the Gulf-Puerto Rican trade while South Atlantic Barge Lines entered this Puerto Rican trade in October 1968, providing some breakbulk service between Savannah, Ga. and San Juan with one barge and tug. Representatives of the FMC and Maritime Administration of the Department of Commerce (MARAD) have met with shippers (New York Commerce and Industry Association) and carriers in New York and San Juan in attempts to alleviate the space shortage problem. As a result of these efforts, Sea-Land added one chartered vessel to the West Coast-Puerto Rican trade and three additional containerships to its Atlantic-Puerto Rican service. The Commission has also assisted shippers of potatoes, animal feedstuffs, steel pipe, chemical fertilizers, meat, and automobile dealers to obtain some shipping space.

General inadequacies of shipping space, particularly for noncontainerizable cargo still hamper commerce moving between the U.S. mainland and Puerto Rico. As previously indicated, shipping capacity from the West Coast region is scarce, particularly on the Pacific Northwest to Puerto Rico route. There is some indication that markets on certain commodities have been diverted from the U.S. mainland to Europe because of these inadequacies.

The Commonwealth of Puerto Rico and shippers recognize that the number of breakbulk vessels available in this trade is very limited and, therefore, have suggested two possible solutions. These solutions are: (1) waiver of the U.S. Coastal Shipping Laws (the so-called Cabotage laws) to permit foreign-flag vessels to enter the domestic offshore trade, and (2) grant subsidy under section 805 (a) of the Merchant Marine Act, 1936, to provide breakbulk service between the Mainland and Puerto Rico. The U.S. Coastal Laws are discussed in the latter part of this chapter (VIII.).

The Martime Administration of the Department of Commerce (MARAD) can permit U.S.-flag subsidized lines, without further legislation, to operate in the Puerto Rican trade under section 805 (a) of the Merchant Marine Act, 1936.10

In New York, representatives of the FMC and MARAD met with carriers and members of the New York Commerce and Industry Association. In San Juan, representatives of the FMC met with shippers at the Puerto Rican Department of Commerce.

10 "It shall be unlawful to award or pay any subsidy to any contractor under authority of title VI of this act, or to charter any vessel to any person under title VII of this act, if said contractor or charterer, *** shall own, operate, or charter any vessel or vessels engaged in the domestic intercoastal or coastwise service, *** or operate any vessel or vessels in the domestic intercoastal or coastwise service, without the written permission of the Commis. sion The Commission shall not grant any such application if the Commission finds it will result in unfair competition to any person, firm, or corporation operating exclusively in the coastwise or intercoastal service or that it would be prejudicial to the objects and policy of this act ** ***

There appears to be two basic transportation problems which must be answered in considering an application for section 805 (a) permission to provide service in the domestic offshore trades. It is necessary to determine: (1) whether the proposed domestic service would interfere with the applicants subsidized service, and (2) whether the present service in the domestic offshore trade by nonsubsidized carriers is adequate or whether additional services by subsidized carriers are needed.

Because of the FMC's regulatory responsibilities and expertise in domestic offshore services, it would seem appropriate to transfer that part of section 805 (a) authority which requires a determination of whether the existing service is adequate to the FMC. It appears that the FMC could deal more effectively with the examination of common carrier service in the domestic coastwise trade and related competitive factors. On the other hand, it would be necessary for MARAD to control the residual provisions of section 805 (a) dealing with the administration of subsidy to any contractor and person applying under authority of title VI and VII respectively of the Merchant Marine Act, 1936. MARAD should decide whether the proposed domestic service would interfere with the carrier's subsidized service.

D. CONTAINER/TRAILER DEMURRAGE

The FMC has conducted a number of informal investigations into the practices of carriers engaged in the Puerto Rican trade with respect to the collection of demurrage charges on trailers and containers which are being detained under the present free time and demurrage regulations contained in the carrier's published tariffs. These investigations have shown that in many cases the carriers have neither collected demurrage bills properly payable under tariff regulations nor taken reasonable steps to collect such charges.

Section 2 of the Intercoastal Shipping Act, 1933 provides that a common carrier by water shall not:

"*** charge or demand or collect or receive a greater or less or different compensation for the transportation of passengers or property or for any service in connection therewith than the rates, fares, and/or charges which are specified in its schedules filed with the Board [Commission] and duly posted and in effect at the time; nor shall any such carrier refund or remit in any manner or by any device any portion of the rates, fares, or charges so specified, nor extend or deny to any person any privilege or facility, except in accordance with such schedules."

