would retain subsidies? How on earth would you compute subsidy if you barred the foreign competition?

Mr. COLES. Yes, Mr. Ashley. In the proposed amendment that they set up something which is completely new, and if I may read it, section 2 says, for the purpose of title 6, that is the operating subsidy section, of the 1936 act, as amended:

Foreign-flag vessels operating to Guam from any ports in the Far East (Japan, Formosa, Philippine Islands, and continent of Asia, from the Union of Soviet Socialist Republics to Thailand, inclusive) shall be considered the substantial competitors of vessels of U.S. registry operating between the United States, the territories or possessions other than Guam, and Guam.

Mr. ASHLEY. So they take the vessels in the trade just listed and use those costs?

Mr. WISEMAN. Yes.

Mr. ASHLEY. It is totally fictitious though because there is no competition against which to measure the costs, so you take costs from routes that are being applied by foreign companies in which there is no competition and use those costs. It is fictitious as it can be, is it not; it does not relate to the situation at all.

Mr. WISEMAN. The only connecting link would be that they both come into Guam. But you are taking a route from the Far East to Guam and computing your cost and say, we will set that up as the basis; I do not know of any situation where that is done.

Mr. ASHLEY. Can you think of any situation where you bar the competition that is meant to be the basis for the subsidy; where you bar the competition but continue to pay the subsidy, or initiate subsidy payments?

Mr. WISEMAN. The original bill would have theoretically permitted foreign competition to come in. If I understand the amendment correctly, foreign competition would not come in under the proposed amendment.

The CHAIRMAN. Is that not practically what exists on the east coast of South America?

Mr. WISEMAN. If it is, I do not know that, Mr. Chairman.
The Chairman. In respect to passenger service?

Mr. WISEMAN. If it is, I do not know.

The CHAIRMAN. There is no passenger service from any foreign line between the east coast of South America and the United States?

Mr. WISEMAN. I am afraid I cannot answer. I do not even know whether there is foreign-flag passenger service or not. I know in Argentina, there are the Rio ships, things of that kind which I believe give passenger service. But I do not know, Mr. Chairman. Mr. ASHLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Any further questions?

Mr. TOLLEFSON. Just one question, if I may.

Because of the typhoon, there will be a lot of new construction and reconstruction work. How long will that construction program run in your estimation?

Mr. WISEMAN. Sir, I would say 5 years.

Mr. TOLLEFSON. Do you contemplate a large drop in carryings after that date?

Mr. WISEMAN. No, sir. Because the concept of the cargo will change, I am sure, but the government of Guam has an economic plan

ning commission which is now formulating plans to entice industry into Guam to pick up the slack that will be caused after this reconstruction is over, and I think that they are going to do a very good job with it.

Mr. TOLLEFSON. How about the sale of Government surplus items? How long will that continue?

Mr. WISEMAN. Sir, that has been going on for quite a long time and I would say it will go on for considerably longer. Now, how much longer, I do not know. But I would like to add at this time that we are the only carriers that have a link between Guam and Manila, and without our vessel going from Guam to Manila the military surplus disposal program would be a fiasco. They could not sell anything, and not only that, but Manila and the Philippines need this kind of material in their own reconstruction, and we feel that with our vessels, with our disposal purchasing program of our own, that not only are we doing a good job with the Government disposal program, but also for the people of the Philippines. Mr. TOLLEFSON. That is all, Mr. Chairman.

Mr. HAGEN. Mr. Chairman, I would like to ask one more question. The CHAIRMAN. Yes, sir.

Mr. HAGEN. You postulate some kind of an industrial future on something for Guam, but actually there is a shortage of labor on Guam at the moment, is there not?

Mr. WISEMAN. There is a tremendous labor force in the trust territory itself. There would have to be a program worked out where the surplus labor of the trust territory would be allowed to come into Guam, integrate, so to speak. And, of course, Guam is having its own population explosion as it were.

Mr. HAGEN. They have to bring in Filipinos to do a lot of that work on Guam.

Mr. WISEMAN. Less and less, as the weeks go by, they are training more and more Guamanian people.

The CHAIRMAN. Thank you very much, sir.

Mr. WISEMAN. Thank you, sir.

The CHAIRMAN. Mr. Gulick, the Maritime Administrator.

