Percentage of ships under construction in country of registry, Dec. 31, 1961

1 Remaining tonnage being constructed in France, Germany, Japan, Netherlands, Spain, and Sweden. 2 Remaining tonnage being constructed in Belgium, Netherlands, and Poland.

3 1 ship of 499 gross tons being constructed in Spain.

4 Remaining tonnage being constructed in France, Germany, and Sweden.

5 Remaining tonnage being constructed in United Kingdom, Denmark, France, Germany, Japan, Spain, and Sweden.

Remaining tonnage being constructed in United Kingdom, Finland, France, Germany, Netherlands, and Norway.

Percentage of ships under construction in country of registry, Dec. 31, 1960

Percentage of ships under construction in country of registry, Dec. 31, 1959

The CHAIRMAN. Does that conclude your statement? Mr. JOHNSON. That concludes my statement, yes, Mr. Chairman. The CHAIRMAN. I must inquire of you whether or not you took into consideration the necessity for and the experience that has been gained over the years with respect to the limitation of 1 year that you propose here. It would seem from discussion with operators that it takes a considerable length of time to determine just what their replacement program will be and to schedule their replacements so as to design their ships and get the approval, I would think, of their Board

of Directors for entering into a contract of this nature. One year would be, in my opinion, insufficient time.

I would like to hear your comment. on just how you arrive at this 1 year.

Mr. JOHNSON. Well, I certainly appreciate your view. I think there is nothing in this statement that should provide or provoke any such difficulty for operators. I am not sure that there is unanimity within the industry with regard to the period of time involved there may be. In any event, it is the position of the Maritime Administration of the Commerce Department, and of the Department, that a 1-year extension is all that we believe wise at this time, measured against the desires and standards within the statement, in view of the fact that we are presently revising, studying, considering, the formulation of the construction shipyard subsidy differential as well as a general review of the construction subsidy program.

That would be the position of the Maritime Administration of the Commerce Department, with regard to the period of time.

The CHAIRMAN. From the experience of the administration itself in negotiating replacement programs, what has been the length of time that the operator and the administration have been negotiating with respect to replacement programs?

Mr. JOHNSON. I think I can give you

The CHAIRMAN. An average length of time.

Mr. JOHNSON. I think I can give you a more direct answer to your question.

Obviously, you do not arrange for, contract for, and request bids on a construction program and have the ship built within 1 year. If that is what you are asking, the answer obviously is that the construction program for a ship operator will extend over a period longer than 1 year. However, it would be our position that that would not be determinative in formulating the extension of the percentage differen

tial.

The CHAIRMAN. You certainly have made a very fine, enlightening, and interesting statement and what I am about to say does not reflect any personal feeling toward the high standard of living here in America; I am for it, but I do not think the record should entirely be based on the shipyards. The high cost of ship construction may not be due entirely to our system of fair wage prices, fair living standards for the men who build ships as well as those that design them and contract for them in the shipyards. They are the only observations I care to make.

Mr. Tollefson?

Mr. TOLLEFSON. Thank you, Mr. Chairman.

I want to join with the chairman in commending you upon a very fine statement. I do share his concern about the 1-year extension. I am wondering if that is a sufficient time for the operators to properly make their plans and to enter into complete negotiations.

It seemed to me that we ought to have at least a couple of years. I think our bill calls for an extension until 1967; that is a 3-year period.

I am interested in one thought. We are presently somewhere in the replacement program which started several years ago; the replacement program involved some 300 vessels. How many of those vessels have been replaced today?

Mr. JOHNSON. 113, at the present time.

Mr. TOLLEFSON. Less than half?

Mr. JOHNSON. Yes, sir.

Mr. TOLLEFSON. Have some of the operators completed their rebuilding program or have they completed them in varying degrees with respect to total replacement?

Mr. JOHNSON. No; they have been completed in varying degrees at the present time.

Mr. TOLLEFSON. In other words, some of them have completed a bigger percentage than others?

Mr. JOHNSON. Yes, sir.

Mr. TOLLEFSON. Well, would there be anything to the thought that if we changed the formula now, we are kind of changing the formula in the middle of the stream? Would that result in some operators being treated differently than others?

Mr. JOHNSON. No; I think not. This would be a prospective change, we do not propose to go back and recompute construction subsidy paid in the past to operators.

Mr. TOLLEFSON. Well, take the case of an operator-I am just picking a figure out of the air-who has replaced 75 percent of his fleet and the case of another operator who has only replaced, say a third of his fleet; the first would have had the benefit of the formula that you have been following in 75 percent of the cases, whereas the other will wind up having the benefit only with respect to 33 percent of his fleet.

Mr. JOHNSON. I think the problem that you raise was apparent in 1916 and 1920 and 1936; any time there is a change it obviously has an impact on those who have been conducting their affairs prior to the change. I do not believe that this would be substantially or significantly different from the impact of any change of this sort.

Mr. TOLLEFSON. Well, have we ever had a replacement program such as the one we are engaged in now?

Mr. JOHNSON. No; this is the first one.

If we

Mr. TOLLEFSON. That was a thought that occurred to me. are going to change the formula, why not wait until the program is completed, then everybody starts off from scratch again. If you want to change the formula, then they will all be treated exactly alike. When is the program designed to be fully completed?