There appears to be a widespread practice with respect to the carriers' failure to collect and enforce their published demurrage and detention charges. The

primary reason for the carrier's failure to collect such charges is that, hitherto, the shippers have not been required to pay for demurrage and detention and have become accustomed to not being billed for such services even though carrier tariffs provide for these charges. As previously indicated in chapter VI. C., consignees in Puerto Rico do not have a sufficient amount of warehouse space to handle large container loads arriving on the Island and have attempted to resolve this problem by retaining the trailers or containers beyond the normal time allowed. Four common carriers in this trade allege that 25 percent of all of their containers, includ ing chassis, have been retained by consignees in excess of the free time allowed; to one carrier, this meant the tieup of 53 percent of its rolling stock. In attempts to alleviate this demurrage problem, representatives of the FMC and Puerto Rico Ports Authority have met with carriers in Washington, D.C. and San Juan. For example, in 1968, the FMC conducted a special field investigation in San Juan of container movements, container demurrage, and related billing and collection procedures maintained by carriers, to facilitate the flow, and/or turn-around time, of containers and trailers. In addition, the Commission attempted to determine whether demurrage was being applied in a just and reasonable manner. There have been numerous discussions involving the carriers, and the situation is improving. But it appears that some carriers may be using demurrage and detention charges as a device to attract traffic from other carriers; and that the shippers, themselves, are playing one carrier off against another in order to benefit from the use of carrierowned trailers in excess of free time.

As already noted, under Agreement No. DC-38, Sea-Land, GPRL, Seatrain, and TTT may collectively agree, among other things, to establish uniform practices in connection with the movement of property between most U.S. mainland ports and Puerto Rico.11 Hopefully, the carriers will use this forum to establish rules and procedures to substantially resolve the problem of excessive free time and demurrage through the enforcement of these rules.

E. CREDIT REGULATIONS

The majority of the carriers in the Puerto Rican trade maintain rather vague provisions in their tariffs with respect to payment of freight monies. The fol

11 This agreement gives parties no authority to fix ocean rates and charges.

lowing provision is one which is published by most

carriers:

"All freight and other charges due the carrier are pre-payable in United States currency, but at the option of the carrier may be collected at destination. The carrier may extend credit to shippers who furnish evidence of financial ability deemed by the carrier to be sufficient to assure payment of such charges within the credit period so granted."

Under this tariff provision a carrier may demand prepayment from one shipper while extending credit to another. There is no quarrel with respect to the right of the carrier to exercise judgment as to which shippers it can reasonably extend credit without fear of financial loss. On the other hand, when the carrier does choose to extend credit to certain groups of financially responsible shippers, it should be extended to all such shippers on an equal basis. As the credit provisions are presently applicable, however, they permit a carrier to discriminate between shippers who have comparable credit standings. For example, one shipper may, because of volume of traffic, be in a position to influence a carrier and receive whatever credit period he demands.

In a 1965 informal investigation of credit practices, various carriers indicated that it is often the large solvent shipper who is tardy with payments. This may be due to two factors. First, large firms gear their internal billing and accounting procedures to longer periods. Second, the superior bargaining position of large firms allows them to play carriers off against each other in order to obtain the most favorable credit period.

Under present carrier credit rules, the credit period could extend for an indefinite length of time. On the other hand, a shipper with equally good financial standing but with less influence could be required to pay his freight bill within a restricted period of time; for example, from 15 to 30 days, depending upon the carrier's desire. Moreover, the vagueness in present credit rules may be used as a competitive device by a carrier. More precision than is afforded by the present credit rules is required to prevent or at least inhibit actions which permit the carrier to discriminate between shippers.

During the credit period, the carrier's operating capital is "tied up". The carrier must meet its operating expenses from other means while waiting for payment. There is at least an indirect relationship between this credit situation and rates because the longer the accounts remain outstanding the more operating capital the carrier requires.

The Shipping Act leaves common carriers free to exercise their rights and privileges with respect to the extension of credit so long as that is not done in an unlawful manner under the Shipping Acts. However, the present situation as to credit rules opens the door to unlawful practices.

Under the FMC's tariff circular rules, the FMC can require carriers in the domestic offshore trades to publish in precise terms all provisions affecting carrier services. The present carrier credit rules do not meet this criterion. Moreover, it follows that if a carrier will extend credit to shippers it must extend the same credit to all shippers with comparable standings.

Rules for extension of credit, therefore, should include: (1) the period within which the carrier will extend credit to all financially responsible shippers, and (2) as a rule, carriers should give identical credit terms to all shippers. If shippers became deficient in payment, the carrier could take remedial action pursuant to prescribed rules.

