Mr. WALSH. So far as we are aware there has not yet been formulated any precise plan as to how the competitive bidding system would operate. An advisory committee to the Navy Department, appointed to study and recommend workable procedures for competitive bidding, is still taking and considering views on this matter.

Yet Admiral Donaho, only 3 weeks ago, advised the Chairman of the Federal Maritime Commission that he hoped to issue invitations for competitive bidding in May.

The steamship industry has not the slightest idea how the Navy Department will solve such basic issues as how should routes be fixedby MSTS or by each individual bidding line; should there be a "floor" established by the Government to prevent ruinous rate cutting and how and by whom should it be determined; should relatively inexperienced newcomers unfamiliar with the route be encouraged or discouraged; what, if any, allowances should be made for speed and characteristics of vessels; what sort of minimum-maximum quantity guarantees should be required; for what periods must MSTS be required to hold cargo in its terminals awaiting a vessel of the favored bidder?

Senator LONG. Might I interrupt you there? I don't have the familiarity with this that Senator Brewster and Senator Magnuson have, but what you say here brings home something that has been on my mind for a long time.

The point of view of the maritime industry, as I understand it, is that building these ships with so much speed might actually be increasing your costs, but on the other hand, this is a defense requirement, so that in wartime you can keep up with a convoy. Isn't that the reason that some of these ships were built as big and fast as they were?

Mr. WALSH. That is correct, Senator.

Senator LONG. After they make you build a ship that from your point of view has a higher operating cost than some of the older ones you have on hand, particularly when you consider the high cash investment and the depreciation of that investment, then it puts you in such a position that you can't compete with someone who has not modernized his fleet, and who is just using a bunch of old junk he has left lying around.

Mr. WALSH. That is quite the case. I think you have stated it very correctly.

Senator LONG. Now, in the event that an enemy started using submarines against us, for example, to cut off cargo that we have going to Vietnam you would then have to discontinue the use of all of the old junk, because those ships couldn't keep up in convoy, and you would have to rely entirely on the ones they forced you to buy at the very great increased cost?

Mr. WALSH. Quite so. The military, as a matter of fact, have acknowledged the importance of the new ships in the merchant marine to the job they have to do in, well, let's say, war or semiwar, undeclared war, and they are very anxious to have the use of as many of that type ship as necessary.

I think, in a national emergency, an all-out war, those ships would be of great value to our Government. There is no question about it. But we have been in a vacuum, as far as our American merchant ma

rine policy, really has been concerned, for a long time, because we built relatively few ships to perpetuate the American merchant marine.

The subsidized lines are the only ones that have been in a position to do it. As you say, they have committed themselves to substantial capital requirements and large investments, and their returns, as I understand it, are restricted. In other words, they are only permitted to earn a certain amount of money and there are safeguards built around the subsidy contracts.

Our own particular company, we are unsubsidized, and we have been asking the Maritime Administration and the Federal Maritime Board for a number of years to clear subsidy contracts so we could have the availability of tax-deferred reserve funds and begin to accumulate money to build these ships which are very expensive.

We just don't seem to be able to get coordination among the Government departments, and implementation of the policy that Congress has spelled out over and over again, and in the Merchant Marine Act of 1936, it presented, I think, all of the bases that are required for the administrative departments to implement that policy.

Senator LONG. Yes; I am familiar with the fact that the Defense Department has been requiring subsidized lines to replace old ships. with these fast big new ships, and that in many instances this has greatly increased costs.

In other words, the putting in of all of the power it takes to move these ships as fast as they want them to go has been at extra cost to the shipowners. But after the Defense Department requires them to build these big ships and put the extra power into them, then it should see to it, having made the shipowners acquire such a ship, that they can make enough money to stay in business.

As I understand it, that has not been your problem. But if you are going to modernize your fleet, that is what you are going to have to think about.

Mr. WALSH. That is right. Our problem at the moment is how to keep alive, particularly under a system proposed like this, and it then becomes the same problem as the already subsidized lines.

I think all you have said is particularly pertinent and applicable to the present situation. I think Mr. Rand would like to add something to what I have said.

