Mr. ASHLEY. I would be interested in knowing why it is that the rates of APL and PFE are 16 percent higher since they operate subsidized vessels as well as the nonsubsidized. It would seem to me that they would be in a better position than Pacific Navigation to offer lower rates, and it would seem that being unable to do so they are availing themselves of this legislative effort to reduce competition.

I think we are concerned with rates here and I am interested in why their rates are 16 percent higher since they also have a subsidized operation.

Would you have any idea on that?

Mr. GULICK. No, sir, we have no information on this. I aline myself with you in being interested in it as a matter of interest to the general knowledge of the agency, but we have no responsibility here. You are aware, of course, that when APL operates in this trade, they are operating in an unsubsidized service.

Mr. ASHLEY. Yes, certainly.

Mr. GULICK. And РFE also has an unsubsidized service here. Mr. ASHLEY. So it certainly helps if you have a subsidized operation to offset the nonsubsidized.

Thank you, Mr. Chairman.

The CHAIRMAN. On the trade route that Pacific Far East operates to Guam, there is no connection with the subsidy there at all, is there? Mr. GULICK. That is right, sir.

The CHAIRMAN. And the American President Lines, it is only that diverted part that carries no subsidy?

Mr. GULICK. That is right, sir.

The CHAIRMAN. And it is far off their trade route?

Mr. GULICK. Yes, sir.

The CHAIRMAN. What do you expect someday to recommend we are going to do about this situation out in Guam? Now, is it going to be all turned over to an industrial carrier, a commercial corporation that is in the shipping business and every other business?

You exclude, do you not, these subsidized operators, from being in mercantile or trading business other than the shipping business?

Mr. GULICK. We permit some other activities, Mr. Chairman, but they may not be the type of activities which would compete with the subsidized service. You have put your finger, however, on the real issue

The CHAIRMAN. That is the reason-I introduced this bill, you know, on request to bring this subject up.

Mr. GULICK. Yes.

The CHAIRMAN. Now, we have Guam out there. Now, it is, I understand, the center of the trading in the trust area, goods are brought into Guam and then moved out. Now, what are you going to offer some day? Buying old ships is going to play out, you understand? Mr. GULICK. Yes, sir, that will not last forever.

The CHAIRMAN. And it is going to cost to build American ships, and this is an interesting subject. Now, what are you people going to come up and offer?

Mr. GULICK. As to a short-range solution on this problem

The CHAIRMAN. We cannot live on short-range solutions.
Mr. GULICK. No, sir, I am speaking only-

The CHAIRMAN. We are going to have that place out there from now and forever on, it seems.

Mr. GULICK. I was speaking only, sir, of the replacement problem. Apparently under existing law it is technically possible, I do not say it is practically possible, for replacement ships to be built abroad, documented under U.S. law, and used in this trade.

Longer range, this is a part of our overall study which is now in progress and rapidly coming up to a head within the agency and the department which must meet the dilemma of our entire domestic trade as well as our other areas of the merchant marine. We sympathize greatly with the people in Guam and we wish it were possible at this moment to be able to offer a solution.

We do not have one as yet, but we do feel that it would be much more desirable to tackle the whole problem of the domestic trade rather than to run the risk of setting an undesirable precedent as to one particular portion of this trade which might not suit the other areas. I wish I could give you a more definite answer, sir.

The CHAIRMAN. For instance, Pacific Far East that has been in this service, they can build a ship abroad then and put it in this service? Mr. GULICK. Yes, sir.

The CHAIRMAN. Notwithstanding the fact that they are a subsidized operator or another trade route?

Mr. GULICK. Yes, sir.

The CHAIRMAN. So then they can build a ship at 55 percent less than they can build a ship for their subsidized trade route?

Mr. GULICK. Yes, sir.

The CHAIRMAN. And I understand then that you would recommend if they desired to continue their service that they build abroad? Mr. GULICK. We do not recommend this, sir. We merely offer it as a possibility.

The CHAIRMAN. It can be done?

Mr. GULICK. It can be done.

The CHAIRMAN. Under existing law?

Mr. GULICK. Yes, sir.

The CHAIRMAN. There would be no question about their application to build abroad and put a ship in this trade?

Mr. GULICK. None to our knowledge, sir.