Mr. JOHNSON. The present program is a continuing program, of course, you might say the present program would end about 1974. There is a substantial period of time, Mr. Tollefson. If a judgment were made to forestall a change, it would be quite significant, I think. And, as I say, our basic motivation here, certainly mine, is one of trying to get back the facts. I came to this very much uninformed, and my basic question was, I wanted to know: What are we trying to do with the construction-differential program? Why are we making these payments? What is the purpose of this program? And, as I said in the statement, it seems to me the purpose of it is to pay the difference between what the American operator pays for his ships in fact and what he would have paid for those ships if we did not insist that he build all of them in the United States. There is the differential that this statute is designed to pay, as I understand it.

Mr. TOLLEFSON. In other words, you are supporting the concept and the principles of parity, that is putting the American operator on

a parity with his foreign competitor with respect to ship construction costs?

Mr. JOHNSON. Let me speak to that, if I may.

I think, certainly in the broad sense of parity, this is all right. But I think specifically we are talking about something a little different, a little more sophisticated, and with regard to basic principles I was delighted to find that I do not believe there is any difference between the position of the Maritime Administration and that of the Committee of American Steamship Lines. They say on page 7 of one of the documents that they gave us:

The overall purpose of CDS was to equalize for the American operator what the capital cost to him

to him

of a new vessel would be if he were free to acquire it on the worldwide shipbuilding market.

This is substantially what we are saying. The construction subsidy shipyard program is designed to provide for the operator the difference between what his costs are under this program and what his costs would be but for this program. And, as I say, it seems to me that to use the lowest cost foreign shipyard does not comport with that principle.

Mr. TOLLEFSON. That is an interesting statement.

If, the American operator did not have to build his ship in a domestic yard, where would he normally build it?

Mr. JOHNSON. Well, here we must necessarily engage in speculation, and that is a part of the difficulty with this formula.

Fortunately, however, we are dealing with matters essentially of economics; our problem is not quite as complex as that of the jury trying to decide how much a lost leg is worth. And here again, the CASL document has as an appendix some data that I think is relevant. We have the same material essentially, but this portrays it just as

well.

Where can we look for examples? Well, we can look to see what do American shipowners do when they are building ships that will not be a part of this program? Where do they build, in fact? Do they build all of their ships in Japan? The answer to that question is, no, they do not build in the lowest cost center; they build throughout the world.

Another place we can look is to what foreign shipowners, operators, do. Let me point out, we are not looking necessarily because of a parity concept, we are looking because we are trying to figure out what the American owner would do, and we say as evidence of what he might do we will look to what his foreign competitor does.

So, let us look to the foreign competitors as set forth in the CASL document. Going down the list here, just taking the top seven countries, for example, if you have their material, it is the last page in this green-covered book. This is a chart that shows the country of registration and the country where the ship is being built. The top country on the list is the United Kingdom. They were building 15 shipsCASL picked the dates of March of 1962 through May of 1963. During this time there were 15 ships being built by the United Kingdom. They did not have to be built in the United Kingdom. They could be

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built anywhere. They could have been built in Japan. How many were built in Japan? Not 1-14 of the 15 ships were built in the United Kingdom-1 in Spain.

Belgium is the next country on the list. Did it build in Japan? No; it built in Belgium.

The next country is Brazil. It built three ships. Were they built in Japan? No. We don't know where they were built. It is under a column "Other," but they were not built in Brazil. At least they were not built in Japan, that is clear. Colombia is the next country. Colombia built six ships. Three of them were built in West Germany, three of them were built in Spain. None of them was built in the lowest cost foreign center. The next country is Denmark. It built two ships, they were both built in Denmark. The next is France. France built five ships. They were all built in France. The next country is West Germany. They built one ship, it was built in West Germany. The CHAIRMAN. Let me interrupt you here for a moment with respect to France.

What year were those ships built in France?

Mr. JOHNSON. You say when were they built?

The CHAIRMAN. Yes.

Mr. JOHNSON. I am taking this off the CASL chart. This is not our material, it is theirs. It indicates that these were orders received from March of 1962 through May of 1963.

The CHAIRMAN. These French ships that you speak of?

Mr. JOHNSON. Yes, sir; presumably the CASL witnesses, when they appear, can tell you more about their chart. I have not studied it in detail. I just use it as it is here. I assume it is accurate.

Our own charts, which incidentally

The CHAIRMAN. We have with respect to France and some of these countries, built ships through contributions from foreign aid.

Mr. JOHNSON. This may be. I could not speak to that. I just use the chart that is here before me.

As I said in response to Mr. Tollefson's question, the problem that we confront is how do you ascertain what the American owner would do in fact, if he did not have to build here? And I am saying that by way of evidence there are two places you could look. You could look to what other American shipowners do when they do not have to build in the United States. You could look to what foreign operators do when they are free to build anywhere in the world. And the question we ask ourselves is, Do they in fact build all their ships in the lowest cost center? And the answer appears to be, No, they do not.

Obviously this is a sophisticated and complex matter. There may be financial benefits involved. If so, those, of course, should be taken into consideration.

This is not simply a matter of looking at a chart.

Mr. TOLLEFSON. I know it is difficult to know just what an American operator would do if he could build his ship in a foreign yard. A number of them have said they would obviously build them in the lowcost yard, and yet you say you must conjecture whether they would or

not.

Ordinarily, the question was, Where would they build a ship? You say, well, the foreigners, according to the CASL figures, built 31 out of 60 vessels or placed orders for 31 out of 60 vessels in the country of