion in capital improvements over recent years, will not be fully utilized. Latest projections indicate that the present shipyard workforce will drop by nearly 66,000 before 1985. In this regard, I would call your attention to the projection in attachment C. About 47,000 of these will be skilled production workers, many of whom come from minority groups in areas of chronic unemployment. Another 200,000 workers in supporting industries will be similarly affected.

It is our considered judgment that the active U.S. shipbuilding industrial base is currently comprised of 26 major shipyards (listed in attachment D). Ten yards are now engaged in the construction of naval vessels; four of these are also building merchant ships. A total of 13 shipyards are engaged in the construction of oceangoing or Great Lakes merchant ships of 1,000 gross tons and over. Under presently projected workloads, the number of yards building Navy ships will drop to six, and no more than three additional yards will be sustained by anticipated market opportunities for merchant ship construction

In sum, 19 of the 26 shipyards in the active U.S. shipbuilding base are currently building ships. It can be predicted that no more than eight or nine shipyards will hold major shipbuilding contracts in 1984. This severe contraction of a resource base which the Secretary of the Navy asserted to this distinguished subcommittee in 1977 was only marginally adequate for a short war and substantially inadequate for an extended conflict should not be dismissed lightly.

The cumulative effect will spread to other industries and activities that not only supply and service shipyards, but also enhance

46-188 - 79 - 15

the assurance of national security to a Nation whose reliance on ships for defense is historic and monumental.

It needs to be stressed that placement of additional shipbuilding contracts today-if that were possible-will not obviate the unemployment and idle facilities now foreseen. The duration of the inescapable slump in activity and the timing of recovery will be contingent on factors beyond the control of shipbuilders individually and collectively; market demands, economic influences, governmental policies, and world conditions.

Worldwide, an increasing number of shipbuilders are chasing a decreasing number of ship construction opportunities. Amid international discussions of ways to reduce overcapacity, below-cost prices are being offered by many foreign shipbuilders, in many cases, with the approval and financial indemnifications of their governments. A demoralizing subsidy war is rapidly evolving. Some nations, previously openly critical of maritime assistance programs, have now added direct subsidy to a subtle array of indirect credit and tax mechanisms.

Acknowledgment of the continuing strategic and economic importance of shipping and shipbuilding has been the underlying motivation. Shipyards in one country are thus not competing with shipyards in another country. Governments are competing with governments to capture ship construction opportunities-wherever, whenever, and at whatever price-to serve what is considered to be their self-interests.

Some shipbuilders abroad are reportedly offering prices at 10 to 40 percent below costs. This "false" pricing has two immediate consequences: First, the statutory CDS ceiling of 50 percent is breached and does not facilitate contract awards in the United States, and, second, U.S. owners look longingly at cheap prices for ship construction-and conversions-in foreign lands.

The allure of such "bargain" prices becomes more intriguing with the realization that foreign-built ships can be documented under the American flag without payment of any import duty with entitlement to a 10-percent investment tax credit. Given the purpose and scope of governmental encouragement and support abroad today, some foreign shipbuilders are quick to exploit this situation as well as the absence of a strong, coherent, coordinated and responsive U.S. maritime policy.

In this sense, while there is currently much emphasis on the virtues of the latest Multilateral Trade Negotiations, "dumping" by foreign shipbuilders, which forecloses subtantial contracts for U.S. shipbuilders and many thousands of man-years of employment for skilled American shipyard workers, continue to escape official response. In effect, the United States offers a 10-percent investment tax credit bonus for the acquisition of a foreign-built vessel: the economic and national security consequences as they may apply to domestic shipbuilding are rarely considered

It might be interesting to recall that roughly 700 vessels of 1,000 gross tons and over were built abroad for U.S. based companies or their affiliates in the years 1958-78. Only a few were registered under the American flag for the reason that the existing Internal Revenue Code permits deferral of current taxation on foreign-flag shipping income by U.S.-owned foreign corporations to the extent

that these earnings are reinvested in qualified shipping assets, including construction of vessels by foreign shipbuilders. This tax privilege can hardly be regarded as encouraging shipbuilding in the United States.