The CHAIRMAN. Mr. Mailliard?

Mr. MAILLIARD. Thank you, Mr. Chairman.

I am just a little bit confused about this provision of law that you quote on the second page of your statement. Foreign-built ships can be documented under the laws of the United States to engage in trade with foreign countries and with the island of Guam, and so forth, and so forth.

Now, if Pacific Far East Line on its present service engages in trade only with Guam and not with foreign countries also, then it would not be eligible, would it?

Mr. GULICK. No, sir. Our construction-I beg your pardon, I am reverting to my days with the Treasury Department-I believe the Treasury Department's construction would be that the ship could trade with any or all of these island possessions of the United States or with foreign countries, not necessarily simultaneously.

Mr. MAILLIARD. Well, it says "and," it does not say "or."

Mr. GULICK. This has been a construction, I think, that the Treasury Department has given to this particular statute, sir.

Mr. MAILLIARD. That is strange, because if you would construe it that way, it seems to me you would also have to construe it in reverse, that you could do the engaging with foreign countries.

Mr. GULICK. I am not sure that I follow you on that, sir.

Mr. MAILLIARD. Well, if that "and" in there does not mean that it has to be both, then it seems to me it could be either, and I was not aware that you can build a ship foreign and document it under the laws of the United States to trade between the United States and foreign countries.

Mr. GULICK. A ship may be built abroad, documented under the laws of the United States to trade exclusively with foreign countries. This is permitted by law today. It is permitted, in fact, by the statute, but this ship may not be subsidized under specific provisions of the Merchant Marine Act of 1963, because it is foreign built.

Mr. MAILLIARD. So you could get advantage of the foreign costs on the ship, but you would still be stuck with the American cost of operation?

Mr. GULICK. Yes, sir.

Mr. MAILLIARD. Well, this is sort of intriguing to me. As far as you know has this ever been used by any American operator?

Mr. GULICK. I believe the Treasury Department would have records which show what vessels have been built to engage in trade in this particular area. I recall of my personal knowledge only one or two. I do not remember the names of these, and they were rather small vessels, too.

This provision came into this statute when it was amended, I believe around 1914, as a part of the Panama Canal Act. Up to that time no foreign-built vessel was permitted to be documented under the laws of the United States except by express permission of the Congress in a special act, and when the Panama Canal was cut through the law was changed so as to permit the documentation under the U.S. flag of certain foreign-built vessels, principally some that had been engaging in trade in the Far East areas.

Since that time there have been innumerable vessels, foreign-built, documented under the laws of the United States. The Bureau of Customs classifies this document as a limited register.

Mr. MAILLIARD. Limited in what way?

Mr. GULICK. Limited in the sense that it is not permitted to engage in either the coastwise trade or fishing. In fact, a little bit more than that if we wanted to be technical. It is limited to trade with foreign countries or trade with these particular island possessions.

Mr. MAILLIARD. Well, do I gather from your responses to the earlier questions, that the Maritime Administration has not come up with a solution but is attempting to find a solution for the basic problem of the high cost of replacing ships in the domestic trades?

Mr. GULICK. Yes, sir.

Mr. MAILLIARD. But your contention is this is the wrong way to go about it?

Mr. GULICK. Yes, sir.

Mr. MAILLIARD. But you have not come up with the right one? Mr. GULICK. We have not come up with a solution at this particular moment, but we are deeply concerned with this and hopefully will have solutions to suggest a little later on. I could not, obviously, in

my position, give a time reference on this, but there is a very serious consideration underway at this time.

Mr. MAILLIARD. Thank you, Mr. Chairman.

The CHAIRMAN. These foreign-built vessels can only trade in the domestic trade with these five ports that you have mentioned? Mr. GULICK. Yes, sir.

The CHAIRMAN. Mr. Ashley?

Mr. ASHLEY. No, thank you, Mr. Chairman.
The CHAIRMAN. Mr. Hagen?

Mr. HAGEN. These foreign-built vessels thereafter would be entitled to operating subsidies, is that right?

Mr. GULICK. No, sir; they would not.

Mr. HAGEN. In other words, the disability the company would suffer if they got a foreign-built vessel would be the loss of the operating subsidy?

