The Government would not be required to pay out cash in either a loan or construction subsidy. The only payments would be those for national-defense features. Domestic shipping would be protected from the competition of a vessel so built and registered to the full extent that it is protected from the competition of vessels receiving construction-differential subsidies.

It is, of course, for the Congress to determine which of these solutions, if not some other solution, should be adopted. The plan suggested in the economic survey impresses me as being reasonable and in accord with sound national policy. It would provide a basis for the growth and maintenance of the merchant marine in times of high domestic shipyard prices without placing the burden of paying larger subsidies upon the National Treasury.

The question immediately arises as to whether it is good policy to permit the building abroad of vessels destined for our subsidized fleet, thereby depriving domestic yards and domestic labor of construction work. The answer is clear. The suggestion provides only for the building in foreign yards of vessels which would not otherwise be built for the subsidized fleet. Thus labor loses nothing with respect to such construction and is benefited to the extent that it is employed to operate a vessel which would not be in existence except for the fact that it was built abroad.

There are only four domestic yards equipped to construct a vessel of the MC design, to be built for the United States Lines Co. as a companion ship to the Manhattan and Washington. Bids were received from three of these. Only the bid which was accepted-submitted by the Newport News Shipbuilding & Dry Dock Co.-was low enough to make possible the construction of the vessel. The Commission determined that the estimated foreign cost of constructing a like vessel, excluding items not furnished by the shipyard, was $10,500,000. The fixed price bids of the two bidders whose bids were rejected were $21,308,000 and $21,947,000, being in each case more than 100 percent above the estimated foreign cost. Thus the MC design vessel could not have been built at the price quoted by either of these yards.

Furthermore, the American shipyards continue to enjoy a complete monopoly for all building for the domestic trade and for such of the Navy construction as was not done in navy yards. It must be remembered that the subsidized fleet now consists of only a million tons, as compared to 10,000,000 tons-vessels of all sizes-operated in the protected domestic trade.

In any event the domestic yards would retain, in addition to construction for the domestic trade and for the Navy, by far the major part of the construction for subsidized foreign operation. The yards would still be protected against foreign competition by a 50-percent differential on the basis of the American price, which may be regarded either in the nature of a 100-percent tariff or a preference similar to that provided by the "Buy American law" approved March 3, 1933 (47 Stat. 1520).

That law directs Government departments to purchase American products and gives such products a preference, in addition to any applicable tariff; but the law provides that foreign goods may be purchased for public use when the cost of American goods is determined to be unreasonable. According to the regulations of the Procurement

Division of the Treasury Department, pursuant to that law-circular letter No. 37 of June 20, 1934-American costs are held to be "unreasonable" on purchases which involve more than a few hundred dollars if the American price is more than 25 percent higher than the foreign cost. Under the Commission's suggestion, the American price for a vessel would have to be 100 percent higher than the foreign price before the right to build foreign would become effective.

Practically no other American industry receives such protection. The average rate of duty collected on American imports was 42.8 percent in 1935. The trend has been downward since 1932, due to the upward movement of prices. It is at the moment believed to be somewhat less, perhaps about 40 percent. The tariff on repairs made abroad to American vessels, which was requested by the domestic yards, amounts to 50 percent. If 50 percent is sufficient for repairs, which are, after all, a form of construction, 100 percent should be very generous for construction.

The protection given to materials used in shipbuilding is but a fraction of that afforded to the completed product under the Commission's proposal. Iron and steel products, which constitute the bulk of the material cost of a vessel, are given protection ranging from 10 percent to 37 percent, with the average lying between 20 percent and 25 percent. Electrical machinery is given 60 percent protection; steam engines get 15 percent, and internal-combustion engines receive 30 percent. Obviously, if the principal items which go into a ship require only 20 percent to 25 percent protection, 100 percent should be ample for the finished product, even allowing for a generous differential in the wages of yard workers. I see no reason why a 100-percent protection against international competition should not be ample for the builders and labor involved in this industry, especially when the industry also enjoys a monopoly of construction for the domestic trade.