F. NON-VESSEL OPERATING COMMON CARRIERS

There is an urgent need today for a single transportation service covering diverse transportation modes. This may be aided by the non-vessel operating common carrier (NVOCC), subject to regulation by the Federal Maritime Commission.12 As its name suggests, the NVOCC does not own or operate the vessel by which the transportation is accomplished. This may be true also where the NVOCC offers a service requiring use of several transportation modes. Then the NVOCC employs rail, water, or air carriers, or a combination of such carriers, to provide the line-haul transportation necessary to the total or through movement. These other carriers are the underlying carriers.

12 In docket No. 815, Common Carriers by Water-Status of Express Companies, Truck Lines and Other Non-Vessel Carriers, 6 F.M.B. 245 (1961), the Federal Maritime Board found that any person or business association may be classified as a common carrier by water who holds itself out by the establishment and maintenance of tariffs, by advertisement and solicitation and otherwise, to provide transportation for hire by water in interstate or foreign commerce as defined in the Shipping Act, 1916; assumes responsibility or has liability imposed by law for the safe transportation of shipments; and arranges in its own name with underlying water carriers for the performance of such transportation, whether or not owning or controlling the means by which such transportation is affected. The Board had previously reached the same con. clusion in docket No. 701, Bernhard Ulmann Co., Inc. v. Puerto Rican Express Company, 3 F.M.B. 771 (1952) with respect to NVOCC operations in the domestic offshore trades.

At the time of the decision in docket 815 there were few, if any, NVOCC's in our foreign trade. However, development of the intermodal container concept in our international trade has encouraged carriers to offer a through, intermodal service such as NVOCC's.

This service is offered at a through, single-factor rate which may or may not be a combination of the local rates for the various transportation modes, and the NVOCC assumes liability for the entire intermodal movement. The NVOCC may add a profit factor to the aggregate of its underlying transportation costs. To make its service competitive, however, it will also endeavor to profit by its ability to consolidate small shipments into larger shipping units to take advantage of volume rates and full container/carload discounts and allowances of the underlying carriers.

The NVOCC may perform many functions including preparation of waybills, bills of lading, and manifests for the underlying carriers; collection of the through charges; providing handling services; routing and tracing shipments when necessary; investigation and settlement of claims; and arrangements made for transfer service on interline shipments. The NVOCC ordinarily charges the shipper a rate approximating that which the shipper would have to pay were this shipper to move his own shipment in the small-bulk service of the underlying carrier, and the NVOCC pays the underlying carrier the lower volume rate, FAK, or per box rate as the case may be. The difference between these amounts represents the revenue of the NVOCC from which all operating and overhead expenses must be deducted. In some instances, the NVOCC charges a rate slightly higher than that which the individual shipper would have to pay to the underlying carrier. The NVOCC justifies this added charge by the extra services which he performs. In the case of the small shipper, the NVOCC is rendering some services which are normally performed by the larger shipper's own traffic department.

It appears that the primary benefit of NVOCC's is that they provide services for small LTL-type shipments at rates lower than would otherwise be available. These shippers would, for example, have to pay higher AQ rates.13 As evidenced by the large amount of business done by NVOCC's in the New York area, smaller shippers make considerable use of NVOCC operations. These NVOCC's afford at least some of the benefits of containerization, including faster delivery, less pilferage and damage, and to some extent, lower rates to the shippers. It appears that NVOCC's have not penetrated the South Atlantic, Gulf, or West Coast market to any appreciable extent.

In the domestic offshore trade, there are approximately 179 NVOCC's publishing 106 tariffs, 58 of

13 For the difference between LTL and AQ rates see chart IV-2.

wise laws as to Puerto Rico would be those members of three conferences 26 now serving nearby islands in the Caribbean such as Jamaica, Haiti, Dominican Republic, and the Leeward and Windward Island groups. Although these carriers operate at lower costs, rate studies (table IV-2, p. 70) show that rates from New York to these islands are considerably higher than the corresponding Sea-Land rates from New York to Puerto Rico. It is recognized that foreign rates from New York to islands nearby Puerto Rico are influenced by the small volume of traffic moving to these islands. This factor, however, does not appear to account completely for the large percentage differentials between foreign and domestic rates (app. E, table 3 shows that about half of the foreign rates examined were from 100 to 500 percent higher than Sea-Land's corresponding rates to Puerto Rico).