Mr. RAND. I would like to say one thing at this point. In all fairness to the Department of Defense, they have not insisted, or the reason we have built the new fast ships is not primarily due to their wishes and directives. We have found ourselves, as a commercial operator, that these larger faster ships from a commercial point of view are very good for our company.

In other words, we have found, and we have done it, we can replace six of the older ships on a given service in the North Atlantic with five new ships, thereby somehow, in some way, more or less counteracting the additional expense.

So, although we have put some features in these ships which have been required by the Department of Defense, it is not entirely a oneway street.

Senator BREWSTER. Please go ahead with your statement, sir.
Mr. WALSH. Thank you.

For what periods must MTMTS be required to hold cargo in its terminals awaiting a vessel of the favored bidder? We sincerely hope that they will not be resolved, as the program itself seems to have been conceived, in haste and with a minimum of attention to matters of practical concern.

But even with the wisest possible implementation of the program, it cannot fail to be a disaster, certainly to the industry and to the future of the American merchant marine, and probably to the Department's transportation agencies as well.

D. COMPETITIVE BIDDING IS DISASTROUS IN OCEAN LINER TRANSPORTATION

The proposal for competitive bidding is advanced in total disregard of nearly a century's history of ocean transportation. That history shows that, without exception known either to us or Mr. Moot, competitive bidding for an important movement of liner cargo inevitably drives rates down below cost and approaching the out-of-pocket costs of cargo handling and added vessel time.

As early as 1875, when several lines were serving the Calcutta/ Europe trade, they discovered that rate competition was quite literally ruinous to each. Out of that costly discovery developed the first steamship conference. The same forces are at work in modern times. Senator BREWSTER. Are you subject to the Sherman Act or the Clayton Act?

Mr. WALSH. No; Mr. Chairman. The conference under which common carrier berth liners operate have been exempted from the antitrust laws provided certain requirements are complied with, primarily filing with the Federal Maritime Commission agreements among themselves which must be approved by the Federal Maritime Commission, before they can become effective.

Senator BREWSTER. We wanted that statement in the record. Please go ahead.

Mr. WALSH. From 1954 to 1958, the Japan to United States trades were in turmoil; rates were driven by competition far below cost and in some instances were below cargo-handling costs.

Again, in 1961, the conference from Italy to the U.S. Atlantic ports was forced to open its rates; competition among the individual Îines, as usual, drove rates down toward the costs of handling the cargo, with little or nothing over for the costs of operating the vessel or manning the steamship line.

The examples could be multiplied. It is sufficient that there is no known exception to the rule that competitive bidding between ocean liners, if long continued, inevitably injures all lines and forces the withdrawal of some lines to escape insolvency which reduces frequency of sailings and availability of space.

In 1914, the Alexander Committee, whose report led to the Shipping Act, 1916, phrased its conclusions vividly. It said:

The entire history of steamship agreements shows that in ocean commerce there is no happy medium between war and peace when several lines engage in the same trade. **To terminate existing agreements would necessarily bring about one of two results: the lines would either engage in rate wars which would mean the elimination of the weak and the survival of the strong, or, to avoid a costly struggle they would consolidate through common ownership.

There is nothing mysterious about this inevitable consequence of competitive bidding in the liner trades. It follows, with the ocean liner just as with the competing railroads or electric light companies, inexorably from the nature of their business.

The great majority of the costs of a liner service are fixed in advance of the voyage. Not only depreciation, overhead, and insurance, but the entire vessel cost of wages, subsistence, fuel and repairs, are incurred once the ship is put on berth for its voyage. Whether much or little cargo is carried, these costs are fixed. Only cargo handling costs, and the additional vessel time for loading and discharging, are incurred for any lot of cargo. Our recent cost studies show that 75 percent of the total cost of the voyage is fixed in advance. For MSTS cargo, where straight-time stevedoring is paid by the Government, the ratio of fixed costs is about 85 percent. It inevitably follows that any rate over these variable costs is often preferable to sailing with empty

space.

This is not a novel theory invented by the industry. It was, as we have indicated, recognized by the Alexander committee in 1914. It was very explicitly and very clearly spelled out by this committee itself in 1961. In reporting the bill which amended the Shipping Act to legalize dual rate contracts it said:

The history of ocean shipping proves beyond peradventure that these competitive rigors are so potentially violent that when unleashed almost invariably they destroy the requisite dependability, regularity and non-discriminatory nature of ocean common carriage.