For the reasons which I have just given, there appears to be no reason to believe that the maintenance and development of the domestic shipyards as effective units, capable of functioning as an important part of our defense machinery, should suffer from the adoption of this suggestion. On the contrary, the introduction of foreign competition might well result in an improvement of our domestic shipbuilding facilities. Should experience prove that the diversion of some shipbuilding to foreign yards under this suggestion-which should be minor and unusual-does in fact result in a material weakening of this vital part of our national-defense machinery, Congress can, of course, increase the protection accorded the domestic ship. yards by raising the 50-percent construction differential limitation or adopting such other course as it may deem wise.

If this suggestion is adopted, it will be possible to invite bona fide foreign bids under conditions where the foreign bidder can feel that there is a reasonable prospect of getting some business. The plan. thus brings other benefits which would not be achieved by authorizing an increase in the allowable construction-differential subsidy. It would have the effect of providing more competition in bidding for the construction of new ships by domestic as well as by foreign builders. The foreign competition would doubtless influence American bids, thus stimulating our own yards to higher standards of efficiency. Furthermore, and this is a very important point, it would greatly

facilitate the administration of the construction subsidy provisions of the act, because the Commission would have actual foreign bids for use in estimating foreign costs.

As had been anticipated, considerable difficulty was encountered in connection with the vessel to be built for the United States Lines. In this case, it was found that there is actually under construction in the Netherlands a ship of remarkable similarity to the MC design. Still, it would clearly have been desirable to have had actual foreign bids on the specific plans on which the domestic yards were bidding, both for the purpose of establishing the differential and for the purpose of indicating the general price trend in the international market. Such data can be obtained only if it is made possible for an award to be made, under certain conditions, to a foreign bidder.

In connection with this question of excessive bids, it is suggested that it might be well to add a provision to the act enabling the Commission, in its discretion, to allow construction abroad in cases where the foreign cost is between 33% percent and 50 percent less than the American price, and the bids received from domestic yards are believed to be unreasonable, excessive, or collusive. Such vessels would likewise be entitled to registration and documentation under our flag and to operating-differential subsidies as previously suggested. The Commission recommends that section 502 (b) be amended accordingly.

Our proposal to build ships in the international market, under certain circumstances, is no new practice among maritime nations. It is no new practice in the United States. It is quite possible for an American citizen to go into the international tonnage market for equipment with which to compete in international trade, but under existing law we cannot grant him an operating subsidy on such equipment. We believe that, under conditions which I have already explained, and in the public interest, the subsidized operator should have the same privilege.

No maritime nation restricts its shipping industry solely to domestic-built vessels. All maritime nations seek, so far as possible, to restrict subsidized vessels to their national tonnage markets. But all such nations, except the United States, have provisions which authorize operators, under certain circumstances, to seek replacement for their subsidized fleets in the international tonnage market. Aircraft: Congress directed the Commission, in section 211 (g) of the Merchant Marine Act, 1936, to determine what provisions of the act and other acts relating to shipping should be made applicable to aircraft engaged in foreign commerce. The Commission was also directed to recommend appropriate legislation.

The directions of Congress have been partially carried out by the Commission. A special report, prepared with expert assistance and after consultation with shippers, passengers, steamship and aircraft. operators, and aircraft manufacturers, has already been prepared and furnished to the Members of Congress.

Overocean air transportation is at present important and potentially vital to the foreign trade of the United States. This is a field in which we now enjoy a tremendous advantage in experience, equipment, and personnel. This advantage, however, may be lost within. a few years-if not a few months-for the speed of the industry's development is comparable only to the speed of the planes themselves.

This country, by its failure to realize the importance of steam and steel, brought about the decline of a once-powerful merchant marine. We should not abandon our leadership in air commerce by failing to make proper provision for Government support of overocean flying. The question presented is not whether overocean flying should be subsidized, for it is subsidized now. A substantial portion of payments for the transportation of domestic air mail represents a subsidy to domestic air carriers. A computation based upon the cost ascertainment report of the Post Office Department shows that the rate per pound-mile paid for the transportation of foreign air mail actually carried, is 11.6 times as much as the average rate for domestic air mail for 1936; it is more than 20 times as much as the average rate paid the three transcontinental domestic lines-American Airlines, Inc., United Air Lines Transport Corporation, and Transcontinental & Western Air, Inc.-during the first 6 months of 1937. It appears, therefore, that a substantial subsidy is now being paid for the development of over-ocean flying. If any subsidy is to be paid, it should not be through what has been referred to by Congress and by the President as a "subterfuge.'

