CONSTRUCTION DIFFERENTIAL SUBSIDIES TUESDAY, APRIL 7, 1964 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met at 10:15 a.m., pursuant to call, in room 219, Cannon House Office Building, Hon. Herbert C. Bonner (chairman of the subcommittee) presiding. The CHAIRMAN. The subcommittee will come to order. The committee is delighted to have the Chairman of the Maritime Administration with us this morning for the first time and we look forward with a great deal of interest to hear Mr. Johnson and to know him better. His background and his ability certainly justify his appointment to the high office which he now holds. The subcommittee meets this morning for consideration of H.R. 10053 and H.R. 10058, to amend section 502 of the Merchant Marine Act of 1936 relating to construction differential subsidies, and we will put a copy of the bills and any agency reports at this point in the record. (The bills and reports follow :) [H.R. 10053, H.R. 10058, 88th Cong., 2d sess.] A BILL To amend section 502 of the Merchant Marine Act, 1936, relating to constructiondifferential subsidies Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the proviso in the second sentence of subsection (b) of section 502 of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1152 (b)), is amended by striking out "June 30, 1964," and inserting in lieu thereof "June 30, 1967,". B-124074. Hon. HERBERT C. BONNER, COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, Committee on Merchant Marine and Fisheries, DEAR MR. CHAIRMAN: Further reference is made to your letter of February 24, 1964, acknowledged on February 26, requesting the comments of the General Accounting Office concerning H.R. 10053, 88th Congress, 2d session, entitled "A bill to amend section 502 of the Merchant Marine Act, 1936, relating to construction differential subsidies." The bill would postpone from June 30, 1964, to June 30, 1967, the reduction of the present maximum 55 percent subsidy rate to 50 percent. We have no special information or knowledge as to the desirability of the proposed legislation and, therefore, we make no recommendation with respect to its enactment. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. Hon. HERBERT C. BONNER, DEPARTMENT OF THE NAVY, Chairman, Committee on Merchant Marine and Fisheries, MY DEAR MR. CHAIRMAN: Your request for comment, on H.R. 10053, a bill to amend section 502 of the Merchant Marine Act, 1936, relating to construction differential subsidies, has been assigned to this Department by the Secretary of Defense for the preparation of a report thereon expressing the views of the Department of Defense. H.R. 10053 would extend for 3 years the increased construction differential of 55 percent, authorized by the Merchant Marine Act, 1936, as amended. Without this extension, the limitation would revert to 50 percent after June 30, 1964. The Department of the Navy, on behalf of the Department of Defense defers to the views of the Department of Commerce as the executive agency having the greatest interest in H.R. 10053. This report has been coordinated within the Department of Defense in accordance with procedures prescribed by the Secretary of Defense. The Bureau of the Budget advises that, from the standpoint of the administration's program, there is no objection to the presentation of this report on H.R. 10053 for the consideration of the committee. Sincerely yours, C. R. KEAR, Jr., Captain, U.S. Navy, Deputy Chief Mr. CASEY. Mr. Chairman, I think it should be noted that Mr. Johnson comes from a pretty good State. The CHAIRMAN. Well, it covers a lot of territory and it is bound to have a few fine men within such a vast area. Mr. DOWNING. Are you from Virginia, Mr. Johnson? Mr. JOHNSON. No, sir. Mr. CASEY. He knows where you are from. The CHAIRMAN. Yes, sir, and incidentally, the great State of Texas has contributed very much to the affairs of this committee in the person of the gentleman who has just called our attention to the vastness and the greatness of the great State of Texas. Now, Mr. Johnson, if you will introduce your associates. Mr. JOHNSON. Yes, sir, Mr. Chairman. This is Mr. Hoffman, of our Office of Ship Construction, and Mr. Ables, General Counsel, Maritime Administration. The CHAIRMAN. Do you have a prepared statement? The CHAIRMAN. If you will proceed, Mr. Johnson. STATEMENT OF HON. NICHOLAS JOHNSON, MARITIME ADMINISTRATOR; ACCOMPANIED BY L. C. HOFFMANN, CHIEF, OFFICE OF SHIP CONSTRUCTION, AND ROBERT ABLES, GENERAL COUNSEL, MARITIME ADMINISTRATION Mr. JOHNSON. Thank you, Mr. Chairman. I am delighted to have the opportunity to appear before you and Mr. Downing and Mr. Casey this morning and give you the views of the Maritime Administration of the Department of Commerce, and the Department, on H.R. 10053. This bill would extend to June 30, 1967, the 55-percent maximum construction-differential subsidy for the construction of cargo ships and the 60 percent rate for the reconstruction of certain passenger ships. We have no objection to a 1-year extension of the present percentage limits. Mr. Tollefson. The CHAIRMAN. Now, we have Mr. Tollefson here, Mr. Johnson, a member of the committee from the great State of Washington. Mr. TOLLEFSON. I apologize for being late. Mr. JOHNSON. Not at all. We have just started. As I had just said, we have no objection to a 