a yearly cycle, this attitude engenders psychological uncertainties which affect operational stability and productivity in U.S. shipyards.

"3. Early this year, GAO released a study of the shipbuilding industry which made two primary recommendations: (1.) That vessels built in foreign yards and operated under the American flag qualify for operating subsidy, and (2.) that authority be given to award construction subsidy to vessels built in U.S. yards which would be operated under foreign flags.

"What is your opinion of these recommendations?"

The GAO report to which you refer also recommends that "early resolution of the Government's expectation of the shipbuilding industry is essential for defining clear and finite objectives for Government support of the industry." To me, this recommendation is far more primary than the other two specifically mentioned in your question.

Nonetheless, these two proposals are not new. They have been advanced before by diverse groups, and have been consistently rejected on the grounds that the American taxpayer and the public treasury with "finite resources" should not be called upon to pay for the construction of merchant ships in U.S. shipyards for foreign owners, nor to pay for the operation of merchant ships constructed in foreign shipyards for U.Š. interests. The rationale has been that shipbuilding support policies must be predicated on the construction of ships in American shipyards to American standards by American craftsmen with American products for American owners to serve American interests.

The second recommendation, cited in your question, is usually offered in a specious effort to make the first more palatable. It is wishful thinking at best. In the 1950-74 time span, U.S. shipyards have built a total of 531 merchant ships (totaling 17,800,000 dwt) for American companies or their affiliates for registry under the American flag. During the same period, nearly 2,000 vessels (totaling more than 100,000,000 dwt) were built abroad by American companies or their subsidiaries for foreign-flag registry. Few of these would have been brought under U.S. documentation even if operating subsidies had been available. Even more, this ratio of four to one favoring foreign shipbuilding suggests that, given the option to build abroad as the GAO advocates, American subsidized owners are likely to do just that-especially when foreign shipbuilders offer "bargain" prices below actual cost.

The consequences in terms of maintaining an essential industrial base for shipbuilding could be serious: The balance of international payments would be adversely affected; employment for skilled shipyard craftsmen would decrease; employment for workers in supporting industries in every State of the Union would decrease; sales of domestically manufactured products for ship construction would decrease; tax revenues would diminish; and reliance on foreign shipyard sources could only herald the doom of other essential national needs-U.S. shiprepairing and U.S. flag shipping among them.

"4. You have indicated that there is a large over-capacity in foreign yards. This is primarily a function of the severe depression in the tanker industry. Can those yards which previously concentrated on tanker construction readily change to building dry cargo ships? If not, why will the over-capacity in tanker building facilities depress world prices for dry cargo ships and other types of more sophisticated yard construction? In short, what I am asking is: Will there be a serious attempt by foreign yards to slash prices for other ships as well as tankers?"

A building dock or building way can be used for the construction of any type vessel whose dimensional characteristics fall within the physical limits of the facility. It is not unusual for a shipbuilder, in this country or abroad, to build a tanker or cargo vessel in the same dock or on the same ship way. This has been done many times. Because of the recent collapse of the tanker market and the current slump in the dry cargo market, Japanese shipbuilders have indicated plans to adapt facilities heretofore devoted to large tankers for the construction of offshore drilling rigs and smaller vessels, even though these alternatives could result in something less than optimum utilization.

The scarcity of market opportunities and all that this adversity foretells in terms of utilization of manpower, shipyard capacity and related production resources, will prompt either: (1) Unrealistic price cutting, (2) increased government support to offset the difference between price and cost, or (3) both. The purpose will be to capture whatever commercial contracts that may be available in a depressed market which could continue for another two years-whether tankers, dry cargo ships, drilling rigs, or other floating craft-to keep people employed and to avoid the social costs of unemployment.

You ask; "Will there be a serious attempt by foreign yards to slash prices for other ships as well as tankers?" My answer is that this undesirable, but under

standable, phenomonon is already taking place. Reportedly, foreign prices are being cut without regard to actual costs. In an unanticipated manner, a principal objective of the 1970 Act has already been undermined: to hold the level of Federal support (CDS) for merchant ship construction at 35 percent. The sensitive influence of foreign shipbuilding prices on CDS determinations in this country, I fear, is not sufficiently recognized.