27

Foreign-flag carriers entering the Puerto Rican trade would probably find that they must take the market as they find it; in other words, they would have to meet the existing level of rates being charged by the American carriers, even though these rates are substantially below those in the trade with the neighboring islands of Jamaica, Haiti, and Santo Domingo. As long as the trade remains undertonnaged, there would be no incentive for the foreign carriers to undercut the rates of the American lines, since the newcomers could count on a share of the market by providing additional space and more frequent sailings for shippers. One of the results of admitting foreign carriers to the Puerto Rican trade, however, probably would be an effort to reinstate the conference system which disappeared when Bull Line left the trade in 1961 (ch. III). The primary purpose of the conference is to establish rate and service stability through the elimination of price competition. The shipping public, therefore, would be most unlikely to benefit from the cost differential of the foreign lines. In all the conferences serving the foreign trade of the United States, the low-cost foreign-flag carriers quote exactly the same rates as the high-cost American flag lines, and there are no cogent reasons for expecting that the situation would be any different if the Puerto Rican trade were to be thrown open to foreign lines. The importance of the competitive factor now existing in ratemaking must not be underestimated.

Approaching this problem from the viewpoint of

The U.S. Atlantic and Gulf-Haiti Conference (Freight Tariff FMC No. 1); U.S. Atlantic and Gulf Jamaica Conference (Freight Tariff FMC No. 1); and U.S. Atlantic and Gulf-Santo Domingo Conference (Freight Tariff FMC No. 1). It is more likely that the entry of the foreign carriers would result in overtonnaging the trade (see discussion in par. C following).

the utilization of shipping capacity, the Northwestern University economists arrived at the conclusion that the foreign cost differential would not be reflected in lower freight rates. The substance of their analysis is as follows:

"Historically most discussions of the excess burden of ocean transportation charges have centered on high input prices resulting from cabotage restrictions imposed by the U.S. Maritime laws. Certainly this source is not unimportant in principle; average costs of ocean carriage in the domestic offshore trades might be reduced by 15 to 20 percent if vessels and other factor inputs could be acquired at world instead of U.S. prices. In the light of the argument in preceding paragraphs, however, we cannot take such discussions seriously, for what is true in principle is not true in practice. The fact is that actual costs of ocean carriers adjust to whatever rate level happens to be established, regardless of the absolute level of the average cost curve. Potential savings through low input prices are thus offset by losses associated with excess shipping capacity. Except in circumstances that ensure full utilization of shipping capacity at all times, input prices have no direct bearing on rates paid by shippers, hence no direct bearing on the excess burden issue." 28

c. The Probable Effect of The Repeal of the Coastwise Laws in the Puerto Rican Trade

Foreign containership operators would be the principal beneficiaries of any repeal of the coastwise laws in the Puerto Rican trade. There are a number of specialized foreign-flag ships now operating in the Caribbean area which can provide services between the Mainland and Puerto Rico. The Booth-Lamport Express Service, for example, is a joint service operated by two long-established British shipowners, offer. ing dry cargo and a reefer container service from New York to St. Kitts, Antigua, Guadeloupe, Dominica, Martinique, Barbados, St. Vincent, Grenada, and Trinidad. A roll-on/roll-off service from New York to the Dominican Republic and Jamaica is maintained by the Caribbean Trailer Express Line.29 Two of the principal gateways for ships entering the Caribbean Sea from the north or leaving it to return to the United States are the Mona Passage, lying just to the west of the island of Puerto Rico, and the Virgin Passage which

28 R. W. Clower and John R. Harris, op. cit.. p. 85.

29 From Miami a weekly roll-on/roll-off service is provided by the M/V Jamaican Provider of the Pan American Mail Line to Kingston and Montego Bay; the Norwegian Caribbean Lines carries unitized, containerized roll-on/ roll-off and reefer traffic on the Norwegian M/S Sunward from Miami to Kingston, Montego Bay, and Port Antonio. Florida Inter-Island Shipping Corp. has a regular container service between Miami and the U.S. Virgin Islands, British Islands, Tortola, and Venezuela. A Swedish company, Wallenius Caribbean Lines, operates two Swedish motorships carrying trailers from Jacksonville and Miami to Panama and return. Gallen Lines has two Finnish-flag ships carrying container cargoes from Houston, New Orleans and Mobile to Port Kaiser, Kingston, Port-au-Prince, Santo Domingo, and the Virgin Islands.