Whether a liner vessel sails full and down or three-quarters empty, it costs about the same to make the scheduled voyage. Fuel, maintenance of the vessel, depreciation, officers' and crews' wages and subsistence, fresh water and insurance these costs and others are affected only slightly by the amount of cargo carried. And so it is, when a trade becomes overtonnaged, that the normal independent self-interest of each carrier in the trade is to get more cargo, by cutting rates, if necessary, to the point where they return at least the cost of handling, for example, the cost of loading and discharging the cargo.

Thus, in ocean shipping there is no floor to rates, which a distressed carrier, or one which must make the voyage for other considerations than immediate profit, may charge.

The Congress has for half a century acted in clear recognition of these elementary truths. In 1916 the same Congress which enacted the Clayton Antitrust Act passed the Shipping Act. Section 15 of that act permits the ocean carriers to fix rates in combination.

Ever since 1916 conference ratemaking, in place of competitive bidding, has been the cornerstone of the regulation of ocean shipping, When Maritime Board v. Isbrandtsen Co. in 1958 threatened the efficacy of the conference rate system by condemning the dual rate contracts, the Congress promptly gave interim relief and in 1961 legalized the dual rate systems precisely because they were necessary to make conference ratemaking effective.

There is not any magic which will avoid this result for the MSTS cargoes. In the last quarter of 1964, before the Vietnam buildup, defense cargoes ranged from 26 to 42 percent of the outbound cargoes in the trades covered by our cost study. This is cargo so important that no line in these trades can forego it without serious consequences. Mr. Moot yesterday considered that MSTS competitive bidding would not produce disastrous rate wars because in many conference trades there was independent competition. We fear that this is the

same sort of superficial analysis which has led to the present proposal. It is one thing to have one or even two independents and a dozen united lines, supported by dual rate contracts, and quite another to have each of a good number of lines in a dogfight with each of the others. In the latter case, which is what MSTS proposes, rate wars have never been avoided.

Senator BREWSTER. Comment, if you will on the charge that Senator Douglas has made that your industry charges U.S. shippers one rate for outbound cargoes and rigs the deal to give a much cheaper rate for inbound cargoes to foreign shippers.

Mr. WALSH. Let me put it this way: There are good reasons why this situation has prevailed over the centuries. In our foreign trade, the outbound volume, particularly of liner-type traffic, exceeds the inbound volume. In recent years the inbound has been increasing. But, nevertheless, the outbound volume is greater. And, therefore, the service that is projected on the trade routes is geared to the outbound volume.

When a ship is returning from abroad and competing with many other ships and all flags for what may be available to come back, and which is not sufficient to go around, then the play of competition inevitably brings those rates down below what they would be on the outbound trade, where there is more cargo to be divided up among the lines.

So I think it a natural economic phenomenon that takes place there, and it is not the result of rigging or anything except the play of natural forces.

This is usually a pretty sound reason for everything that takes place in business and, in this particular case, I think that is the reason for it.

Senator BREWSTER. Should the U.S. Government attempt to invoke any type of economy or shipping sanctions against foreign shippers who utilize rebates, types of monopoly, and utilize types of activity that restrains free trade and hampers U.S. merchant marine activities?

Mr. WALSH. I think our Government should do whatever it can to try to adjust those unfair situations. Of course, under our shipping laws, rebates are illegal, and they are not illegal under the shipping laws of, I think, most of the other countries in the world. So, while I think foreign lines, foreign-flag lines, may, and undoubtedly do, observe our laws in connection with their trades to and from this country, as far as we know, nevertheless, it is a situation that is different here than any place else. I don't think that I would want to say that we should necessarily legalize rebates.

I think we would have to proceed on the basis that it may be a factor that is very difficult to deal with, but it has been one that has been prevalent in our steamship industtry for quite a long time.

Senator BREWSTER. I do not suggest that we legalize any type of rebates. I do suggest that maybe the U.S. Government could do more to help the shipping industry in the United States, and I am asking your opinion as to what the U.S. Government can do more to help the U.S. merchant marine.

Mr. WALSH. Well, I think, presumably, for the future of the American merchant marine, I think the Government should try to protect