specific amendments to the Merchant Marine Act of 1970. In fact it is my opinion that the Commission is not, under these circumstances, privileged to do so. It is clearly in the national interest to support a larger and more efficient U.S. flag merchant fleet than exists today. This does not, as many of the conclusions of the Commission imply, necessitate an equivalent support of the U.S. shipbuilding industry. For example, federal funds could be stretched to cover many more ships by permitting U.S. owners to purchase ships abroad and operate them under the U.S. flag with an operating differential subsidy, particularly if the Congress should fail to appropriate funds for the construction-differential subsidy program which would be adequate to sustain the on-going merchant marine objective. This Commission is the Commission on American Shipbuilding and not the "Commission on the American Merchant Marine." The national objectives regarding the merchant marine are clearly not dependent upon a great expansion of activity of the U.S. shipyards, and such an expansion may not represent a high level national priority. With the foregoing findings, facts and industry developments fully available to its final deliberations the Commission has nevertheless recommended a number of far-reaching amendments to the Merchant Marine Act of 1936, as amended by the Merchant Marine Act of 1970, the most significant of which and the most costly, in terms of federal subsidies or alternatively in terms of costs to U.S. consumers, is that cargo preference legislation be enacted to establish a quota for the carriage of petroleum and gas imports in U.S.-built, U.S.flag vessels. I respectfully submit that in view of the Commission's findings, the extent of its mandate, and the environment in which the U.S. shipbuilding industry finds itself today, this is not a recommendation to which I, as a Commissioner, can subscribe. As I understand the circumstances, Mr. Chairman, the majority of the members of this Commission have been persuaded toward recommending a U.S. flag quota for oil and gas imports largely on the basis that other nations, either directly or indirectly, have forced similar quotas upon their foreign commerce, and, as a matter of national policy, have thus supported both their merchant marine and shipbuilding industries. The Commis sion has also pointed out that the quota would inevitably have a positive beneficial effect on the U.S. balance of payments. As to the first point: Mandatory flag legislation, particularly if imposed by the U.S., will without doubt encourage others, and specifically the OPEC nations, to impose similar flag restrictions. While some of this is now in evidence, backed by either direct or indirect mechanisms, it is by no means the universal rule; it certainly will become so if the U.S. endorses this particular form of protectionism. The world-wide result can only be higher freight rates, less logistical efficiency, and the locking of vessels into inflexible trade routes. The balance of payments argument, if used in support of cargo preference, must be examined in terms of other alternatives. The balance of payments problem is an aggregate problem of this country, not one of a single industry. A nation attempting to solve its BOP problem must support and spend its subsidy (in whatever form) on those export industries which have the greatest leverage, vis-a-vis foreign competition, from a price-competitive standpoint. The U.S. economy would be better served by efforts aimed at increasing exports of high technology, low labor content types of products where the returns in the form of BOP savings are substantially higher. There are many U.S. industries having a higher leverage and with better qualifications for support if the objective is a maximization of BOP relief per dollar of subsidy. Leaving aside for the moment the question of whether the Commission, in view of its findings, has either an obligation or the privilege of making recommendations regarding amendments to the Merchant Marine Act, I would like to suggest that certain other recommendations might have been made to facilitate the objectives of that Act. Some of these, which are contained or implied in the background studies available to the Commission, are noted below. (1) To facilitate the securing of financing for new U.S. flag and U.S. built vessels, the restrictions of foreign ownership in U.S. vessel operation appearing in the Shipping Act of 1916 should be changed and made consistent with the requirements for foreign ownership applying to any U.S. industry. (2) Amend those sections of the Merchant Marine Act which require that vessels receiving op erating subsidies must operate in U.S.-foreign commerce. To be competitive, international tanker owners must have the flexibility to schedule tankers as required. This is particularly significant for large vessels when considering the lack of deepwater port capability in the United States. (3) Amend that section of the Act which prohibits the granting of operating subsidies unless the recipient agrees, in effect, not to expand his foreign flag fleet and to eliminate it within 20 years thereafter. The Merchant Marine Act of 1970, and specifically its provisions regarding a construction-differential subsidy, an operating-differential subsidy and a tax-deferred capital construction fund, go a long way toward providing American owners an incentive to build ships in the U.S. rather than expand or replace their ships under "Flags of Convenience". However the above "Grandfather Clause" is a serious and unnecessary deterrent to those U.S. owners who would otherwise be willing to build in the U.S. and operate under that flag. Mr. Chairman, may I say that I have enjoyed serving as a member of this Commission. It has been a rewarding experience, not the least of which has been the respect which I have developed for you and for each of my fellow commissioners. The Commission has been concerned with a subject of tremendous complexity and I do not find it strange that a report satisfactory to every commissioner could not be attained. I sincerely hope that the report of this Commission, and perhaps even these dissenting views, will be of some future value to those concerned with the well-being of the U.S. shipbuilding industry. Respectfully yours, W Alhome rung W. H. KROME GEORGE. Rear Adm. ALBERT G. MUMMA, USN (Ret.), Commission on American Shipbuilding, DEAR ADMIRAL MUMMA: I have signed the Report of the President's Commission on American Shipbuilding because I agree with several of the conclusions and recommendations of that comprehensive study. I do believe, however, that the Report is too orientated to the needs of the ship operating industry to the neglect of several legitimate needs of the shipbuilding industry. Specifically, I have the following objections to the Report: (1) The third general conclusion in the letter to the President and the Congress reads: "Because of the relatively higher wages and cost of materials in the United States, the [shipbuilding] industry has not been competing on a cost basis in the international market despite its potential equality in productive efficiency." While it is true that wages and costs of materials in the United States are higher than those in other shipbuilding countries, I do not believe that this is the principal reason why ships are not built in the United States for export. At the present time, LNG tankers can