In the same 1958-78 timespan, U.S. shipbuilders delivered 447 merchant ships of 1,000 gross tons and over to U.S. owner/operators. Of this total, 234 involved CDS construction, 8 were built for Government account, and 205 were constructed for unsubsidized U.S.-flag operation (see attachment E).

From all of the foregoing statements, a number of conclusions can be reasonably drawn: (1) U.S. merchant shipbuilding requirements, contrary to general belief, are and have been shared with other shipbuilding nations, (2) a major segment of the industrial resource base is sustained by both subsidized and unsubsidized contruction, in nearly equal proportions, (3) some contraction of that base is certain, (4) in this country, inflation and domestic regulatory requirements restrain the kind of price/cost maneuvering which today benefits foreign shipbuilders, and (5) shipbuilding worldwide is in the doldrums. A return to normalcy can only be shaped by Government policy-more appropriately by more than one Government policy-and the shipbuilders of the United States sincerely hope this distinguished subcommittee will assume a role of positive leadership in insuring, as in other countries, the preservation of an essential core of shipyard facilities and manpower to support national interests.

Thank you very much, Mr. Chairman.

[The following was received for the record.]

The CHAIRMAN. Mr. Donnelly?

Mr. DONNELLY. I have no questions
The CHAIRMAN. Mr. Trible.

Mr. TRIBLE. No questions.

The CHAIRMAN. Mr. Snyder.

Mr. SNYDER. I think that in the interest of time, and since we do have a lot of witnesses, that you honor my unanimous consent request, that I be permitted to submit specific questions to Mr. Smith of Farrell, and a couple of general questions to CASO. Counsel will give them to the witnesses today, and they can respond to them for your record, within what, 10 days, is that all right? I do not want to delay the thing.

The CHAIRMAN. We have a time limit on marking up, but 10 days is within that time.

Mr. SNYDER. Whatever the Chair suggests, I would just ask unanimous consent that we put their answers in the record.

The Chairman. I would like to join the gentleman in that. I have some questions on the current status of the ODS contracts, their terms, and certain other elements that I am going to ask each of the operators to respond to for the record, and without objection, that request is ordered.

Are there other questions?

Thank you very much, gentlemen.

[The following was received for the record:]

QUESTIONS OF MR. MURPHY AND ANSWERED BY ALBERT E. MAY

A. Questions for all.

1. What is the current status of the operating differential subsidy contracts that you hold? Do you all hold long-term contracts?

a. Please indicate where certain traditional elements of subsidy, such as P. & I. insurance costs and M. & R. costs, have been eliminated.

b. What are your replacement obligations under these contracts?

Answer.

American President Lines, Ltd. APL currently holds a 20-year ODS agreement which became effective January 1, 1978.

(a) The traditional ODS regarding insurance costs and M. & R. were eliminated with respect to 15 container ships, but full subsidy was applicable to the 5 breakbulk vessels.

(b) They are required to enter construction contracts for 2 ships by March 31, 1978. The 20 ships in the APL fleet are required to be replaced as they reach the end of their economic lives or an equivalent total carrying capacity basis.

Farrell Lines Inc. One MSB-352 contract has been in effect since January 1, 1976. It is due to expire December 31, 1995.

(a) In this contract, M. & R. and hull insurance were both eliminated; P. & I. retained.

(b) Replacement obligations are as follows: (1) Five break-bulk, C-4s due to be replaced in 1987-88; (2) two break-bulk C-4s due to be replaced in 1990; (3) four C-6 and C-8 container vessels to be replaced in 1997-98; (4) three C-8 LASH vessels due to be replaced in 1996-98.

In the Export services, the MSB-87 contract currently in effect expires December 31, 1979. (a) The contract retains hull insurance, M. & R. and P. & I. (b) Replacement obligations will be complete with delivery of the two C-5 container vessels, one this year and one next year.

Farrell has reapplied for renewal of the full 20-year contract, and it is presently being processed. They do not expect it to be completed before the expiration date, and have been given to believe that they will be granted a one year extension. Moore-McCormack Lines, Inc. Their ODS contract expires December 31, 1994. (a) Subsidy for M. & R. as well as hull insurance was eliminated in accepting this contract.

(b) Construction contracts are required for two new vessels in 1983, with delivery in 1985.