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eign competitors. Section 502(b), as originally enacted, provided that the Board should select the principal foreign shipbuilding center which is availed of by the principal foreign competitors in the service in which is deemed by the Commisson (now the Maritime Subsidy Board) to furnish a fair and representative example for the determination of the estimated cost of construction in foreign countries of vessels of the type proposed to be constructed * * *.

In the statement we have underscored the phrase: which is availed of by the principal foreign competitors in the service in which the vessel is to be operated.

The very fact that the original language limited the selection to a foreign shipbuilding center meeting the criteria stated in the underscored portion of the original enactment refutes any suggestion that the lowest cost foreign yard, worldwide, was intended. On the contrary, it only confirms the intention of Congress to have the Board consider only those foreign shipbuilding costs where the competitive foreign operator would build U.S. ships.

The claim is made that Congress by the 1939 amendment of section 502 (b) eliminating the reference to the operator's foreign competitor evidenced a clear intent that the foreign shipbuilding center selected should be the lowest responsible foreign shipbuilding center. The legislative record in connection with the 1939 amendment of section 502(b) does not support this claim.

The intent of the 1939 amendment was set out in the Maritime Commission memorandum No. 8—suggested amendment to section 502 (b) Merchant Marine Act, 1936, as amended. The Commission was concerned by the fact that the foreign competitor's home country was in a position to afford some form of government aid that could reasonably be expected to outweigh purely economic factors in his choice of shipbuilding center and was concerned by the fact that other complex considerations were called for in the determination of the shipbuilding center of the operator's foreign competitor. In the interest of a direct and realistic approach, the Commission recommended that reference to the operator's foreign competitor should be eliminated from section 502 (b). The Commission said:

All that appears necessary to produce a nearer approach to parity in capital costs is for the Commission to use as a differential basis whatever foreign shipbuilding center, whether "principal" or not, an ordinary prudent businessman having a ship constructed for him for operation in foreign trade, and guided principally by economic considerations, would no doubt use. It may be objected that this, in some instances, might result in the Commission selecting that foreign shipbuilding center where costs are cheapest. If that is the center an ordinary sensible businessman would utilize, obviously it is the proper measure.

The shipbuilding market is worldwide, and any competitor at any time may purchase a ship in any of the principal shipbuilding centers and obtain the best price that is available.

The object of the Merchant Marine Act was to put our operators on a comparable basis with foreign operators--and any foreign operator, unless restricted by national policy, in which case he receives concessions by his own government, has a vailable to him a worldwide building market.

The two committee reports upon this 1939 amendment include substantially the same language as set out in the Commission's memorandum.

It cannot be claimed with justification, therefore, that the Congress by the 1939 amendment eliminating from section 502(b) the refer

ence to the operator's foreign competitor, intended that the Commission should give no consideration to the building practices of the operator's foreign competition. To repeat from the above quotation, the Commission stated that, The object of the Merchant Marine Act was to put the operators on a comparable basis with foreign operators * * *. The report of the two committees included this same statement.

In view of the language in the committee reports, it is clearly in order for the Maritime Subsidy Board to consider the building practices of the foreign liner service operators, and we will show that almost all foreign liner service operators build their ships at other than the world's low-cost shipyard.

The purpose of the 1939 amendment was to remove the requirement that it be a center used by the operators' foreign competitors.

The amendment did not substitute for this requirement the lowest cost center.

Likewise, we do not believe that the agency's administrative practice of using the lowest cost center is binding upon it for the future.

Where a statute is not clear or is ambiguous, contemporary administrative construction will be very persuasive as to the meaning of the statute. The authority conferred upon the Board, however, is not ambiguous or uncertain: it is a grant of authority to the Board to determine, upon the basis of its discretion and judgment, the “fair and representative example.” The absence of uncertainty or ambiguity in the authority of the Board would make inapplicable the doctrine of contemporaneous or practical construction.

The matter at issue is the exercise of an authority of the Board involving the discretion and judgment of the Board. The rule giving judicial weight to contemporary administrative construction simply does not apply to a usage having its origin in authority to exercise judgment and discretion.

Therefore, the long followed practice of selecting the lowest cost foreign shipyard was not the resolution of an ambiguity in the statute. It was an exercise of administrative judgment. Since the competitors of the subsidized operators do not generally build in the lowest cost shipyards, we believe we can exercise a different judgment as to the center that should be selected to give them parity.

Now a few words with regard to the arguments relating to the contracts.

Perhaps the least convincing argument why the Board cannot use other than the low-cost foreign shipyard is the argument that the operating-differential subsidy agreements preclude any change in the present method of computing construction-differential subsidy. The argument is that the proposed change in CDS procedure is contrary to certain provisions in the ODS agreements on two grounds: (1) certain language in the ODS agreements should be interpreted to mean that the United States in furtherance of the operator's vessel replacement program is required to grant the maximum subsidy authorized by law, and (2) the United States is bound by the terms of the ODS contracts which cannot now be changed "even by Congress by subsequent statute or by failure to appropriate funds." - There is nothing in the operation-differential subsidy contracts calling for the maximum subsidy authorized by law. The relevant lan

guayo which appears in article I-9 of the contracts simply says that before the operator is required to proceed with its replacement obligations, the United States must determine that it is willing and able to grant financial assistance which by the aforesaid provisions (including the provisions of title V] it is authorized to grant, and that the United States— shall provide construction-differential subsidy pursuant to the act, including particularly the limitation of section 502(b) and, if such construction-differential subsidy is not provided, the required construction will be deferred until it is so provided.