Mr. GULICK. Yes, sir. To go further and be perfectly frank about this, there are other disabilities. Mr. Mailliard touched on one of them. They could not get an operating differential subsidy. They are barred from participation in the coastwise trade except as permitted here, and they definitely could not be used in the fishing industry.

Mr. HAGEN. How large an advantage would a carrier have who carried a large proportion of his own merchandise over a common carrier, we will say? Is that a major factor?

Mr. GULICK. This might be a consideration, sir. I can imagine situations in which it might be well worth an operator's money investment to purchase a foreign-built ship to be used in this particular restricted service.

Mr. HAGEN. I am not relating particularly to that, but we have one carrier here who apparently hauls about 25 percent of his own merchandise, the cargo is about 25 percent of his own merchandise, and he says he operates profitably at a lower rate. Would that tie-in make possible that lower rate?

Mr. GULICK. I would certainly think this would help out in the situation; yes, sir.

Mr. HAGEN. You said these rates were set by the Federal Maritime Commission. Apparently they do not have any minimum rates, just maximum rates; is that correct?

Mr. GULICK. I would prefer, sir, that you ask about rates, if agreeable to you, of the FMC witness. My personal understanding is that FMC under the Intercoastal Shipping Act, I believe, can set both a minimum and a maximum rates, or either, but I am not an expert on this.

Mr. HAGEN. To take a particular situation, apparently one company is charging rates considerably lower than the others.

Mr. GULICK. So I heard this morning, sir.

Mr. HAGEN. You mentioned a precedent. As I recall the testimony here previously this same precedent has been established already with respect to Samoa and the Virgin Islands. Is that a correct recollection?

In other words, this bill, to some extent at least, would equate Guam with Samoa and the Virgin Islands-American Samoa.

Mr. GULICK. I think, sir, you could equate Guam with the Virgin Islands and with American Samoa. Of course, it was this committee which in 1934, after finding-let me go back beyond that-in 1920, section 21 of the 1920 act extended the coastwise laws to all of the island territories and possessions which were not embraced within the coastwise laws. American Samoa was included in that group.

In 1934, the Congress was advised that by the treaty under which American Samoa was acquired, Great Britain and Germany had been guaranteed equal rights in trade of their ships to American Samoa. Obviously the coastwise restriction cut across this. So, in 1934, the Congress amended the law so as to take American Samoa out of the coastwise trade.

I mention this because I think it is important here to indicate that that amendment was made not by virtue of any U.S. service requirements with American Samoa, but on the basis of a foreign policy question involving a treaty.

The Virgin Islands have almost consistently been outside the scope of the coastwise laws. From the date of their acquisition until, I believe, the Organic Virgin Islands Act in 1936, or thereabout, the Virgin Islands were not within the coastwise laws. That act extended the coastwise laws to the Virgin Islands, and gave the President the right to make applicable to the Virgin Islands such of the navigation and vessel inspection laws as he deemed proper.

By an Executive Order No. 9170, of May 21, 1942, he made certain navigation laws and vessel inspection laws applicable but he expressly reserved the application of the coastwise laws and as I recall, the tonnage tax statute.

Mr. HAGEN. What prospect is there of getting this Executive order with respect to the ability of foreign ships to call at Guam reversed? Mr. GULICK. This, I would think, would have to be answered by the Department of Defense. My knowledge extends only, sir, to the fact that this Executive order was applied in 1942 when Guam was a strategic base. From that time on up until August 1962, no vessel except military vessels were permitted to trade with Guam, except by express Navy permission.

In 1962, this restriction was lifted and the trade was opened to both foreign and commercial American vessels. The latter had also been within this restriction.

Mr. HAGEN. Now, from your statement, I would judge that it is more economic in terms of transportation to haul equivalent goods from the Far East sources to Guam than it is from the United States to Guam, is that correct?

Mr. GULICK. I think the map proves this; yes, sir. It is much closer to the Far East.

Mr. HAGEN. So there is concern with the fact there may be increasing trade with Japan and these other foreign countries because of this transportation disability?

Mr. GULICK. That is correct, sir. It raises a problem with respect to balance-of-payments problems as well as other problems. Mr. HAGEN. Thank you very much.

The CHAIRMAN. Mr. Drewry?

Mr. DREWRY. Mr. Gulick, you have referred several times to your sympathy for the people of Guam, but I wonder, have you conferred