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which cover general cargo and 48 tariffs covering household goods. In the U.S. mainland-Puerto Rican trade, there are 30 NVOCC carriers of general cargo with tariffs on file with the Commission.14 In 1967, seven of the largest NVOCC's in the U.S. mainlandPuerto Rican trade earned $6,175,010 in freight revenues, based on 105,966 tons, under FAK and TL rates largely from North Atlantic ports to Puerto Rico.15 The principal moving commodities were leather and leather goods, dry goods, rubber and rubber goods, plastic articles, machinery, paper and paper articles, shoes, chemicals, electric appliances, stationary, auto supplies, furniture, drugs, toys, and hardware. Most of these commodities lend themselves to LTL shipments since they are often shipped in smaller quantities. A comparison of Sea-Land and Puerto Rican Forwarding's LTL weight rates on these commodities revealed that, with two exceptions, the LTL weight rates of both carriers were the same. The NVOCC's have not been required to file financial statements of revenues and expenses earned in the trade. In recent years, the FMC has been faced with numerous and perplexing problems in its efforts to administer the shipping statutes in the regulation of NVOCC's. Because of the importance of NVOCC's to the shipping public, the Commission's staff is now conducting an investigation into NVOCC activities. 16
in its domestic trade. 18 In the trade between Puerto Rico and the Mainland, this restriction was made effective shortly after the United States began to exercise jurisdiction over the Island following its 1899 cession by Spain.19 Except for certain emergency situations, this ban on the use of foreign-flag vessels has always been in effect in the Puerto Rican trade. At various times, however, proposals have been made that the restrictive provisions of the Merchant Marine Act of 1920 be repealed to permit the operation of foreign-flag vessels in the Mainland-Puerto Rican trade, on the theory that the foreign-flag ship operates, enjoying the benefit of lower operating costs, will furnish shipping services at reduced rates or provide needed services and thereby benefit the economy of Puerto Rico. Paragraph 1 below discusses the repeal of the Cabotage laws, and paragraph 2 following considers waivers to these laws.
1. Suspension of Coastwise Laws
The coastwise laws, as applicable to Puerto Rico, have been suspended only twice since 1898. On each of these occasions, the circumstances were not such as to afford any reliable guide to the possible effects of a suspension of the coastwise laws under the conditions and circumstances prevailing today. During World War I, the coastwise laws were suspended because of the extraordinary scarcity of ships.20 This suspension of the coastwise laws did not produce adequate cargo space or hold down the level of water freight rates. The next suspension of the coastwise laws, as far as Puerto Rico was concerned, came in 1962 when Con. gress, finding that no American-flag ships were reasonably available from West Coast ports to Puerto Rico, enacted Public Law 87–877 to permit the shipment, during a 1-year period, of lumber on foreign-flag ships from U.S. ports to Puerto Rico. The quantity of lumber
14 In addition, there are 95 carriers of household goods in this trade.
15 Examination of eight NVOCC's that carry the bulk of general cargo in the Puerto Rican trade (i.e., Consolidated Express, Inc., Transconex, Inc., Twin Express Co., Acme Fast Freight International, Inc., San Lorenzo Express, Puerto Rican Forwarding Co., Inc., El Sol De Mayo, Express Furniture, and Valencia Baxt Express) shows that the two largest NVOCC's, Consolidated Express, Inc. and Puerto Rican Forwarding Co., Inc., each paid FAK rates exclusively in 1967 while some of the smaller NVOCC's such as Transconex, Inc., and San Lorenzo Express paid only truckload rates.
16 In 1969, the FMC instituted a nonjudicatory review by its staff to ascer. tain if there is a need for guidelines, rules and/or legislation in the area of NVOCC regulation. (Source: See Non-Vessel Operating Common Carrier by Water-Staff Investigation, Federal Register notices, Feb. 12, Apr. 3, and June 18, 1969.
17 Section 27 of the Merchant Marine Act of 1920 provides that no mer. chandise shall be transported by water, or by land and water, on penalty of forfeiture thereof, between points in the United States, including districts, territories, and possessions thereof embraced within the coast wise laws, either directly or by a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States.
18 Under a law enacted in 1798, discriminatory tonnage duties were levied on foreign ships operating in the American coastal trades. Then in 1808, another law extended the restriction to a complete exclusion of foreign-flag shipping from participation in the domestic trade of the United States.
19 The United States is not unique in limiting its domestic shipping trades to its own vessels. As of 1969, there are only six nations of the world that permit foreign-flag vessels to engage in their coastal traffic; Great Britain, Germany, Norway, Sweden, Denmark, and Italy. In their efforts to main. tain a national-flag merchant marine, most countries of the world jealously and rigidly bar foreigners from participation in their domestic trade lanes.
20 The belligerent nations pressed into war service anything that could float; the neutral ship.owning nations, such as The Netherlands and the Scandinavian countries, did not have sufficient tonnage, even at fantastically high freight and charter rates, to meet the insatiable demand for shipping space. The United States, after its declaration of war in 1917, seized neutral Dutch-flag vessels in American ports pursuant to the rarely-exercised right of angary. America's war-built fleet, with which it was hoped to bridge the Atlantic, did not begin to come down the ways until after the armistice of Nov. 11, 1918, and by the time that these vessels were ready to enter service, ships were a drag on the market,
shipped, 4.5 million board feet, represented approximately one full shipload of cargo, a relatively insig. nificant amount to move over the period of 1 full year.21 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.