It goes without saying that the factors which determine the essentiality of ocean transport services are the same factors which should also determine the essentiality of foreign air-transport services, for both services must draw their principal support from traffic. It is apparent, moreover, that the well-developed foreign-trade service of the future will be an integrated air-water service, fast passenger traffic and express traveling by air and slow passenger traffic and heavy cargo traveling by water over substantially the same routes. Such an integrated service would, in the opinion of the Commission, be superior to and far less costly than the superliner services with which other nations have sought to meet the need for increased speed in transoceanic transport.

While the Commission does not desire to add to its already pressing problems, it is forced to conclude that the development of transoceanic transport-with which development the Commission is already charged by Congress-logically includes the development of air transport as well as transportation by water. It follows that the development of both forms of overseas transportation should be vested in the same agency. Congress, of course, must determine the agency to which it wishes to entrust this task.

The objections to a mail subsidy to the merchant marine, which were so obvious as to cause Congress to abandon the ocean-mail contract system, apply with equal force to air transport. The mistakes which were made, and the resulting chaotic condition of the American merchant marine, can be prevented with respect to foreign air transport by providing for its proper administration now. A representative of the Post Office Department told these committees, when the Merchant Marine Act, 1936, was being framed, that: "The question of a United States merchant marine is a question that is way beyond the province of the Post Office Department. Our interest is primarily in the handling and the carriage of mails." The statement is equally applicable to overocean transportation by air. There is, of course, no sound analogy between overseas flying and domestic air transport. The problems of overocean transport are those of foreign trade.

The Commission feels that it is the agency of Government which has been charged with the development of overseas transportation, and that it is equipped with the information and personnel necessary to accomplish this task. As air transport is of rapidly increasing importance to this development, the Commission believes that the Merchant Marine Act should be broadened to make aircraft engaged in overseas commerce eligible for the aid given to shipping in the present Merchant Marine Act.

The present need, of course, is not for construction-differential and operating-differential subsidies, but for assistance in the initial financing of aeronautical enterprises. The cost of such financing is heavy, but it is believed that it will pay dividends to the Government to assist at this time in the establishment of air trade routes which will benefit our commerce. It may be pointed out, too, that should foreign manufacturers turn from military aircraft to the production of commercial aircraft, the lower costs of labor prevailing in foreign countries may give rise to a construction differential which it would be necessary for this Government to meet.

If the Government is to take action in this field, it should do so immediately. England, Germany, and France are not only engaged in vigorous and extensive programs for the development of air trade routes, but these programs are tied in with shipping, particularly in the case of Germany and France. The most recent example of this is the new air line, almost 2,000 miles long, along the west coast of Africa from Dakar south, which was created and is being operated by the old Fabre Steamship Line, now called Chargeuers Re-Unis. It is entirely independent of the French national air line, Air France. For its air operations this steamship line ordered a fleet of American Sikorsky Clippers of the S-43 type. This is only one of many indications that unless this country enacts legislation to advance American interests in the foreign air transportation field, we will see it preempted by our foreign competitors.

In the event that this task is imposed by Congress upon the Commission, the Commission will, of course, apply the same rules of sound business and rigid economy which it applies to ocean-going shipping. The Commission does not wish to be regarded as presenting a request for the enlargement of its powers. It is merely reporting to Congress, as it was directed to do by the Merchant Marine Act; the Commission is recommending also, as directed by the act, the enactment of legislation applicable to aircraft engaged in overseas foreign commerce which, it is felt, will more effectively further the policy of the Merchant Marine Act of 1936.

Labor-mediation: Perhaps the most difficult problem with which the Commission is confronted is an unfortunate employer-employee relationship which has resulted in destructive disturbances in the shipping industry. Unless something can be done to stabilize those relationships, to reduce interunion friction, to increase the efficiency of crews and to restore order and discipline aboard our ships, all of the Government's efforts to develop a strong American merchant marine will be futile.

It need not be pointed out to these committees that the major part of all subsidies granted American shipowners is accounted for by the greater labor cost of operating ships under the American flag. Under the present temporary agreements, the Government is paying 43