You may proceed, sir.

STATEMENT OF J. W. GULICK, DEPUTY MARITIME ADMINISTRATOR, ACCOMPANIED BY WILLIAM BURCHILL, ASSISTANT GENERAL COUNSEL FOR LEGISLATION

Mr. GULICK. Mr. Chairman, my name is J. W. Gulick, Deputy Maritime Administrator. I am accompanied by Mr. William Burchill, Assistant General Counsel for Legislation.

The bill would (1) exclude Guam from the coastwise laws, (2) classify trade between Guam and the United States as foreign trade rather than domestic trade for regulatory purposes, and (3) classify this trade as foreign trade for purposes of the Merchant Marine Act, 1936, so as to make American-flag vessels engaged in this trade eligible for construction-differential subsidy and operating-differential subsidy.

We recommend against favorable consideration of the bill.

Section 27 of the Merchant Marine Act, 1920, provides, with narrow exceptions, that no merchandise shall be transported by water, or by land and water, between points in the United States embraced within the coastwise laws, either directly or by a foreign port, in any other vessel than a vessel (1) built in the United States, (2) owned by citizens of the United States as defined in section 2 of the Shipping Act, 1916, and (3) documented under the laws of the United States.

This section of the Merchant Marine Act, 1920, and the documentation laws of the United States are administered by the Department of the Treasury.

Under existing law, Guam is embraced within the coastwise laws. Section 4132 of the Revised Statutes (46 U.S.C. 11), however, provides that foreign-built ships can be documented under the laws of the United States to engage in trade with foreign countries and with the islands of Guam, Tutuila, Wake, Midway, and Kingman Reef, if such vessels are wholly owned by citizens of the United States or by a corporation organized under the laws of the United States, or any State thereof, whose chief executive officer and chairman of the board of directors are citizens of the United States and no more than a minority of a quorum of whose directors are aliens.

Under this statute the Treasury Department will document a foreign-built vessel to engage in trade between the United States and Guam if the owner is a natural person and a citizen, or if the owner is a corporation and meets the foregoing requirements.

At the hearing on this bill on October 23, 1963, several witnesses testified that there was no desire to open the trade between Guam and the United States to foreign-flag vessels but that they understood that this was necessary in order to provide for operating and constructiondifferential subsidies under the Merchant Marine Act, 1936.

This understanding is correct. Section 601 (a) of the Merchant Marine Act, 1936, requires a finding, before operating differential subsidy can be granted, that the operation of the American-flag vessel in the service, route, or line is required to meet foreign competition. Even if the bill is enacted, operating differential subsidy could not be granted unless substantial foreign competition develops.

This is inherent in the 1936 act. The purpose of the act is to help American-flag operators meet foreign competition and if there is no foreign competition there would be no means of measuring the subsidy. The amount of subsidy authorized is the excess of the fair and reasonable cost of four specified items of expense of operating the American-flag vessel-insurance, maintenance and repairs, wages, and subsistence of officers and crews-over the fair and reasonable cost of the same items of expense of operating competing foreign-flag vessels. If the bill is enacted, it is not clear to what degree foreign-flag operators will enter this trade. On the other hand it is clear that such cargo as they are able to obtain will come out of our present U.S.-flag carryings.

Because of Guam's geographic position and the Pacific trade patterns, stops at Guam cannot easily be made en route between the Far East and the United States. A deviation is required which necessitates the availability of substantial amounts of cargo to make the venture worthwhile.

Such cargo does not exist. In 1961 and 1962 the total cargo, including military, between Guam and the United States was only 143,800 and 154,900 tons, respectively. The existing service provided by U.S.-flag vessels adequately serves this cargo movement. Between 1959 and 1963 Pacific Far East Line increased its stops at Guam from 25 to 36 per year.

During the same period American President Lines has averaged approximately 18 stops per year on its way to the Far East. It is also our understanding that since October of 1963 an additional monthly service has been advertised by an unsubsidized operator, Pacific Navigation Systems, Inc.

A substantial portion of the total cargo carried between the United States and Guam is military cargo and must be carried aboard U.S.flag vessels. In 1961 and 1962, the MSTS cargo represented 43.4 and 38.7 percent, respectively, of the total cargo movement. As a result, the relatively small amount of cargo available to both foreign- and U.S.-flag vessels is further reduced.