If the parties to the contract had intended that the maximum CDS would be granted in all cases then presumably the word “maximum" would have been inserted in the contract language. In the absence of any amount of CDS being specified, it is believed that the above quoted provisions logically should be construed to mean that construction subsidy would be granted as authorized by the 1936 act.

It is true that all current operating-differential subsidy contracts were executed against the background of the Government's consistent practice of paying construction differential subsidy based on the lowest cost foreign center, but it is also true that these contracts were executed against the background of the statute which makes the selection of the foreign center discretionary with the Board, and it is the statute, not the practice, to which the contracts specifically refer.

Now, the CAŚL group has also commented with regard to any financial burden that would be imposed upon them.

We do not consider the financial objections of the Committee of AmericanSteamship Lines to be pertinent to the question whether the Maritime Subsidy Board has the right to adopt the proposed method of computing construction differential subsidy. Nevertheless, a look at their financial situation reveals some impressive facts.

As of December 31, 1962, the combined financial statements of the subsidized lines state that approximately $344,444,000 of the earnings and gains deposited or to be deposited in statutory reserve funds may become subject to Federal income taxes if withdrawn for general purposes or in the event of termination of subsidized operations. At a current tax rate of 50 percent, this deferred tax liability is equivalent to an interest-free long-term loan from the Government of $172,222,000.

Comparisons based on dividends paid by subsidized operators and by industrial companies are not meaningful. The only earnings of subsidized operators from which dividends may be paid are so-called free earnings; namely, earnings equal to 10 percent of capital necessarily employed in subsidized operations, and earnings from unsubsidized operations.

During the 25-year period ending December 31, 1962, the net worth of subsidized operators increased from nearly $60 million to $800 million or almost 14 times. This happened in spite of the fact that operating-differential subsidy contracts were suspended for 5 years during World War II.

During this 25-year period, the subsidized operators paid out dividends of $310,105,000, which represented about 80 percent of the earnings available for dividends. They received operating-differential subsidy during this period of over $1.5 billion.

During the 3-year period ending December 31, 1962, dividends paid by the subsidized operators amounted to nearly $39 million and retained earnings incrcased by $72 million. During this period dividends amounted to 2242 perceni of the original investment made by stockholders, and retained earnings amounted to 41 percent, a total of 6312 percent, or an average return for each year of 712 percent in cash and 1372 percent in retained earnings.

The committee has also referred to the shipbuilding practices of the competing foreign lines.

Major shipbuilding nations generally built all, or almost all, of their tonnage for operation under their own country's flag. Ships which are to fly the flag of France, Italy, West Germany, Japan, and the United Kingdom are almost all built within those countries. Norwegian flag operators buy substantial tonnage outside Norway evidently because Norway does not have sufficient shipbuilding capacity to build all of the ships that will fly the Norwegian fag.

We have attached to this statement exhibits which show the percentage of ships which from 1959 through 1963 were built in the coun

try of the previo there auntry of report

We believe there are a number of reasons why foreign vessels are often built in the country of registry rather than in a more distant low-cost shipbuilding center. There may be tax benefits; there is the matter of national pride; there may be less inspection-and-delivery cost; they may find greater availability of replacement parts; there are sometimes long-term business relations between shipyard and shipowner, including common ownership; there may be a fear of contracting with unknown firms who have different standards of construction; there may be credit advantage or foreign exchange limitations; and there is the matter of good will, building in a country that the ship will serve.

And so I concluded in the same spirit as I began. There is no desire on the part of the Maritime Administration of the Commerce Department to attempt to devise devious schemes whereby the Maritime Administration, by perverting the purpose of the 1936 act, can shift a few dollars of the shipyard subsidy cost onto the ship operators.

The Maritime Administration does have the ever-present obligation under the law, however, constantly to review its practices with regard to every aspect of the Merchant Marine Act. One of the most important requirements of that act is our determination of the foreign shipbuilding center which is a fair and representative example for measuring the burden of the build-American program for American operators. · That is what we are doing with the present study.

We are operating under the assumption that the purpose of the construction-differential subsidy is to subsidize American shipyards, not American shipowners. We believe that the law intends that this subsidy should be of an amount that will put the American shipowner in the position he would have been in but for the build-American requirement—no more and no less. We believe that to figure this difference using only the lowest possible cost foreign yard may not be a realistic way of determining the additional cost this program puts on American shipowners. We believe the proposed five-country formula would more nearly approximate the actual cost, but we are continuing to study the matter.

To provide more than this difference would constitute a subsidy in fact as well as in form to the American shipowners in his construction program in addition to the operating-differential subsidy. That is, it would put him in a better position financially than he would be in if he were free to build his ships wherever he wished. We do not believe Congress intended that result with this statute.

It is with these principles in mind that we continue our present. study. Because you had inquired about this proposal we did want to give you the benefit of our present thinking even though we have not yet settled on the precise formula that we will use.

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

(The tables referred to follow :)

Percentage of ships under construction in country of registry, Dec. 31, 1969

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1 Remaining tonnage being constructed in Germany, Japan, Netherlands, and Sweden. ' Remaining tonnage being constructed principally in United Kingdom, France, and Netherlands. 1 ship of 22,000 gross tons being constructed in another country.

Percentage of ships under construction in country of registry, Dec. 31, 1962

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1 Remaining tonnage being constructed in France, Germany, Japan, Netherlands, Spain, and Sweden. * Remaining tonnage being constructed in United Kingdom, Belgium, Italy. and Netherlands. * Remaining tonnage being constructed in Belgium, France, Germany, and Norway * Remaining tonnage being constructed in United Kingdom, Denmark, France, Germany, Japan, Netherlands, Spain, and Sweden.

Remaining tonnage being constructed in Denmark, Finland, France, Germany, Netherlands, Norway, Spain, and Yugoslavia.

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