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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).

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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." 29

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, offering 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

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

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.

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 deviate 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

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.

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

There are two collateral factors that should be considered 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.

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-rated 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

1. General

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 located 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

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.

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

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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, plastiflex— imitation 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

32 Federal Maritime Commission, Alaska Trade Study, A Regulatory Staff Analysis (Washington: Government Printing Office, July 1967), p. VIII-21.

has been prepared only to provide the information needed to bring carriers and shippers together.

In addition, discussions with EDA officials generated a list of commodities on which that agency suggests steady or lower northbound rate levels (app. B, northbound traffic). These are: rum; vegetables, refrigerated and nonrefrigerated; 33 canned or bottled foodstuff including dumplings (pasteles), guava paste, honey and molasses; antennas; baseballs; hairpins; carpets and rugs; cigars; drugs and medicines; finished dry goods including women's and men's underwear; electrical appliances; equipment and materials; shoes; leather goods; plastic products; toys; scrap tobacco; and copper wire. According to the EDA, rate increases on these exports would seriously inhibit Peurto Rico's commerce moving to U.S. mainland markets.

Appendix B also contains a list of products on which developmental rates may be needed by the Commonwealth in the future. These products are aluminum products, plastic pellets, nylon and other man-made fabrics, and tires. EDA is now considering an industry based on alumina. This industry will process alumina into aluminum which, in turn, will be used for the manufacture of various aluminum products including aluminumware, extrusions, sheets, etc. EDA is also considering the establishment of an industry to produce plastic pellets. Plastic producers use these pellets for producing plastic articles. Production should be underway in approximately 2 to 4 years. The Commonwealth's petrochemical industry plans production, in approximately 1975, of man-made fabrics (e.g. nylon). Finally, EDA is also considering an industry that will import rubber thread for the production of tires. These tires will satisfy some domestic demand and will also be exported to Mainland markets.

The Commission should continue its policy of encouraging developmental rates in the domestic offshore trades to assist the economic development plans of Puerto Rico.

I. CONCLUSIONS AND RECOMMENDATIONS

1. Conclusion

It is difficult to see how rate-fixing conference agreements can be justified by existing transportation needs in this trade or how the economy of Puerto Rico would

33 For example, Yautias, plantains, melons, pumpkins, and tanniers.

secure important benefits through such agreements. During the existence of Puerto Rico's conference system, rates rose considerably (i.e., doubling during the 1954-60 period) while technology remained stagnant. In contrast, under open competition, the economic performance, service, and rate levels of common carriers in this trade have been much more satisfactory. Thus, as a matter of policy, the Commission has discouraged conference agreements for fixing ocean rates in the domestic offshore trades. This policy is strongly supported by the Commonwealth of Puerto Rico.

Recommendation

The staff of the Commission should continue the pol icy of generally discouraging ratemaking conference agreements.

2. Conclusion

A general inadequacy of shipping space hampers the flow of certain commerce between U.S. mainland ports and those of Puerto Rico, particularly with respect to breakbulk cargoes. One possible way to alleviate the shortage is to authorize certain American-flag subsidized lines to provide service in the domestic offshore trades.

Recommendation

It is recommended that the Commission make a study of the present and potential effect of containerization on breakbulk service in the domestic offshore trades. The objectives of the study should be (a) to evaluate. the need for each type of service, in terms of present and probable future cargo volume, including whether containerization promotes shipments in different quan. tities, and (b) to consider and make recommendations concerning possible solutions to the increasing shortage of breakbulk space.

3. Conclusions

(a) Although the situation with respect to demur. rage has improved considerably, common carriers by water still often fail to collect demurrage and detention charges. This failure to collect such charges constitutes a violation of the act.

(b) It appears that the credit rules of most common carriers by water in the Puerto Rican trade are vague and unfair. Under some credit rules, a carrier may arbitrarily demand prepayment from one shipper while extending credit to another.

Recommendations

(a) It is recommended that the Commission direct the parties to Agreement No. DC-38 to act promptly not only to establish rules and procedures which will resolve the problems of demurrage and unfair credit rules but more importantly also to enforce these rules.

(b) It is recommended that the Commission continue to evaluate credit and demurrage conditions in the domestic offshore trades (i.e. Hawaiian, Alaskan, and Puerto Rican trades).

4. Conclusion

On the basis of available evidence, it does not appear likely that the entry of foreign carriers into the U.S. mainland-Puerto Rican trade will, in the long run, result in substantial benefits to the economy of Puerto Rico. On the contrary, the analysis contained in preceding chapters and section G of this chapter (the U.S. Coastwise Laws) indicates that, in general, the economic performance, service, and rates of U.S. domestic common carriers over the past decade have been satisfactory. It is also important to note that under the present restriction against entry of foreign bottoms into the U.S. mainland-Puerto Rican trade, carriers have made large investments in ships and associated terminal facilities needed for the rapid advances in containerization which have proven to be of considerable benefit to shippers and the people of Puerto Rico. For these reasons, suggestions that the exclusion of foreign carriers from the U.S. coastwise trade results in relatively high ocean transportation charges or that entry of foreign carriers into this trade would reduce such charges are contrary to the experience in this trade. Shortages of vessel space may be relieved by other means (e.g., see conclusion and recommendation 2 of this chapter).

Recommendations

It is recommended that: the present policy of the United States with respect to the exclusion of foreign carriers from the domestic offshore trades be preserved. 5. Conclusion

The Commission encourages developmental ocean rates, which are otherwise inaccordance with law, where there are benefits to Puerto Rican infant industry and ocean carriers. As long as the vessels of common carriers frequently leave Puerto Rico relatively light, any

revenue which is in excess of the out-of-pocket expenses incurred, serves to contribute to the full costs of the entire voyage.

Developmental rates are important to Puerto Rico because of the Island's system of importing and processing raw and intermediate goods, such as leather, yarn, fabrics, electrical and electronic components, and metals; thereafter, re-exporting these goods to U.S. markets. This system of importing and exporting, involving double shipments and freight charges, increases the proportion that ocean transportation comprises of the total cost of finished goods. If the output can be transported to Mainland markets at low rates making Puerto Rico's commodities competitive with corresponding foreign and Mainland articles, the Island's industrial growth will be greatly assisted.

The Commonwealth indicates that the industrialization program requires relatively low export rates on certain export traffic to keep Puerto Rico's infant industry production competitive with other sources of supply on the U.S. mainland. Northbound developmental rates would appear to be of special significance for the list. of commodities outlined in appendix B (northbound traffic) 34 and appendix H. Developmental rates on northbound traffic would not only benefit the economy of Puerto Rico but also the carriers. These rates could help to alleviate the existing imbalance in traffic flow and freight revenues, encourage larger investments in Puerto Rico and provide the impetus for further development of the Island's industry, and generate greater movements of southbound support cargoes. Northbound developmental rates would, therefore, appear to be of benefit to the economy, carriers, and shippers.

Recommendations

It is recommended that:

(a) Carriers offer developmental rates on northbound traffic where such rates aid in the establishment of an infant industry and meet the other requirements of law; and,

(b) The FMC continue to utilize its good offices in bringing shippers and carriers together with respect to developmental rates and to support the basis for such

rates.

34 The list of commodities on which steady or lower northbound rate levels are suggested include: baseballs; hairpins; carpets and rugs; cigars, drugs or medicines; finished dry goods (including women's and men's underwear); electrical appliances, equipment and materials, shoes, leather goods, plastic products, toys, scrap tobacco, and copper wire.

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