be built in the United States at costs comparable to construction costs in Japan or Europe, and, from time to time, the cost differential for other types of ships, for example, very large crude carriers, would be more than offset by the rapid delivery available from a shipyard in the United States. The shipyards in the United States do not produce vessels for the export market because United States government aids for ship construction are limited to United States citizens. Japan and other shipbuilding countries subsidize the construction of ships for export usually by guaranteeing loans or subsidizing the interest rates on construction and long-term loans irrespective of the citizenship of the borrower. The United States has a similar program of guarantee loans used to construct ships August 24, 1973. (Title XI, Merchant Marine Act, 1936, as amended) but the United States program is restricted to borrowers who are United States citizens. It is impractical at the present time to obtain financing for the construction of ships without some form of governmental assistance. Our failure to furnish such assistance to foreigners is, therefore, a policy determination not to encourage the construction of ships in the United States for export. I do not recommend that this policy decision should be changed, but I think that we should accurately describe the reasons why ships are not built in the United States for export. (2) I refer to the conclusion in the sixth paragraph of the letter to the President and the Congress. While it is true that the basic market in the United States for commercial shipbuilding has been limited to ships needed to "carry United States domestic and foreign commerce," this results primarily from the statutory requirement that ships built with United States government aid are required to engage in such trades except to the extent that the Secretary of Commerce acting through the Maritime Administrator approves the use of such vessels in the foreign-to-foreign trades. I believe that this trade restriction of general application places an unwarranted burden upon the owners of ships constructed with a United States subsidy or with government assistance. These ships should be free to operate in the foreign-toforeign trades without specific approval as similar ships built in foreign shipyards at comparable costs are free to operate in such trades. (3) I do not agree with the conclusion in paragraph 12 that a cargo preference system in the form recommended should be adopted. The reasons for my disagreement are: (a) Cargo preference invites retaliation. Whether or not such a system should be imposed, in my opinion, requires far more careful study of particular trades than we have been able to give to the problem. Specifically, before we enter into such a program, I should like to see negotiations with individual foreign countries so as to as sure that the net result of such cargo preference and expected retaliation by foreign countries will not be detrimental rather than helpful to the American Merchant Marine. (b) In my opinion, cargo preference without some requirement for new building by those receiving the preference will not result in the construction of new ships. We have had cargo preference laws with respect to military and AID cargoes ever since World War II and, so far as I am aware, such cargo preference has not resulted in the construction of a single bulk cargo or tanker ship.* On the contrary, with respect to shipbuilding, cargo preference has been counter-productive because it provides a ready market for overaged ships and, in effect, has subsidized obsolescence. I would, however, not dissent from a system of cargo preference which was based upon some form of negotiation with foreign countries and which contained proper safeguards to require the beneficiaries of cargo preference to construct new vessels. (4) I disagree with the Commission's recommendation in paragraph 15 concerning freight rate equalization. There is nothing in our extensive and voluminous study upon which an intelligent evaluation can be made as to the need or effect of such a program. Moreover, the program seems to be related to the operation of a limited portion of liner services rather than to American shipbuilding. Further, I do not see how we, on the one hand, can defend operating-differential subsidies pursuant to the Merchant Marine Act, 1936 which enables certain American liner vessels to carry cargo at rates below actual cost, and, at the same time, complain that other countries are permitting their liner services to do the same thing. It seems to be that the adoption of this recommendation would open a Pandora's Box of retaliation and counter-retaliation. (5) I believe that some recommendation should be made with respect to the effect of the citizenship requirements for American shipping and banking companies as contained in Section II of the Shipping Act of 1916. That statute defines a citizen as, inter alia, a corporation organized under *I am told that probably some of the liner ships built with construction differential subsidies and with operating differential subsidies might not have been built had it not been for cargo preference. Liner ships, however, represent a decreasingly small segment of the world's merchant marine. the laws of the United States or a state, territory, district or possession thereof, and for operation of a vessel in the foreign trade, a corporation with 51% of its stock owned by U.S. citizens, and for operation of a vessel in the domestic trade, a corporation with 75% of its stock owned by U.S. citizens. It is impractical to determine the actual stock ownership of a public corporation, therefore a rule has been adopted that 75% ownership will be presumed only if 95% of the stockholders are residents of the United States, and that 51% ownership will be presumed only if 65% of the stockholders are residents of the United States. United States corporations which are commonly regarded as United States citizens are barred from all participation in government aid shipping programs including guaranteed mortgage and construction loans unless they meet the above stockholder requirements. Moreover, United States national or state-chartered banks not meeting such stockholder citizenship requirements are barred from making loans secured by mortgages on American flag ships. The effect of this is already important and may become far-reaching. At least two major United States oil companies because of some stock ownership by foreigners cannot transport crude oil or petroleum products between United States ports except under the limited conditions of Section 27A of the Merchant Marine Act, 1920. Further, the citizenship of other oil companies may become affected by pass-through agreements currently being made by such companies with oil producing countries. These agreements may raise serious questions as to whether the oil producing companies will exercise such a degree of control over the involved United States oil companies as to endanger their Section 2 citizenship. I, therefore, believe that serious consideration should be given by the President and by the Congress to modification of these citizenship requirements. It was a great honor and a most stimulating experience to serve on the Commission and I hope that our study will have a beneficial effect upon the American shipbuilding industry. Sincerely yours, Arttien Ill Becker ARTHUR M. BECKER. |