"5. On page 46 of your testimony, you recommend that there be a 'restatement of CDS percentage guidelines.' Does this mean that you think the 35 percent CDS ceiling will have to be raised? Is so, what are your reasons?"

It is difficult to establish the differential between a domestic and foreign shipbuilding price at any one time with exactness because of the unlikelihood of an absolute comparison: two identical ships being constructed simultaneously-one in the United States and one abroad-under identical procurement procedures, production, conditions and cost accounting methods. The task is further complicated by the price-influencing variations in foreign governmental policies and subsidy assistance. The pattern of shipbuilding economics in other countries thus affects the level of subsidy in this country.

As prices move upward in Europe or Japan, for whatever reasons, the amount of CDS paid in this country is reduced. Conversely, as prices are decreased abroad, the CDS rate is increased. In the judgement of government and industry officials, the 35 percent CDS ceiling with respect to negotiated contracting, now mandated by the Merchant Marine Act of 1970, does not reflect the differential between true U.S. shipbuilding costs and artificial shipbuilding prices presently being offered abroad. Because of the sharp decline in ship construction market opportunities worldwide, there is evidence that some foreign builders are actually resorting to desperation price cutting in an effort to obtain urgently needed work and to keep their labor force employed-regardless of true cost. This trend toward "bargain" prices abroad, as indicated, will force the CDS rate above the present statutory ceiling of 35 percent for negotiated contracting. These kinds of fluctuations in the international market suggest that the ceiling must be raised and that provision should be made for flexibility in the future.

"6. Sea-Land has suggested that the construction subsidy be modified so as to provide subsidies above parity with foreign costs. Their contention is that this expanded construction subsidy should largely replace the operating differential subsidy. What is your view on this suggestion?"

Taking into account the expanding array of shipping/shipbuilding assistance provided in other countries and economic distortions caused by state-owned fleets, this suggestion may have a certain appeal. Yet, the combination of CDS with ODS—or ODS with CDS-might well produce more complexity than now prevails in preserving the parity system on which the Merchant Marine Act of 1936 is based. Such an approach might enable more flexibility in financing for the shipowner/operator, but it would also involve basic policy considerations with respect to capital structure, vessel replacement commitments, governmental control, elimination of restrictions on foreign registered tonnage, among others. If the Sea-Land proposal is to be seriously considered, these, and other questions that pertain to the appropriate role of government in life-cycle acquisitions of merchant ships need far more examination than has taken place to date.

During my November 5 testimony before the Subcommittee on Merchant Marine, you properly stressed the imperative need for data as to the numbers of ships by types and the amount of shipyard capacity that might be required to support a national cargo policy. As promised, I have been searching for valid projections of shipping and shipbuilding anticipations, and find that the Commission on American Shipbuilding devoted considerable attention to this subject in its October 1973 Report. Volume III, Annex IV, pages 847, 848, 849, 852, 968 and 969 contain useful tabulations, and the accompanying commentary is especially helpful in evaluating the impact and potentials of cargo penetration-to serve national interests.

I stand ready to provide any additional views or information you might desire. With warm personal regards always, I am

Cordially,

EDWIN M. HOOD, President.

Mr. DONNELLY. Mr. Peter Luciano, Director of Policy Planning and Development, Transportation Institute.

STATEMENT OF PETER LUCIANO, DIRECTOR OF POLICY PLANNING AND DEVELOPMENT, TRANSPORTATION INSTITUTE, ACCOMPANIED BY EMANUEL ROUVELAS, COUNSEL TO THE TRANSPORTATION INSTITUTE

Mr. LUCIANO. Thank you, Mr. Chairman.

Mr. Chairman and members of the subcommittee: My name is Peter Luciano. I am director of policy planning and development of the Transportation Institute. I am accompanied by Emanuel Rouvelas, counsel to the Transportation Institute.

The Transportation Institute is a nonprofit research and education organization which directs its efforts toward the preservation and promotion of a strong marine transportation capability in the United States. Our 174 member companies operate U.S.-flag vessels in the Nation's foreign and domestic shipping trades including the inland waterways and Great Lakes.

