tured commodities from the Mainland to satisfy local demand and the industrialization program. During 1967, imports from the continental United States represented about 81 percent of the total value of Puerto Rico's imports. Of these imports, approximately 50 percent ($750 million) were food and other consumer goods; the remainder were largely semimanufactured goods.

Selection of commodities for examination in this chapter was predicated mainly on the basis of the commodities listed in the publication entitled, Goods and Services Priced for the Calculation of the Consumer Price Index for Wage Earner's Families in Puerto Rico. This publication lists the consumer items which are the most important to Puerto Rico's wage earners' families (low-income groups). These families spend a substantial proportion of their annual income on these consumer items. Only the rates of the principal common carriers from each region were taken into consideration. These carriers include Sea-Land (North Atlantic), TMT (South Atlantic) and GPRL 10 (Gulf) which, combined, carried about 85 percent of the traffic, in terms of freight revenues earned, to retailing outlets in San Juan, Ponce, and Mayaguez.

Appendix G, table 1 contains U.S. wholesale and Puerto Rican retail prices (San Juan), ocean freight and delivery charges, and the markup of the Puerto Rican merchant. In this chapter, "markup" refers to the difference between the landed cost in Puerto Rico (which landed cost includes the U.S. wholesale price, ocean freight charge, and terminal charges, Puerto Rico trucking charges and excise taxes) 11 and the retail selling price in Puerto Rico. In addition, tables containing indices of 1958-67 retail prices in Puerto Rico and the corresponding ocean rate indices of SeaLand, GPRL, and TMT, have been prepared (app. G, table 2). The ocean freight rate indices take into consideration all of the rates offered by each carrier on the commodities involved.

At the outset, it is important to observe that the pricetransportation cost relationship is not indicative that the ocean freight rates are reasonable or unreasonable.

Puerto Rico Department of Labor, Goods and Services Priced for the Calculation of the Consumer Price Index for Wage Earner's Families in Puerto Rico (San Juan: July 1967), p. 8.

10 For the most part, their rates were similar to those of the other common carrier (s) serving the same region.

11 The Puerto Rican excise tax does not apply on food items. In addition, excise tax does not apply on household articles when their cost at the factory does not exceed a prescribed level. The cost of the items considered in this examination was generally below the taxable level (Source: Puerto Rico Department of Treasury, Taxes in Puerto Rico-1968, San Juan, 1968, pp. 25-26).

In this analysis, the reasonableness of rates is not at issue. The examination only serves to demonstrate the probable impact of rate levels on economic conditions in Puerto Rico.

B. THE U.S. MAINLAND WHOLESALE PRICE AND THE SAN JUAN RETAILER'S MARKUP

The relationship of ocean freight charges to price levels is demonstrated by comparing the U.S. mainland wholesaler's prices 12 on 45 actual shipments with Sea-Land's corresponding ocean freight charges 13 from U.S. port of origin to San Juan. The examination demonstrates that the effect of ocean freight charges on the wholesale selling price 14 is relatively small compared to the impact of Puerto Rico's marketing system on the same price (app. G, table 1).

1. Consumer Goods

Table V-1 shows that 1967 ocean freight charges from U.S. mainland ports increased the U.S. mainland wholesale selling price of various food items from some 6 to 45 percent, or an average of 11 percent, while the average effect of retail markups was approximately six times greater.15 For example, in 1967 the wholesale selling price in New York (FAS price) for one pound of red kidney beans was 10 cents. The ocean freight charge to San Juan on this commodity was 1.08 cents per pound. This transportation cost increased the New York price 10.8 percent. The San Juan terminal plus pickup and delivery charges to the retailer's door, which amounted to only 0.11 cents, raised the New York selling price on the one pound of beans by only one percent. Thus, total transportation cost to doorstep increased the New York wholesale price of 10 cents by

12 The term "U.S. mainland wholesaler" refers to the continental supplier who ships commodities to Puerto Rican retailers. This wholesaler's price is considerably less than the final shelf price in Puerto Rico.

13 Sea-Land's ocean freight charges were used because Sea-Land's rates have affected more than 60 percent of the traffic transported to Puerto Rico by common carrier.

14 The U.S. mainland wholesale prices on selected commodities, contained in appendix G, table 1, were obtained from 1967 average price lists solicited from various U.S. mainland distributors by means of correspondence and questionnaires (form FMC-119). Unfortunately, valid wholesale prices could not be obtained on all of the consumer commodities which were under consideration.

15 The proportion of ocean freight charges to price on potatoes, eggs, and onions were about two to four times above the average. Rates on onions and eggs have remained constant or declined during the last 8 years. The rate on potatoes, however, increased more than 50 percent during the same period, based on rates in effect Sept. 1, 1968.

TABLE V-1

1.19 cents, or about 12 percent. On the other hand, the San Juan retailer's markup of 8 cents on this commodity raised the U.S. wholesale price of beans almost 80 percent or more than six times as much as the total price-transportation cost relationship.