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 for: mula, and (2) if dealing with foreign containerships, where cargo handling costs are relatively small and ves. sel expenses are proportionally greater, the cost differ. ential favoring foreign-ship operators is about 18 to 20 percent.25
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
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
2 Twelve applicants sought permission to ship by foreign-lag 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 coast wise 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,
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 gubsidized 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 subsidies only for certain defined categories of operating costs.
MR. W. Clower and John R. Harris, The Transportation Center at North. western University, Puerto Rican Shipping and the U.S. Maritime Laws: An Economic Appraisal (Evanston, III., October 1965), p. 38. 24 Their computation was as follows :
Percent Wages, 70 percent on 15 percent of total costs.
10.5 Subsistence, 25 percent subsidy on 1 percent of total costs... 0. 3 Maintenance and repair, 30 percent subsidy on 2 percent of total
0.6 Insurance, 40 percent subsidy on 3 percent of total costs.--- 1. 2
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. Mari. time 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
c. The Probable Effect of The Repeal of the
Coastwise Laws in the Puerto Rican Trade
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).
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.27 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
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, offering dry cargo and a reefer container service from New York to St. Kitts, Antigua, Guadeloupe, Dominica, Martinique, Barbados, St. Vincent, Grenada, and Trin. idad. 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
R. W. Clower and John R. Harris, op. cit., p. 85. 23 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 Carib. bean Lines, operates two Swedish motorships carrying trailers from Jackson. ville and Miami to Panama and return. Gallen Lines has iwo 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.
The U.S. Atlantic and Gull- Haiti Conference (Freimht 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).
21 It is more likely that the entry of the foreign carriers would result in overtonnaging the trade (see discussion in par. C following).
than the possibility of a temporary destructive rate war if the competition should become too intense. When such competition develops between American and foreign-flag carriers, it is the higher cost American-flag carrier who is hardest hit by the loss of revenues and, conceivably, this could extend to the elimination of most American carriers from the trade unless a conference system were established by the competing carriers.
d. Collateral Factors
lies between Culebrita Island (off the eastern end of Puerto Rico) and Savana Islands, 2 miles west of St. Thomas. Ships bound to or from the North Atlantic ports of the Mainland normally use the Virgin Passage; those traveling to or from Miami and New Orleans ordinarily take the Mona Passage. A ship trading with other Caribbean Islands or the ports of Central America and the north coast of South America could easily devi. ate from its normal route through either of these passages to deliver or pick up cargo at Puerto Rican ports. Geographically, Puerto Rico sits astride these trade routes and the added cost of calling at the Puerto Rican ports would be negligible. Moreover, both quantitatively and qualitatively, the Puerto Rican traffic is far more profitable to the water carrier than that with the other Caribbean Islands and areas.30 A ton of cargo moving to or from Puerto Rico will yield greater revenue because of the higher class character of the cargo, and there is a far greater tonnage moving in this trade.
In light of the existence of numerous foreign-flag container shipping services operating in the Caribbean area, the apparently low marginal cost that would be involved in deviating to deliver or take on board cargo at Puerto Rican ports, and the comparatively higher profits involved in the Puerto Rican trade, it seems very probable that the foreign-flag carriers would flock to the Puerto Rican ports if this trade were opened to them. Because of the large number of foreign carriers in the area (ch. VI), one of the effects of their entry would probably be the overtonnaging of the trade; and, as a result, there would be far more available shipping space than cargo. For the American-flag carriers now in the trade, including Sea-Land, Seatrain, and TTT, this would mean dilution of revenues and a reduction of profit margins. On the other hand, to the foreign-flag carriers, participation in this trade in conjunction with their existing services would mean an increase in their aggregate revenues and profit margins; as long as the marginal revenue derived from the Puerto Rican traffic exceeds the marginal cost of calling at the Puerto Rican ports, they would be certain to gain. There is nothing whatever in this situation that would hold out any hope of substantially reduced rates over the long run, other
There are two collateral factors that should be con. sidered in connection with any proposal to suspend the coastwise laws. First, the admission of foreign-flag carriers to the coastwise trades undoubtedly would lead the American-flag carriers, as a measure of selfpreservation, to ask Congress for an operating differential subsidy to apply to ships already in the trade, as well as a construction differential subsidy for ships to be built or converted thereafter. It seems unlikely, in view of current pressures to curtail Government spending, that the Congress would increase the appropriations for maritime subsidies to include financial aid to carriers in the domestic trades. A second collateral factor is the potential effect of a suspension of the coastwise laws on the U.S. balance-of-payments position. If foreign carriers are permitted to enter the Puerto Rican trade, all payments to those carriers for freight and other charges would reduce our balance-of-payments account.