We appreciate the opportunity to express our views on H.R. 2462, the authorization of appropriations for maritime programs for fiscal year 1980. As you know, the Administration proposes to spend in the coming fiscal year $101 million for ship construction, $256 million in operating differential subsidies, $16 million for research and development, $25 million for education and training programs, and $35 million for administrative expenses including maintenance of the National Defense Reserve Fleet

It is our view that this authorization is indispensable to the maintenance of U.S. maritime policy as articulated in the Merchant Marine Acts of 1936 and 1970. This authorization is particularly important inasmuch as it directly addresses one of the key objectives of the changes made in the Merchant Marine Act of 1970 and that was to redevelop a dry bulk fleet under the U.S. flag. It is anticipated that three dry bulk vessels will be built with the construction funds that would be made available under this bill.

As this committee well knows, the dry bulk sector of the U.S. fleet has been allowed to deteriorate to the point where only some 2 percent of our dry bulk imports are carried in U.S. vessels. This precarious condition is complicated by the fact that both the U.S. economy and our defense complex have developed a continually increasing reliance on the imports of such raw materials from other countries.

We find ourselves, therefore, in the difficult position of being dependent on the good will of both the foreign owners of raw materials and on foreign-owned transportation systems for the delivery of raw materials that are critical to our economic and security posture. Hence, it is especially encouraging that the Maritime Administration has prepared for new initiatives in this vitally important sector of maritime capability.

At the same time, this construction program provides desperately needed orders for American shipyards which provide a key component of U.S. national security both as a deterrent in time of peace and as an essential construction and repair facility in time of national emergency. The amount requested for the National Defense Reserve Fleet augments this defense capability.

The operating differential subsidy funds are continued in order to strive for parity with the elusive costs of foreign shipping compa

nies, virtually all of which are subsidized and promoted heavily through both direct and disguised mechanisms.

The authority requested for research and development activities would permit the Maritime Administration to continue research on ship design innovations of the kind which the U.S. maritime industry has been successful in deploying.

Altogether, the fiscal year 1980 maritime authorization constitutes a cornerstone for continuation of the maritime policy which holds that a strong U.S.-flag merchant fleet is an essential component in our economy and our defense.

The Transportation Institute respectfully urges this committee to authorize the funds proposed in this bill. But it is our strong contention that this authorization should be viewed as but one step in the development of an urgently needed comprehensive maritime policy for the United States. The urgency of this need results from rapid changes in the world economic order which have left many of the key assumptions of U.S. economic and maritime policy devoid of relevance. Perhaps the most crucial aspect of these changes, at least in the area of world shipping, has been the gradual destruction of the free market as a force in driving the allocation of world shipping resources.

The net result of these changes is that we are left today with a world shipping market which in a real sense scarcely deserves to be called a market. This development has occurred to the chagrin of many people including not only U.S.-flag shipping companies but also officials from executive branch agencies such as the Commerce Department, the Treasury, the Justice Department, and the Federal Maritime Commission, among others. Regrettably, some of those agencies are convinced that by decree they can restore the world order to some imagined pristine state of perfect competition which preoccupied Adam Smith some two centuries ago.

Many analysts doubt that such an effort could be successful even if it were confined to entirely domestic industries within this country. But to attempt such a program in an international industry where the United States has so little impact, is nothing short of naive. Our maritime policies to date have operated on the implicit assumption that if we can only make the costs of U.S. vessels equal to those of the foreign competition, then shippers would naturally flock to U.S. vessels. This is one of those free market assumptions in which the only driving motivation in world shipping is to minimize costs.

Unfortunately, that assumption is simplistic It fails to recognize changes in real-world circumstances and the share of our foreign trade carried by U.S.-flag vessels shows its lack of relevance to the world in which U.S.-flag vessels must actually operate.

This real world, if you will, is one in which virtually every leading maritime nation offers substantial and increasing subsidies as protection for its merchant fleet. It is a real world in which state-controlled fleets undermine those of capitalist economies through rate-cutting practices whose purposes are political rather than profit oriented and which are totally unrelated to elementary notions of cost. It is a real world, furthermore, in which some 46 nations, including 10 of 13 OPEC members, employ cargo prefer