The low price-transportation cost relationship on foods partly reflects the Federal Maritime Commission's policy of permitting low rate structures on commodities which are essential to the economy of Puerto Rico. This policy, as already noted, was established in the Commission's 1965 investigation of automobile freight rates entitled, Reductions in Freight Rates on Automobiles-North Atlantic Coast Ports to Puerto Rico; 8 F.M.C. 410 (1965), which stated:

"The 37-cent rate will allow the automobile shippers to share in the benefits of this increase in carriage. At the same time, however, it will be high enough to allow a sufficient number of carriers to remain in the trade adequately to maintain the transportation of basic foodstuffs and products for 'Operation

Table V-1 also shows that transportation charges on selected household goods, including refrigerators, stoves, sewing machines, washing machines, and T.V. sets, increased the average U.S. wholesale price on these items by 9 percent. By comparison, the average Puerto Rican markup on the same items increased the price by about 112 percent. Ocean transportation charges increased the average U.S. mainland wholesale price of selected automobiles 8.5 percent whereas the Puerto Rican markup on these automobiles increased the price about 61 percent. Puerto Rico's excise tax on automobiles alone has a greater impact on their U.S. mainland wholesale price than the ocean transportation.

16 If the rates on some articles do not cover their full share of the cost of transport, it is axiomatic that other articles (high-valued nonessential goods) must bear more than their proportionate share if the carrier is to maintain adequate service.

For example, the Puerto Rican excise tax on a U.S. passenger car valued at $1,937 FAS Baltimore increases the wholesale price about 21 percent, or $400.1 In contrast, the ocean transportation on this vehicle increases the price about 10 percent, or $207.20. Excise taxes can also apply on petroleum products, cigarettes, matches, tires and tubes, rugs, photographic equipment, appliances, radios and T.V. sets, trucks, and motor vehicle accessories.

The Puerto Rican markup on foods, consumer items, and automotive items has greater impact on the price level than does the ocean transportation charge because retailers typically calculate their markups on the basis of the total cost to them of the merchandise which includes ocean transportation. This is not to say that retailers in Puerto Rico are making excessive profits. It is recognized that high markup margins on the Island may be prompted by high expenses including large inventories, as well as accompanying storage expenses and other costs. These factors and the effect of Puerto Rican wholesalers on price levels are discussed in section D following. The examination of markups is made simply to setforth the relative effect of Puerto Rico's marketing policies on the cost of living.

The examination of the price-transportation cost relationship on various southbound intermediate goods, or nonconsumer articles, revealed that ocean transportation often comprises a significant part of the final selling price on this category of cargo. The ocean freight charges increase the U.S. wholesale price on: animal feed and poultry, 42.9 percent; cast iron pressure pipe, 50 percent; pipe fittings, 33.3 percent; paint thinner, 27.4 percent; wooden barrels, 33.2 percent; synthetic enamels, 5.7 percent; lacquer, 9.3 percent; and lubricating grease, 11.3 percent.19

In considering the impact of ocean freight costs on these goods, it should be borne in mind that the retailer's markup is absent in most of these items since there usually exists a straight buyer-seller relationship between the Mainland supplier and the manufacturer in

17 Taxes in Puerto Rico, op. cit., pp. 25-26.

18 The term "intermediate goods" refers only to those nonconsumer products which need further processing before being marketed for final consumption or those raw materials which are derived from other raw materials or subcom. ponents of completed products (e.g., construction materials). Some of these are: cast iron pipe, lacquer, paint thinner, yarn, unfinished hides, shoe uppers, furniture, boxboard, ingots, plastic resins, and all semiprocessed articles.

19 While the price-transportation cost relationship on consumer goods being sold directly to consumers can be measured very easily, the same ratio on intermediate goods which must be further processed into finished goods before sale cannot be measured with the same accuracy.

Puerto Rico. The impact of the freight cost on cost of living with respect to these goods acquires importance mainly when the final product is sold locally. It appears, however, that rates have a significant impact on these items.

Appendix B contains a list of basic foods and intermediate goods on which the Commonwealth hopes that together the ratemaking practices of common carriers and the FMC's regulatory policy can maintain low rates. This appendix also describes the Commonwealth's reasons why these commodities are important to the economy and industrialization of Puerto Rico. The intermediate commodities include: industrial acids, industrial alcohol, boxboard, carbon black, carbon electrodes, animal feed and feed stuffs, paperboard, silica gel, synthetic resins, rubber, urea, yarn, hides, and agricultural implements.

C. THE ISLAND'S RETAIL PRICE STRUCTURE

The retail price-transportation cost relationship possesses positive analytical value because it indicates the direct burden that transportation might have on Island consumers. This relationship was, therefore, examined.