While we appreciate the desire of the people of Guam to realize the lowest possible shipping rates, we do not believe H.R. 7028 is the answer. The existing high rates are not as much the result of the absence of foreign competition and subsidy as the absence of large amounts of commercial cargo.

Since Guam has only a small amount of exports, the vessels unloading cargo in Guam are unlikely to fill up the empty space on their way to the Far East or on their return to the United States. The commercial cargo that is carried to Guam from the United States is carried in small lots of grocery store quantities which tends to inflate cargo handling and checking costs. We understand that the port costs in Guam are much higher than in other Far Eastern ports.

H.R. 7028 will not produce more cargo, and, therefore, is unlikely to produce lower shipping rates. Instead, the bill would eliminate the most effective method by which the reasonableness of shipping rates can be reviewed by the Federal Maritime Commission. Under sections 2 to 4 of the Intercoastal Shippffing Act, 1933, as amended (46 U.S.C. 844-846), rates for shipping cargo between the United States and Guam must be filed with and are subject to the disapproval of the Federal Maritime Commission.

Interested parties can under the existing law petition the Commission to examine the reasonableness of any such rates in the domestic commerce. If the Commission finds the rates unduly high they can order their reduction to a reasonable level.

If H.R. 7028 is enacted, however, the vessel operators would only be required to file their tariffs with the Commission. Operators could not be required to charge rates deemed reasonable by the Commission.

In addition, the enactment of H.R. 7028 would set an undersirable precedent regarding the protected domestic trade. If the protection afforded by the coastwise laws is done away with in this instance, it would lend impetus to similar action regarding our other noncontiguous States and territories.

Such a trend would seriously jeopardize the segment of our merchant marine servicing the domestic commerce. This coupled with the fact that the increased costs to the Government in the form of con

struction and operating subsidies may not result in any benefits for the citizens of Guam compel us to oppose H.R. 7028.

The Bureau of the Budget advises there is no objection to the submission of this statement from the standpoint of the administration's

Mr. ASHLEY. Has any computation been made by your office as to what the subsidy costs would be over the life of the contracts provided for in this legislation?

Mr. GULICK. We have only a very incomplete computation based upon existing service, Mr. Ashley. I will be glad to give this to you broken down by Pacific Far East Line, American President Lines, and Pacific Navigation Systems.

PFE operates four ships, two C-2 types and two Victory types. The estimated cost per annum-well, perhaps I should give the service area of these ships also. These ships normally provide service between California and Guam calling at intermediate islands en route. Occasional voyages also serve the Pacific Northwest and Hawaii.

Hawaiian cargo is limited to other than domestic cargo of the United States, that is not subject to section 805 (a) of the act.

The estimated cost per annum if the ships were granted operating subsidy and met substantial competition under foreign flag would be approximately $2,275,000. Admittedly this is a guess, but it is the best guesstimate we have at the moment.

American President Lines operates eight ships on its Atlantic Straits service between United States California and Atlantic ports and ports in Indonesia and Malaya. Service calls are made regularly at Guam en route. In this latter connection the contract wth APL precludes calling at Guam in excess of 16 times per year for the carriage of cargo originating in California.

The estimated cost to the Government per annum, if Guam is placed in foreign category, and the operator met substantal foreign-flag competition, and made about 16 calls at Guam, would be $320,000

per year.

Pacific Navigation operates chartered tonnage of the Liberty and Victory type. We have heard their service area this morning. The estimated cost, if this company were found to be eligible for subsidy, would mean the subsidization of approximately two ships at a cost of about $1,200,000.

This would be a total cost for the ships in question of $3,795,000 per year.

Mr. ASHLEY. Now, the rates charged by APL and PFE, do they come under the scrutiny of Maritime?

Mr. GULICK. Not of the Maritime Administration. I believe this is a Federal Maritime Commission jurisdictional area, sir.

Mr. ASHLEY. Would you have any idea whether the rates that are presently being charged, which are some 15 or 16 percent higher than Pacific Navigation Systems, whether these rates have been deemed to be fair and reasonable? Presumably they have?

Mr. GULICK. I can only assume so, since this is within the jurisdiction of FMC and we have not, to our knowledge, heard of any requirement or finding that they are not reasonable.