year. 21

shipped, 4.5 million board feet, represented approxi mately one full shipload of cargo, a relatively insignificant amount to move over the period of 1 full No efforts were, therefore, made to continue the suspension of the law. One point, at least, is certain. The previous instances of suspension of the coastwise laws offer little guidance for future situations, so the probable effect of such a suspension in the Puerto Rican trade under present-day conditions can be appraised only through an analysis of the various factors involved. Since the assumption that use of foreign-flag ships would bring about lower freight rates in the Mainland trade with Puerto Rico is based largely on the existence of a differential in the operating costs of American and foreign-flag ships, the first step in analyzing the situation should be an examination of such operating costs. a. Cost Factors and Rate Levels

At the outset, it must be borne in mind that in contrast to domestic carriers, foreign vessels operating costs are not easily obtainable. This information generally is considered a trade secret, the disclosure of which would be detrimental to the competitive position of the individual carrier. There are, however, subsidiary means of estimating operating costs; for example, the cost of seafaring labor. The Maritime Administration estimates the operating costs of foreign-flag vessels as a basis for the determination of the amount of operating subsidy to be paid to American vessels operating in the foreign trades.

To arrive at the probable operating cost differential of a foreign-flag carrier entering the Puerto Rican trade, the current costs of the American-flag carriers in this trade have been reduced by the amount which would have been paid as an operating-differential subsidy by the Maritime Administration to American-flag carriers in Trade Route No. 4.22 The net cost, after deduction of

21 Twelve applicants sought permission to ship by foreign-flag vessels, each of which was approved by the Secretary of Commerce, upon recommendation of the Maritime Administrator, subject to the requirement of a "first-refusal" procedure, under which American-flag carriers were allowed 5 days within which to meet the terms of the foreign-flag ships.

22 Subsidies are computed separately for each of the trade routes determined by the Maritime Administration to be essential to the foreign commerce of the United States. No subsidy has ever been computed for the Puerto Rican trade because this is purely domestic. To estimate the operating-cost differential of foreign-flag carriers, which might enter the Puerto Rican trade if the coastwise laws were suspended, the closest approximation could be derived from the Maritime Administration's computations for Trade Route No. 4, the service between U.S. Atlantic Coast ports (Maine to Florida) and foreign ports in the Gulf of Mexico, Caribbean Sea, and the Guianas. The foreign-flag carriers which would be the most likely to enter the Puerto Rican trade are those who now are serving nearby islands and areas in the Caribbean. The most recent subsidy computations for this trade route allowed the American-flag carrier approximately 66 percent for wages for seafaring personnel, 9 percent for subsistence of officers and crew, 36 percent for maintenance and repair costs,

the subsidizable costs, amounts to about 85 percent of the total cost. Thus, the cost advantage of the composite foreign-flag ship would be conservatively about 15 percent. In 1965, an estimate of the cost differential in the Puerto Rican trade was made in a study conducted under the auspices of the Transportation Center at Northwestern University for the Ports Authority of the Commonwealth of Puerto Rico.23 The authors of this study used what they described as the average rates of subsidy in the Atlantic and Gulf services, said to be in the vicinity of 70 percent for wage costs, 25 percent for subsistence costs, 30 percent for maintenance and repair costs, and 40 percent for insurance. Applying these rates to the distribution of costs in the U.S.-Puerto Rico trade, the authors found that, if subsidies were paid in this trade, approximately 12.5 percent of total costs would be covered by subsidy.24 Based on these two estimates, a cost differential favoring foreign-ship operators in the range of 12.5 to 15 percent is as reasonable as can be determined. It is recognized, however, that: (1) there are other elements of cost favoring foreignship operators which do not appear in the subsidy formula, and (2) if dealing with foreign containerships, where cargo handling costs are relatively small and vessel expenses are proportionally greater, the cost differential favoring foreign-ship operators is about 18 to 20 percent.25

b. Benefits to the Public

At this point, the crucial question is, "To what extent would the benefit of the cost differential (lower foreign-flag costs) be passed on to the shippers or users of these transport services if the Puerto Rican trade were thrown open to foreign-flag shipping"? In the beginning, at least, the foreign steamship lines most likely to take advantage of any suspension of the coast

17 percent for hull and machinery insurance, and 83 percent for protection and indemnity insurance. There are several categories of operating expenses such as fuel, stevedoring, pilotage, port charges, and dockage that cannot be subsidized for the reason that American shippers pay no more for these goods and services than do foreign ships. Administrative and overhead expenses are also not subsidized because Congress has provided for the payment of sub. sidies only for certain defined categories of operating costs.

23 R. W. Clower and John R. Harris, The Transportation Center at Northwestern University, Puerto Rican Shipping and the U.S. Maritime Laws: An Economic Appraisal (Evanston, Ill., October 1965), p. 38.