Two separate examinations have been made. First, the rates 20 on 24 foods of paramount importance to the Island's low income groups were compared to the corresponding retail prices 21 in Puerto Rico for the calendar years 1958 through 1967. Second, ocean freight as a percentage of the retail prices in Puerto Rico was examined on 47 general consumer items. At the outset, it is important to observe that this analysis is limited to consumer commodities and did not consider intermediate goods which comprise a substantial part of Puerto Rico's imports from the United States.

1. Effect of Ocean Transportation on Cost of Livng for Low Income Groups (24 foods)

Although Puerto Rico, in general, enjoys a relatively high standard of living compared to other Caribbean Islands, its low income groups constitute a substantial part of its total population. They eat the least expensive foods, but few clothes and manufactured goods, and

20 Ocean freight rates of Sea-Land, TMT, and Gulf-Puerto Rico combined. 21 Average retail prices corresponding to the 24 foods.

spend almost one-half of their total annual income on food. Consequently, the group of commodities selected for this analysis is that used by the Commonwealth's Department of Labor to obtain the Island's cost of living for low income groups.

Chart V-1, p. 94, illustrates the comparative indices. of ocean freight rates, retail prices in Puerto Rico and traffic volume, for the fiscal years 1958-67. These indices apply to the 24 primary foods selected for examination. The chart demonstrates that the retail price trend increased steadily since 1958 while ocean transportation rates, for the most part, had a declining trend during the same period. Although the price and rate indices commenced at 100 percent in 1958, diverging trends in these indices resulted in an 18 percent differential by 1967. By 1967, retail prices had climbed by 16 percent while ocean freight rates declined about 2 percent.

Of the 24 food items considered, the comparative rate indices of about 60 percent or 15 items, are below the levels existing 9 years ago as a result of ocean freight rate reductions. The decreases on dairy and poultry products were considerable, for example, 13 to 18 percent on butter, eggs, and oleomargarine. Chicken enjoyed the largest decline, dropping to 70 percent of the comparative rate index level existing in 1958.22 The rate index levels on rice (in cartons) and beans, two of Puerto Rico's most important food staples, remained the same during the 9-year period. On the other hand, the rate index on rice (in sacks) increased by 5 percent by 1967. Comparatively, there were rate index increases also on floor (8 percent); ham (9 percent); potatoes (10 percent); pig's feet (10 percent); lard (7 percent); and onions (12 percent). Codfish experienced the highest increase, reaching an index level of 133.

For the most part, retail prices climbed markedly compared to the ocean freight charges. For example, chart V-1 shows that a declining trend existed in the 1960 ocean freight rates while the corresponding prices showed the opposite trend. The same pattern continued in 1963, 1964, 1965, 1966, and 1967. In many cases, the increase in price greatly exceeded any rise in rates. Moreover, chart V-1 also indicates that traffic volumes on these food items climbed considerably while rates were steady during the same period. The overall traffic

22 The other commodities which experienced declining rate indices were: oatmeal (98 percent); beef steak (92 percent); pork chops (92 percent); sausages (95 percent); cornbeef (95 percent); salmon (95 percent); evap. orated/powdered milk (92-93 percent); fruit juice (97 percent); vegetable soup (96 percent); and tomato sauce (99 percent). Appendix G, table 2, table contains the rate and price indices on each commodity for the 9 years under consideration.

indices on these imported foods climbed from 100 in 1958 to 230.5 in 1967. Consequently, it follows that ocean freight rates on essential foods have not played an important part in contributing to Puerto Rico's rising retail food prices. On the contrary, these divergent trends on rates and prices contradict the generally held opinion that ocean transportation is a significant determinant in Puerto Rico's food prices, although transportation is a factor present in the price level.

2. Percent Ocean Freight is of Retail Price in Puerto Rico

The unit freight and price-transportation cost relationship on retail prices was computed on 41 articles to analyze the impact of transportation on the total price structure.23 Of these 41 commodities for which ocean freight costs as a percent of the retail selling prices were computed, the price-transportation cost ratio was from five to 19 percent on some 23 commodities, most of which are foodstuffs, and of the remaining items (also mainly foods) the ocean freight charge was 4 percent or less. Comparatively, ocean transportation is high on the low-valued foodstuffs. The ratio was 11 percent on onions, 8 percent on eggs and on rice. In this food group, potatoes revealed the highest increase. Freight on this item amounted to about 19 percent of the retail purchase price. In addition, flour, tomatoes, and chicken were relatively high. The freight on these commodities amounted to 7 percent of the purchase price. In the case of televisions, tires, and stoves, freight is far less important than on food. Their freight was 2.4, 2.8, and 2.0-3.1 percent respectively of the retail prices. In general, the retail price-transportation cost ratio of these commodities was relatively low compared to the ratio of the same transportation cost to the initial wholesale price discussed previously. This reflects the higher values involved in retail prices due to markups and other costs.