1-year extension of the present limits in the construction subsidy program, and I was about to go on to give you some background on what the present rates have been, in fact, during 1963. As you will see from the statement that you probably have before you, in January of 1963, four ships constructed for Lykes were under a subsidy percentage of 49.8 percent; in March of 1963, four Grace Line ships were at 54 percent; in April of 1963, three Gulf & South American ships were 53.9 percent; and three American President Lines ships were at 54.5 percent; and finally, in August of 1963, Lykes had another four ships at 55 percent. The latest rates determined with respect to the reconstruction of passenger ships are 58.9 percent for the Argentina and the Brasil, and 58.6 percent for the President Cleveland and the President Wilson. Since the actual difference between American and foreign costs in recent shipbuilding contracts has been between 50 and 55 percent of the total cost, it is appropriate that we have authority to pay subsidy in this cost range, if it becomes necessary. We have every hope, however, that we will not need to use this authority. The Maritime Administration of the Commerce Department is making every effort to minimize the amount of the construction subsidy, while still shifting from the shipowner applicants the extra-cost burdens of the build-American requirement, as authorized by the statute. As we testified when the maximum construction subsidy rate was last extended to 55 percent, we reduce subsidy costs by making awards in groups of ships and requiring standardization of ships to the extent practicable. We are now considering the various methods of computing the construction differential. Accordingly, we believe it would be wise to limit the extension of the 55-percent level to one year in order to provide greater flexibility pending the outcome of our present studies on this and other basic issues in our maritime program. At present, the foreign shipbuilding center we select for comparison with American cost is the lowest cost center in which the vessel could be built. This formula presupposes that, but for the buildAmerican requirement, the American shipowners always would select the lowest cost foreign yard. That has not been the actual practice of foreign shipowners who were free to choose their shipyards, nor of American shipowners not subject to the build-American requirement, however, and there is no reason to believe it would be true for the presently subsidized American companies were they free to build abroad. Under new methods of computation presently under consideration we would attempt more closely to approximate what American shipowners' costs would be in fact if they were free to choose their yards. One proposal that has received widespread attention recently is that we select for comparison that foreign shipbuilding center whose estimated costs most closely approximate the weighted average estimated costs of the five leading foreign shipbuilding centers. In view of your request that we comment this morning upon that proposal, let me explain our ideas more fully. For the reasons I have just stated, we announced, on January 27, 1964, in the Federal Register, that the Maritime Subsidy Board intended to adopt the above method of ascertaining the representative foreign shipbuilding center, and we asked interested persons to submit their views. The Shipbuilders Council submitted brief views that the proposed method is not in accordance with the intent of Congress and that its adoption would have a further diminishing effect on the U.S. merchant marine. The Committee of American Steamship Lines commented extensively, making four chief points: (1) That the legislation history of section 502 (b), and the agency's past practice, require selection of the lowest cost foreign shipbuilding center. (2) That the language of the operating-differential subsidy contract implies that we will grant the maximum amount of constructiondifferential subsidy authorized by law, and that the operators' execution of these contracts was based upon the agency's practice to select the lowest cost foreign shipbuilding center. (3) That the proposed method would result in increased capital costs to the subsidized companies in the face of low earnings records and the burdens these companies are under to replace their ships. (4) That foreign liner companies can and do order ships from shipbuilding centers where they believe they get the lowest overall shipbuilding costs, that the present method results in a price substantially higher than the operators could get if they built abroad, and that the 1939 amendment eliminated the reference to the principal shipbuilding center available to foreign competition. We do not believe the legislative history requires the selection of the lowest cost center in which the vessels could be built. The statute does not specify the lowest cost center. It specifies the centerwhich is deemed by the Secretary to furnish a fair and representative example for the determination of the foreign cost of construction of vessels. There is no ambiguity in this language. It is a clear delegation to the Secretary of authority to determine this center on the basis of what he determines will most closely give the operator parity with his for |