Finally, it must be borne firmly in mind that the policy of Congress, as set forth in the preamble to the Shipping Act of 1916, was to encourage, develop, and create a naval auxiliary and naval reserve and a merchant marine to meet the requirements of the commerce of the United States with its territories and possessions and with foreign countries. Opening the Puerto Rican trade to foreign-flag vessels certainly contributes nothing to the development and creation of an American merchant marine.
30 Compared with Puerto Rico, most of the other Caribbean Islands are poor and their poverty is reflected in the character of their exports and imports. Theirs are essentially agricultural economies whose visible exports consist largely of sugar and its byproducts, sea-island cotton, and tropical fruits, even though their income is supplemented to some extent by their earnings from tourism. Because of the lack of local industries, there is comparatively little demand for imports of capital goods, and imports of consumer goods are drastically limited by the low average per capita purchasing power.
2. Waivers to the Cabotage Laws
Certain conditions may arise including shortage of shipping capacity during emergency periods to adversely affect the transport of essential commodities. As previously indicated, a comprehensive survey of shipping problems in the Puerto Rican trade, using about 2,500 questionnaires, revealed that approximately one out of every five shippers has experienced shortage of space problems during recent years. Approximately half of the commodities affected by the shortage of space
problems were low-raidd items including cast iron, pipe, tanks, containers, steel shapes and plates, steel fittings and sheets, and fire brick and refractory material. In certain circumstances, waivers to the cabotage laws may be necessary to provide adequate transport for essential commodities. Where there is a clear finding that no American-flag vessels are reasonably available to carry essential cargo or render an essential service, waivers of the Act, limited to a specific commodity or service and for a limited time, should be considered. Protection to American-flag vessels in the form of first refusal provisions might be considered.
H. DEVELOPMENTAL RATES
flow and over the long run increase freight revenues by encouraging larger investments in Puerto Rico and providing the impetus for further development of Puerto Rico's industry. In addition, they could generate a greater movement of southbound support cargoes. Northbound developmental rates would, therefore, appear to be of benefit to the economy, carriers, and shippers.
In recognition of these advantages, carriers have established developmental rates since 1946 when the Commonwealth inaugurated the present program of industrialization (Operation Bootstrap), and some have organized a trade promotion program for this purpose.
These developmental rates of the 1940's and 1950's, most of which have been carried forward to the present time, have covered such a wide range of commodities that there have been comparatively few occasions during the past 5 years or so on which the carriers have published new developmental rates. South Atlantic and Caribbean Line published a number of reduced rates in 1963 and later years, designed to assist Puerto Rican producers, such as those on sugar plant equipment, meat, fish and shell fish, lard, and nursery stock.
Although, generally speaking, the initiation and establishment of developmental rates is subject to the managerial discretion of the carriers, the FMC does encourage low rates in the domestic offshore trades on developmental type cargoes. In the Alaskan trade, for example, the benefit inherent in these rates led the Commission's staff to conclude that * * * "developmental rates should be encouraged in the Alaskan trade to assist the state in developing its natural resources and its economic potential." 32
This section discusses the importance of export (northbound) developmental ocean rates 31 to the industrial firms which have been attracted to Puerto Rico. The staff of the FMC was unable to determine the effect of ocean rates on firms which have decided not to locate on the Island because the EDA and Puerto Rico Ports Authority have kept no records of firms dissuaded from locating in Puerto Rico due to high ocean rates. The discussion, therefore, focuses on developmental rates applicable to the northbound traffic of EDA-sponsored industries. It is based largely on information developed in interviews of carriers and Commonwealth officials in New York and San Juan as well as questionnaires aimed at industries loc in Puerto Rico.
It is a fact that the Island has only limited natural resources and, therefore, imports semi-manufactured goods and raw materials from the U.S. mainland for manufacture and export to U.S. mainland markets. In the process, shippers necessarily incur a double (twoway) transportation charge on their products. Puerto Rico also produces some agricultural products (ch. II) which it exports mainly to U.S. consumers. If the output can be transported to Mainland markets at low rates which help make Puerto Rico's commodities competitive with corresponding foreign and Mainland articles, Puerto Rico's industrial growth will be greatly assisted and the unemployment problem alleviated. Developmental rates on northbound traffic will not only benefit the
economy of Puerto Rico but also the carriers. These developmental rates could be very beneficial to carriers. They could alleviate the existing imbalance in traffic
2. Survey of EDA-Sponsored Factories
During the course of the this study, the EDA and FMC conducted a joint survey of Puerto Rico's industries by means of questionnaires to determine which firms seek northbound developmental rates. Appendix H contains a list of the commodities on which developmental rates are desired. These commodities include: tennis shoes, leaf wrapper and filler tobacco, plastic toys, black and galvanized steel pipe, plastifleximitation leather, finished brassieres, ladies underwear, bras and girdles, ladies and men's raincoats, sweaters, swimsuits, and skirts. Considering that the matter of extending developmental rates rests primarily within the managerial discretion of the carriers, appendix H
31 Developmental ocean rates are ocean rates that are established by carriers at comparatively low levels designed to promote the movement of commodi. ties so rated.
32 Federal Maritime Commission, Alaska Trade Study, A Regulatory Staff Analysis (Washington: Government Printing Office, July 1967), p. VIII-21.